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First Material Breach Defense Fails in Tennessee Commission Case

With some frequency, we see the first material breach defense raised in cases where a sales representative is owed commissions. After placing the account, the party with whom it was placed desires to keep the revenue, but resents continuing to pay the agreed commissions. So, it alleges that it should not have to pay any more commissions because the party who generated the account and revenue somehow breached the terms of the contract.

A recent Tennessee commissions case illustrates how such an argument as above can fail, as it should. Here are the pertinent facts of the case:

  • Plaintiff was an insurance agent who had built what appears to have been a pretty substantial book of business which was renewing consistently
  • Plaintiff, apparently anticipating health problems, entered into a written contract with an insurance agency (“Defendant Agency”)
  • Pursuant to the terms of the contract, for a four- year period, Plaintiff was to receive 50% of the commissions from her accounts
  • Pursuant to the terms of the contract, after the four- year period, the accounts would be owned by the Defendant Agency, and it would owe no more commissions to Plaintiff
  • Pursuant to the terms of the contract, during the four-year term, Plaintiff was to assist in helping the Defendant Agency retain and produce business
  • The contract expressly contemplated that the Plaintiff might die within the four-year period as it provided that, if she did, any monies owed to her under the contract would be paid to her estate
  • About a year and a half into the four- year period, the Plaintiff died
  • The Defendant Agency continued to pay the Plaintiff’s commissions to her estate until about three months after her death

The Defendant Agency claimed that it was not required to pay any further commissions because, shortly after the contract was signed, the Plaintiff stopped coming into the office and assisting with the accounts; stopped returning phone calls of clients; failed to invite clients to the office of the Defendant Agency to meet its principals; and failed to learn how to use the Defendant Agency’s systems. In the lawsuit filed by the Plaintiff’s estate, the Defendant Agency asserted that it was not required to pay any further commissions due during the agreed four- year term because the Plaintiff had committed a first material breach by the above actions and inactions.

In finding that the first material breach defense was not applicable, the Court of Appeals of Tennessee relied on two distinct rationales. First, it found that the Plaintiff’s failure to assist in retaining and producing business could not be a material breach because it was anticipated by the parties as evidenced by the term in the contract that required the Defendant Agency to pay the commissions due to the Plaintiff during the four-year term to her estate, if she died before the end of the four-year term. Second, the court pointed out that, under Tennessee law, a non-breaching party may waive a first material breach by the other party by accepting the benefits to the contract knowing it has been breached. The court found that, even if the Plaintiff had committed the first material breach of the contract, the Defendant Agency had waived it by continuing to accept the revenue from the accounts assigned to it by the Plaintiff.

In Tennessee commissions cases, expect to see a first material breach defense. It is a knee-jerk defense when someone owed commissions sues because they have not been paid. Those who are owed commissions for accounts generated by them can take comfort in the reality that, if the opposing party continues to receive the revenues from those accounts, it is usually an uphill battle to attempt to avoid paying the commissions by alleging first material breach.

For Tennessee attorneys who handle commission cases, the case discussed in this blog does not stand alone. While the facts may differ, there is other Tennessee case law which holds that, under circumstances broadly similar to the ones in the above case, the first material breach rule is not a valid defense.