It is common, particularly following termination of an agency agreement, for agents and principals to become involved in disputes over the commission which the agent is entitled to be paid. Where any such dispute arises, the first thing to do is check what the parties have agreed. Most written agency agreements contain detailed terms dealing with the rate of commission the agent will be paid, the timing of payment and the circumstances which will give rise to an entitlement to commission.
Often though we are consulted by agents whose agency arrangements have arisen informally. Many have no written agreement with their principal. Some have agreed verbally on the rate of commission they will be paid, but have no verbal or written agreement as to any other terms. In such cases, Part III of the Commercial Agents (Council Directive) Regulations 1993 will apply. What does it say about commission?
- Regulation 6 says that where the parties have not made any agreement as to the rate of commission, the agent is entitled to be paid the amount “customarily allowed” in the place where he carries on business, or, if there is no customary practice, “reasonable remuneration taking into account all aspects of the transaction”.
- Agents who have not agreed a rate of commission with their principal will need to consider what is reasonable having regard to matters such as the typical rates paid in their industry, lead times, and the value and frequency of the transactions they arrange.
When does a right to commission arise?
There are three situations in which an agent is entitled to be paid commission under the Regulations, set out in Regulation 7:
- The most common is where a sale has been concluded between the customer and principal, which was made directly as a result of the agent’s actions, for example because the agent introduced the customer to the principal and/or negotiated the sale.
- An agent is also entitled to commission where a sale has been concluded between the principal and a customer which he did not directly arrange, but the customer is one whom the agent originally acquired for the principal for transactions of the same kind. This provision is intended to ensure that the principal does not escape liability to pay commission on repeat transactions by cutting the agent out after the first sale.
- Finally, if it has been agreed that the agent will have exclusivity over a particular geographical region or group, the agent will be entitled to commission on any sales made to customers in that region or group by the principal directly or by another agent.
There is some uncertainty as to whether these provisions are mandatory, or whether agents can agree with their principals that they will not apply.
What about after the agency has been terminated?
An agent whose agreement has been terminated remains entitled to commission on any transaction concluded after termination where either:
- The order was received before the agreement was terminated (though the transaction itself was not completed); or
- The transaction is entered into within a reasonable time of the date of termination, and was wholly or mainly attributable to the agent’s efforts. Once again, this provision is designed to protect agents from missing out on commission on sales which would have been due to them, had the agreement not been terminated. What is a reasonable time will depend on the industry and the typical lead time for the product the agent is selling.
When must the principal make payment?
- Regulation 10 provides that commission becomes due to the agent once the principal has executed the transaction by supplying the goods to the customer, or should have executed it. This means that once again, the principal cannot escape the obligation to pay commission by failing to hold up his end of the bargain. However, if the customer fails to pay for the goods then the agent’s right to commission may be extinguished.
- Once the commission has fallen due, the Regulations provide that the principal must pay the agent at the latest on the last day of the month following the quarter in which it became due. The quarter periods run from the date the agency agreement began.
- Agents and principals can agree alternative payment arrangements if they are more favourable to the agent than those set out in the Regulations, but the principal cannot impose less favourable payment terms.