Commercial Agent - FAQ's

A commercial agent is defined as “a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude such transactions on behalf of and in the name of that principal”.

Commercial agents are usually paid a commission on sales achieved, they are not a party to the sales contract, and they are not a distributor.  It is important to determine if you are a “commercial agent” because if you are, you will benefit from the significant protection of The Commercial Agents (Council Directive) Regulations 1993. The Regulations set out the rules which govern a commercial agency, including a principal’s conduct and behaviour towards an agent and what protection an agent has from being dismissed without due compensation.

The Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) implement the EU’s Commercial Agents Directive (86/653/EEC), a Directive of European Law which was introduced to effect the co-ordination of laws between European member states relating to self-employed commercial agents.  The Regulations came into force in England and Wales on 1 January 1994 and cover the rights and obligations of both agents and principals and provide commercial agents with significant protections.

The Regulations remain in force after Brexit as they have been adopted as “retained EU law”. There is no anticipated change to the Regulations in the short to medium term.

The Regulations apply to commercial agents who sell or purchase goods in Great Britain on behalf of their principals, where English law applies. Therefore, if you are a commercial agent in England and Wales (an agent) or if you engage commercial agents in England and Wales (a principal), the Regulations are likely to apply to you. There are a limited number of exceptions.

The Regulations do not define what "goods" means, although goods are generally considered tangible items.

The Regulations do not apply to agents who sell services. There is sometimes a fine line between what is goods and what is a service, and therefore it is not always clear whether the Regulations apply.

Of particular relevance to agents is whether software is goods and is covered by the Regulations. Under English law, if software is sold on its own (for example, if it is downloaded or delivered digitally), it is not considered to be goods, however, if it is in physical form (such as a hard disk), it can be. However, the position is less clear where software is downloaded or delivered digitally. A recent ruling in the European Court of Justice specifically referred to the Regulations applying where the agency was for the supply of “computer software to a customer by electronic means where that supply is accompanied by the grant of a perpetual licence to use that software”.  It is anticipated that the English courts will follow this judgment.

Although the UK is no longer part of the EU, the English courts will likely be heavily influenced by the decisions of the European courts.

Whether the sale of software which is licensed on a subscription basis rather than accompanied by the grant of a perpetual license is covered by the Regulations is still unclear. 

A commercial agent will have the authority of their principal to negotiate sales in the principal’s name. The commercial agent will not be a party to the sales contract with the customer. Because the commercial agent contracts in the principal’s name, the commercial agent will not take possession or control of the principal’s goods, and delivery of the goods is likely to be made directly by the principal to the customer. By comparison, a distributor will usually take possession of the goods and then re-sell or distribute them to customers, usually by contracting in its own name.

A commercial agent negotiates the sale of goods between a customer and the principal, with the authority of the principal to conclude transactions on behalf of the principal.  A marketing agent, by comparison, would be responsible for carrying out marketing activities for the principal to encourage sales for the principal, but would not have the authority to negotiate sales or to bind the principal to any transactions. The Regulations do, however, extend to marketing agents to afford them protection.

The Regulations are unlikely to apply to sub-agents because their contractual relationship is likely to be with the main commercial agent and not with the principal. However, this question is subject to much academic debate and has not been determined by the Courts. The Regulations are only likely to apply as between the principal and the main agent.

It has been suggested that a sub-agent may be able to claim a contribution from the main agent who is paid compensation upon the termination of its agency by the principal, but this point has also not been tested by the Courts.  

In a franchise relationship, the franchisee contracts with the customer on its own behalf and in its own name but will often pay a percentage or proportion of its turnover to the franchisor.  This percentage or proportion is usually in exchange for the use of the franchisor’s name, goodwill or products, so is quite different from a commercial agency relationship.

A sole agency is where the principal is not able to appoint any other commercial agent to act on its behalf in a specified territory (where the sole agent is authorised to act), but the principal is able to seek customers and to negotiate sales directly within that territory.

An exclusive agency is where the agent has the exclusive right to represent the principal in a territory, and the principal is prohibited from trying to seek customers and to negotiate sales directly for itself in that territory.

A non-exclusive agency is where the principal is free to appoint other commercial agents in the same territory and to seek customers and negotiate sales directly.

