A commercial agent is (subject to certain exceptions) a self- employed ‘intermediary’ who has ongoing authority to negotiate the sale or purchase of goods- not services- on behalf of someone else (the ‘principal’). A door-to-door salesman is a classic example, but an agent need not be a natural person.
A commercial agent has three key rights relating to commission or damages:
Unpaid commission The agent has a right to receive unpaid commission still outstanding at the time of termination.
Pipeline commission The agent has a right to receive ‘pipeline commission’. Pipeline commission is commission on business transacted within a reasonable time after the agent’s termination that is mainly due to his or her work during the agency. However, it is possible for a contract to exclude this right.
Compensation or indemnity Under the Commercial Agents (Council Directive Regulations) 1993, an agent has a right to receive either ‘compensation’ or an ‘indemnity’ upon termination unless:
the contract is terminated by the principal because of an action or failure by the agent justifying immediate termination, or
the agent terminates the contract because of something the principal has done or because of the agent cannot reasonably continue working due to age, infirmity or illness.
It is not possible to contract out of this right. The compensation provisions of the Regulations will automatically apply unless the agency contract specifically states that the agent will be entitled to an indemnity.
If the contract adopts the indemnity agreement, an agent is entitled to an indemnity if he can show that:
he has acquired new customers or significantly increased the volume of business with existing customers for the principal AND
the principal continues to benefit substantially from the resulting business.
The court also has to consider it to be fair to award an indemnity taking into account the circumstances as a whole.The indemnity is equivalent to:
the average annual income over the last five years if the contract has existed for five years or more, or
if the contact has existed for less than five years, the average income for that period.
An agent is entitled to compensation for damages suffered as a result of the termination, particularly when the termination:
Deprives the agent of the commission he would get if the contract continued while the principal continues to accrue substantial benefits from the agent’s work, OR
Prevents the commercial agent from amortising the costs incurred during the contract on the advice of the principal.There is no limit on the compensation the courts can award and it is an either/ or situation: unlike pipeline commission, compensation can still be awarded if the principal does not continue to derive substantial benefits from the business generated by the agent.The calculation of the amount of compensation is complex and will be the subject of another blog.
Agents should be aware of their right to claim commission on transactions resulting from their work even after their contractual relationship with their principal has ended, and should consider whether they are entitled to compensation or an indemnity.
Principals should consider whether to adopt the indemnity system in their contacts with agents – this area of law is complex and could have a significant financial impact.
5 February 2016
Jennifer Cove – Trainee Solicitor. Jennifer joined Helix Law after gaining litigation experience as a county court advocate and as a duty advisor in housing and private family law matters. She completed the Bar Professional Training Course as a William Shaw Scholar of Gray’s Inn after obtaining a Graduate Diploma of Law at the University of Brighton where she was awarded the Sweet & Maxwell prize for best overall marks and the DMH Stallard prize for top marks in the law of torts. Prior to beginning a career in law, Jennifer was a German to English translator specialising in business and finance.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.