It is an important question. The rational for any business to use an agent is that the relationship is results based. Unlike a sales representative (where there will also be the issue of national insurance contributions aka employment tax), no sale equals no commission payable to the agent.
There are two other reasons why it is an important question:
for a principal to have to pay commission to an agent where the principal has not been paid can only impact on the profits of the principal; and
if it should be the case that the principal is liable to the agent for unpaid commission in situations where the principal has not been paid by the customer, the amount of such commission should be taken into account when calculating the amount of the compensation or indemnity payable to the agent on termination of the agency agreement.
The authors of the EU Agents Directive were alert to the David vs Goliath issue which often exists between agent and principal. The Directive provides that the right of an agent to commission can be extinguished only if and to the extent that:
it is established that the contract between the customer and the principal will not be performed; and
that fact is due to a reason for which the principal is not to blame.
What these words mean is in the context of such ‘back’ commission was considered in a recent judgement of the European Court.
The agency agreement before the Court provided for the agent to receive commission for each contract performed. However, the agency agreement also stated that any non-payment by a customer would result in a forfeiture of the commission or a proportional reduction of such commission.
A number of customers failed to pay. They claimed that the principal had treated them badly and that as a result they had lost confidence in the principal. Unsurprisingly this resulted in the non-payment by the principal of commission to the agent.
The agent claimed that it was entitled to the commission. It relied on the principal being to blame for the fact that the principal had not been paid by the customers.
The first issue before the European Court was to consider whether the right to commission can be extinguished only in situations where there is a complete non-performance of the contract between the principal and the customer or whether the same principle also applies in situations where there has been a partial non-performance of the contract.
Looking at the words, ‘if and to the extent that’, the Court had little difficulty in deciding that the intention of the Directive was to ensure that as the performance of a contract progresses, commission becomes due to the agent. But what then of the further provision in the Directive (and correspondingly in the Commercial Agents Regulations) that any commission which the agent has already received in a situation where the contract between the principal and the customer will not be performed shall be refunded to the principal? With reference to this the Court decided that a provision in an agency agreement that the agent is to reimburse the principal commission received by the agent where there is partial non-performance of the contract between principal and customer is enforceable and could be relied on by the principal as long as:
the obligation on the agent to refund commission is strictly proportionate to the extent to which the contract between principal and customer has not been performed; and
such non-performance of such contract is not due to a reason for which the principal is to blame.
The last question in this case to be considered by the Court concerned what is arguably the very essence of the back commission protection given to agent. The Court was asked to consider whether ‘a reason for which the principal is to blame’ concerns:
only the legal reasons that resulted directly in the non-performance of the contract between principal and customer; or
whether that concept covers all legal and factual circumstances for which the principal is to blame and which results in the non-performance of the contract with the customer.
The Court pointed out that the Directive is concerned with protecting the agent in its relationship with the principal. In view of this, and given the need to avoid possible abuses by the principal, the Court concluded that all legal and factual circumstances relating to the principal must be taken into account.
Take home points
For agents the situation is straight forward – there is a need for agents to keep records of situations where they have not been paid commission on orders that they have taken. However, it is the experience of the Fox Williams’ agentlaw team that agents often fail to keep detailed records. In a situation where the agency agreement is terminated without good reason by the principal, this lack of records can prove very costly indeed to the agent.
For principals the situation is also straight forward – given that their profitability is dependent upon the contracts being performed and payment being received from customers, principals should seek to avoid non-performance situations!
The Directive and the Regulations make clear that it is not open to the principal and agent in the agency agreement to contract out of the entitlement of the agent to back commission. But if a principal can find a way of reducing the commission paid to an agent by reference to the commission earned by the agent (and subject, of course, to this being acceptable to the agent), whilst the principal will still have an obligation to pay back commission, the cost of doing so may be off set against the lower commission being earned by the agent going forwards.