The Regulations are important to both principals and agents in confirming their respective rights and obligations and in providing what should happen if the commercial agency relationship is terminated or otherwise ends. If you are an agent, you may have the right to bring a claim for compensation under the Regulations should the principal terminate your commercial agency. If you are a principal, you may be able to rely on certain provisions of the Regulations to deflect or reduce your liability to an outgoing commercial agent.

An agent is subject to the obligations set out in the Regulations. If there is a written agency agreement in place, the agent may also be subject to other contractual obligations set out in the agency agreement.

Under the Regulations, a commercial agent must look after the interests of his or her principal and act both dutifully and in good faith.  Specifically, the commercial agent must make proper efforts to negotiate and conclude transactions, must communicate all necessary information they have to their principal, and must comply with any reasonable instruction given by their principal. 

An agent must comply with the terms of any written agency agreement or any terms which have been agreed orally.

A principal is subject to the obligations set out in the Regulations. If there is a written agency agreement in place, the principal may also be subject to other contractual obligations set out in the agreement.

Under the Regulations, a principal must act both dutifully and in good faith. This includes providing the commercial agent with the necessary documentation concerning any goods, obtaining whatever information is necessary for the agent to perform the agency, informing the agent if a significantly lower than usual volume of transactions is expected, and informing the agent of the principal’s acceptance or rejection of any transaction procured by the agent. A principal must provide the agent with a statement of commission due to the agent and must pay the agent “reasonable remuneration” in the absence of any agreement in relation to a specific level of remuneration. In addition, the agent must comply with the terms of the agency agreement in place with the principal, whether those terms are recorded in a written agreement or agreed verbally.

It is not possible to contract out of or exclude the Regulations in their entirety; however, it is possible to limit the application of certain specific Regulations. We strongly recommend that legal advice be taken if an agency agreement seeks to limit the effect of any of the Regulations.

At the outset of an agency, the agent and principal are free to negotiate and sign up to a written agreement if they so wish. However, having a written agency agreement in place is not a legal requirement.

There can be a binding agency contract in place even though the terms of the agency have never been recorded in writing.

Under Regulation 13, an agent is entitled, on request, to receive a signed written document from the principal setting out the terms of the agency contract.

If there is no written agency agreement in place, the Regulations will still apply as the fall-back position. Relying solely on the Regulations can have advantages and disadvantages depending on whether you are an agent or principal and the circumstances of the dispute which has arisen. 

This will depend on the circumstances of the relationship between the agent and the principal. 

Written agency agreements can often impose obligations on agents which are more onerous than the obligations set out in the Regulations, so it may be in an agent’s interests not to have a written agreement in place. The absence of a written agreement also means the agent is likely to benefit from the payment of compensation on termination under Regulation 17 rather than an indemnity, and generally speaking compensation will be more favourable to the agent.

There can also be advantages to having a written agency agreement in place. For example, a written agreement will usually give clarity to the rights, duties and obligations of both agent and principal, which can assist in determining the contractual relationship between them. 

If you are a principal, it may be advantageous for you to put a written agreement, in place. That will allow you to set clear sales targets and to specify that an indemnity rather than compensation is payable on termination under Regulation 17.  A principal may also want to impose restrictions on the agent after termination.

Whilst there can be advantages in having a written agreement, if the written agreement is poorly drafted or is drafted by someone without an understanding of the complexities of the Regulations and how they apply in different situations, the agreement may not do its intended job and may in some circumstances even give rise to ambiguity and disputes concerning the parties’ rights and obligations.

There are some common areas for disagreement when negotiating written agency agreements.  They include:

• the imposition of sales targets on the agent
• when the parties are entitled to terminate the agency relationship
• whether compensation or an indemnity under Regulation 17 is payable on termination
• the exclusion of Regulation 8 (pipeline commissions)
• restrictions on the activities of the agent after termination
• which country’s laws and courts should determine any dispute (where the agent and principal are based in different countries)

If you are an agent and you agree to the imposition of sales targets in your agency agreement, you are accepting that you are contractually bound to meet those sales targets.  If you do not then meet those sales targets you are likely to be in breach of contract, which can have serious consequences.  In some circumstances they may entitle the principal to terminate the agency agreement and avoid paying compensation. You should therefore think carefully about whether the sales targets are achievable and whether you wish to be bound by them.

