Written by Steve Sidkin
19 July 05
The obligation on the principal to pay commission to the agent should be straightforward. The agent takes the order which the principal accepts or confirms. The principal supplies the goods ordered and pays commission to the agent. Unfortunately for principals, this obligation is far from straightforward as a result of the operation of the Commercial Agents Regulations (which implements into English law the European Self-employed Agents Directive.) Whilst the Regulations have been in force for more than ten years, many principals and agents have still to come to terms with the way in which they affect the entitlement of an agent to commission.
The first issue is one of timing. The Regulations link the accrual of commission to the time when the principal has delivered or should have delivered the goods or the customer has paid for the goods. Because of the uncertainty as to when any of these events may occur, the Regulations provide that the commission accrues due at the latest when the customer has paid for the goods or should have paid for them if the principal had delivered the goods as he was required to do.
The Regulations then provide for commission to be paid no later than the last day of the month following the quarter in which it became due. For this purpose the first quarter runs from the date the agency agreement takes effect.
Whilst this may appear common sensical, the Regulations state that it is not possible for the parties to contract out of this long stop date by which commission must be paid. Accordingly if the quarters follow calendar quarters, commission which becomes due on 31 March, must be paid by 30 April. This is despite the fact that the principal may have allowed the customer credit terms which mean that by 30 April the customer has still to make payment!
Sometimes a customer will operate in a number of locations within the territories of different agents. What is it happen in this situation is not addressed by the Regulations. Accordingly if the agency agreement is silent on this point, it is necessary to apply a decision of the European Court. This decision referred to “the centre of gravity of the transaction effected.” This is determined by a number of factors including the place where the customer ordered the goods and the place where they are delivered. Interestingly the address of the registered office of the customer was not stated to be a factor.
Unfortunately the Court’s decision can lead to the situation where a number of agents have competing claims in respect of commission on orders from a single customer. In addition there is no provision in the Regulations enabling commission paid to one agent to be set off against commission that would otherwise be payable to another agent in this situation.
Failure to address this problem in the agency agreement may sour the relationship between principal and agent. At worst, the agent may claim that non-payment of commission is a repudiatory breach of the agency agreement resulting in its termination and a claim under the Regulations. It may also result in problems concerning so-called back commission.
Back commission is a unique concept under the Regulations which are quite clear as to when the entitlement of an agent to commission can be extinguished. Accordingly if it can be established that the contract between principal and customer will not be performed and this is due to a reason for which the principal is not to blame, then the agent will not have a right to commission. Again the Regulations prohibit the parties from contracting out of this situation.
Unfortunately it is the case that some principals will supply goods which are defective and for which the customer refuses to make payment. It is also the case that sometimes a principal will be unable to deliver all the goods ordered by the customer or delivery may be delayed beyond the delivery date. However, if as a result of any of these failures by the principal the customer chooses to terminate the contract and not pay the principal, the principal will be left with a liability to pay commission to the agent. Essentially it is a matter of fairness. The Regulations hold to the view that the agent should not be disadvantaged by the failure of the principal to make delivery in accordance with the contract made with the customer. In contrast the principal will not have liability to pay commission to the agent where the reason why the contract with the customer is not completed is because, for example, the customer is insolvent.
In order to guard against insolvency, some principals have the benefit of factoring agreements or trade insurance. Unfortunately the Regulations do not address what is to happen where such safety nets are in place. It appears that where the principal does have the benefit of such arrangements, the principal will be liable to pay the agent commission on the sum received.
Interestingly many agents are unaware of their entitlement to back commission. Certainly this would appear to have been the case in the High Court decision in 2003 of Tigana v Decoro.
The entitlement to back commission can often cause unhappiness between principal and agent. As such it is usually the case that a claim for back commission will only be made when the agency agreement has come to an end. At this time an agent who has kept a record of non-payment of back commission will be well placed to claim it. Meanwhile there is a further difficulty for the principal in that the amount of back commission will compound the amount claimed on termination by the agent for compensation or indemnity. It may even impact on the claim for post-termination commission.
Such commission arises after the agency agreement has terminated. When the Directive was being drafted it was thought that there could be situations where an agent had undertaken the ground work for orders to be received by the principal, but that these would only be placed after the termination of the agency agreement. As such the agent would not have the benefit of the commission paid on these orders for the purpose of calculating the agent’s entitlement to either compensation or indemnity following termination. Unsurprisingly, therefore post-termination commission has sometimes been described as “pipeline” commission. However, this in itself raises the question as to the period of time for which an agent should be entitled to post-termination commission. In this respect it is the case that the Regulations are unclear in that they refer to the entitlement of the agent to receive such commission where the order for which he did the work prior to termination results in a contract being entered into by the principal with the customer within a reasonable period after the agency agreement has come to an end. But what is to constitute a reasonable period is unspecified.
In this respect a limited amount of guidance can be taken from Tigana v Decoro. In that case the agent claimed that it was entitled to commission on orders received by the principal during a period of eighteen months after the agency agreement had come to an end. In contrast the principal claimed that no orders after the termination of the agency agreement were mainly attributable to the agent’s efforts made during the agency agreement. In a Solomonesque decision (which he sought to link to the facts of the case), the Judge awarded the agent commission on orders received during a period of nine months following termination.
In contrast, however, to the agent’s entitlement to commission and back commission, it is open to the parties to contract out of an entitlement of post-termination commission or to specify in the agency agreement that it will be limited to a particular period of time after the agency agreement has come to an end. Nevertheless in many agency agreements the principal fails to take advantage of this way of limiting the agent’s entitlements. Overall, however, what is important is for both agent and principal to be clear as to their entitlements under the Regulations and the agency agreement and to keep good records of their entitlements or obligations to pay commission respectively. In this way they may be able to unravel the mysteries of commission, particularly on termination.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any member of the Fox Williams’ agentlaw team (www.agentlaw.co.uk)