Commercial agent’s right to commission on incomplete orders
The vast majority of commercial agents and principals will be well aware of the circumstances in which the commercial agent is entitled to be paid commission on sales made to customers by the principal under the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”).
This is largely dealt with under Regulations 7 and 8 and there have been a number of cases in the UK and European Courts which have clarified the rights of the commercial agent. While the issue of entitlement to commission is often considered following termination, the entitlement applies throughout the commercial agency. However, there may be understandable reluctance on the part of the commercial agent to raise such issues or bring claims while their agency is still live.
Much less attention has been paid to Regulation 11, which sets out the circumstances in which a commercial agent remains entitled to commission even though the sale between the principal and the customer has not been completed. Again, this entitlement applies throughout the commercial agency.
Regulation 11(1) deals with this by setting out when the commercial agent’s right to commission is extinguished, as follows:
11 (1) The right to commission can be extinguished only if and to the extent that-
(a) it is established that the contract between the [customer] and the principal will not be executed; and
(b) the fact is due to a reason for which the principal is not to blame.
There are a few key points which can be drawn out of the above:
- There must be a contract between the customer and the principal - Despite the use of the word “executed” (see below), I think it is clear that there must be a contract in place between the customer and the principal. In deciding whether there is a contract, I would need to look at the trading terms of the principal (and perhaps also the customer) to determine the point at which an order from the customer has been “accepted” by the principal. Generally, it will not be sufficient for the customer (or the commercial agent on behalf of the customer) to simply place an order with the principal. The principal will usually need to take some positive step to confirm it has “accepted” the order. That action could involve the principal issuing an order acknowledgement confirming a delivery date, taking steps to deliver the order or issuing an invoice for the goods ordered. Assessing the point in time at which an order has been accepted by the principal such that there is a contract in place can be quite difficult and will probably require legal advice unless the position is very clear.
- Meaning of “the contract … will not be executed” The use of the word “executed” is quite confusing in the context of Regulation 11(1). Under UK law, using the word “execute” in conjunction with “contract” usually indicates a requirement for a contract to be signed by the parties to it. However, in the context of Regulation 11(1)(a) I think the word “executed” actually means “completed” or “fulfilled”. This view is supported by the wording in Regulation 10, which makes a number of references to the principal and customer “executing” the transaction (i.e. completing or fulfilling their obligations under the contract). Logically, therefore, Regulation 11(1)(a) applies where the contract between the customer and the principal will not be completed or fulfilled.
- Reasons for the contract not being executed. The commercial agent only retains their entitlement to commission under Regulation 11 if the contract is not completed or fulfilled for a reason for which the principal is to blame. Those reasons would include: a) the customer cancelling the order because the principal has delivered the wrong goods or has failed to deliver the goods within timescales specified by the customer, b) the customer rejecting the goods delivered because they are defective, of poor quality or not fit for purpose.
Reasons for which the principal would not be to blame include failure by the customer to pay for goods received or if the order was cancelled by the customer for a reason for which the commercial agent is to blame (e.g. the commercial agent inserted the wrong goods in the customer order or placed an order for goods which the commercial agent knows are out of stock).
As far as I am aware the right to commission under Regulation 11 has not yet been addressed by the Courts in the UK or in Europe. The reason for this is probably that the circumstances in which the commercial agent could bring this type of claim are quite rare. However, the rights under Regulation 11(1) should be kept in mind by both the principal and the commercial agent where sales are not completed, particularly for example where a new product proves to be extremely popular and the principal has difficulty in keeping up with demand or where the principal is focussing on new markets and accepts orders but does not give priority to the UK market.
Under Regulation 11(3), the commercial agent and the principal are not able to contract out of Regulation 11(1). Any contrary provisions in the contract between the commercial agent and the principal would therefore be overridden by Regulation 11(1) and would be void.
Another important point for commercial agents and principals to keep in mind is Regulation 11(2), which notes that if commission has already been paid for a particular sale, the commercial agent will be required to refund that commission if the sale is not completed or fulfilled for a reason for which the principal is not to blame. The most obvious example would be if the customer fails to pay for goods delivered. Again, this scenario is likely to be quite rare as the majority of principals do not pay commission to their commercial agent until they have received payment from their customer.