If a commercial agent has been acting for a principal for some time without  a written agreement in place, the principal cannot “force” the agent to sign up to a written agreement at a later date. The agent is generally within his or her rights to refuse.

A principal may be entitled to vary the terms of a written agency agreement, but this will depend on what the proposed change is. An agent does not have to agree to a significant change, although minor changes may be able to be imposed without the agent’s agreement, since an agent does have duty to comply with “reasonable instructions”.

A written agreement will usually set out set out the procedure for varying the agreement, and the variation procedure must be followed for a variation to be valid.

If the written agreement does not set out the procedure for varying its terms, it is advisable to obtain both parties’ written agreement to the variation to ensure it is binding.

If a commercial agent is in very serious breach of the terms of the agency agreement, this may entitle the principal to terminate the agreement and avoid paying the agent certain termination payments. It is always advisable for a principal to take advice before taking any steps to terminate to ensure its position is not prejudiced.

If the principal breaches the agreement, an agent may be able to take action to compel the principal to adhere to its obligations under the agreement. If the breach is serious enough, the agent may have the grounds to bring the commercial agency to an end and pursue the principal for a termination payment. It is always advisable for an agent to take advice before taking any steps to terminate to ensure the is or her position is not prejudiced.

This depends on the wording of any agreement and the severity of the breach. In some circumstances, a failure to meet sales targets may be give the principal the right to terminate your agency without having to give you any notice or pay compensation under the Regulations. 

A written agreement may specify the consequences of a particular breach. However, agents should be wary of clauses which set out the consequences of breach or seek to exclude an agent’s rights or entitlement. These types of clauses, depending on their wording and effect, might be unenforceable. An agent should always seek advice in these circumstances.

You should consider any sales targets which the agreement seeks to impose and also whether compensation or an indemnity will be payable in the event that the agency is terminated. An agent should also consider all other obligations the agreement seeks to impose, particularly those which appear onerous.

If you are an agent and are being asked to sign an agency agreement, it is advisable to seek legal advice prior to signing the agreement to ensure that the terms of the agreement reflect your interests and that you understand the terms which will apply to your agency.

When agents service large or repeat order customers, it is not unusual for principals to wish to take certain customers “in-house”, to remove the agent’s involvement to avoid paying the agent substantial commissions on sales made to those customers.  A principal will generally not have the right to do this, and the agent is likely to be able to resist such a change. A principal must always act in good faith when seeking to vary the terms of an agent’s contract, or it is likely to be in breach of the Regulations.

An agent faced with this scenario should seek advice early so he or she can protect her position.

It may be possible for an agent to negotiate a settlement with the principal, compensating the agent for the loss of future commissions that the agent would have received from future sales to those customers.

A principal who takes customers in-house without the agent’s agreement or prevents an agent from continuing to service certain customers may give the agent the right to terminate the agency and claim compensation or an indemnity. A principal should therefore be sure it understands its rights before taking such a step.

A principal may try to reduce an agent’s territory, and if it does so, the agent’s commissions are likely to fall as a result.

Whether a principal has the right to do this will depend on the terms of the agency agreement and the circumstances at the time, although a principal will generally not have the right to do this, and the agent is likely to be able to resist such a change. A principal must always act in good faith when seeking to vary the terms of an agent’s contract, or it is likely to be in breach of the Regulations.

It may be possible for an agent to negotiate a settlement with the principal, which compensates the agent for the loss of part of his or her territory.

Yes – commercial agency agreements can be specified as being only for a fixed term. However, the fact that a commercial agency is specified as being only of a fixed duration does not prevent the application of the Regulations. The provisions relating to termination payments under the Regulations will still apply where the agency agreement terminates at the end of the fixed term.

A principal can only prevent an agent from competing against it if there are enforceable restrictive covenants in place. Whether the restrictions are enforceable will in part depend on whether they are reasonable. They are likely to be unenforceable if they are unreasonable in their scope.

An agency agreement is likely to set out when and how an agency agreement can be properly terminated, although this does not prevent a principal from terminating at any time. If the principal does not terminate the agency in accordance with the terms of the agency agreement, it will be in breach of the contract. The principal may also be in breach of the Regulations if it doesn’t give the agent the minimum notice prescribed by the Regulations.

A principal may terminate an agent at any time, however, if it does so, it is likely to be liable to pay the agent a termination payment under the Regulations. An agent’s right to a termination payment will depend on the circumstances surrounding the termination and the terms of the agency agreement. In most cases, it will comprise compensation or an indemnity under Regulation 17, and pipeline commissions under Regulation 8. There may also be a claim under Regulation 15 if the principal has not given the agent the minimum notice of termination.

If the principal terminates on the grounds of a serious breach,  it may be entitled to terminate the agency without giving notice and without any obligation to pay compensation or an indemnity under Regulation 17. The agent would, however, still be entitled to be paid all commissions due and owing up to termination and pipeline commissions (unless they have been validly excluded by contract). The right to terminate on this basis is a common dispute between agents and principals, and advice should be taken by parties in these circumstances.

A repudiatory breach is a very serious breach of the agency agreement entitling the principal to treat the agency agreement as immediately at an end and avoid paying a termination payment under Regulation 17. There is little case law which assists in determining what is and what is not classed as a repudiatory breach in a commercial agency context.  Whether an agent is in repudiatory breach is a common dispute which arises between agents and principals.

A principal can terminate a commercial agent for poor performance at any time. However, if there is a written agreement, the principal should comply with any termination provisions set out in the agreement.

Poor performance may give rise to a contractual right under the agreement to terminate, but that will not necessarily mean the principal can avoid paying the agent a termination payment. It will only be if the agent’s poor performance is so serious that the principal has the right to terminate the agent with immediate effect that the principal be able to avoid paying a termination payment under Regulation 17. Advice should be sought by principals who are considering terminating for poor performance so they understand what notice should be given, and their potential liability to the agent upon termination.  

Upon termination of an agency, an agent should seek advice as to its entitlement under the Regulations. It will be important for the legal advisor to understand, amongst other things, the terms of the agency and the basis for termination.

If a principal is alleging that the agent is in repudiatory breach of the agency, it is unlikely to give the agent notice of termination. However, if it is subsequently found that the agent was not in repudiatory breach, the agent will be entitled to claim damages in lieu of notice.

If the principal is terminating other than on the grounds of repudiatory breach, the minimum period of notice required by the Regulations should be given. This will be dependent on the length of the agency. For agencies which have lasted for three years or more, an agent must be given three months’ notice of termination.

In some cases, the written agency agreement may provide for a longer notice period than that set out in the Regulations, and in that case, the agent should be given the longer notice period.

If an agent is provided with less than the required notice under the Regulations (or under a written agency agreement), the agent will have a claim against the principal for a payment “in lieu of” the notice which should have been provided.  It is not possible for parties to an agency agreement to agree to shorter notice periods than those provided by the Regulations, regardless of what a written agency agreement might say. It is only where an agent is in repudiatory breach that a principal is entitled to terminate without giving notice.

If a principal makes it impossible for an agent to properly perform its agency role, for example, by not providing the agent with suitable samples, the principal may be in repudiatory breach of the agency agreement. If the principal is in repudiatory breach, it would entitle the agent to treat the agency as at an end and claim a termination payment. An agent who thinks their principal might be in repudiatory breach should seek advice as to its legal position before to ensure its position is not prejudiced.  

If a principal refuses to pay an agent its entitlement under the Regulations following termination, the agent should assert a claim under the Regulations. It may be possible to negotiate a settlement of an agent’s claim, or it may be necessary to issue court proceedings. Agents are encouraged to seek advice in these circumstances so they understand their entitlements under the Regulations and the potential value of any claim.

The requirement for a principal to pay either compensation or indemnity to a terminated agent stems from Regulation 17. Compensation requires the principal to pay a sum of money to the agent as compensation for the agent’s loss of the agency with reference to the value of the agency to a hypothetical purchaser at the date of termination, whereas an indemnity requires the principal to indemnify the agent for commissions which the agent would have received had the agency not been terminated. The two entitlements are calculated very differently.

The default provision is that compensation is payable unless the parties have agreed that an indemnity should be payable instead. If there is a written agreement and it is silent about which is payable, the compensation option will apply.

In most cases, the compensation value will be higher than an indemnity value. However, this is not always the case and will depend on various factors and the circumstances of each individual case.

The method of valuation for Regulation 17 compensation was decided in the House of Lords case of Lonsdale v Howard and Hallam. The purpose of compensation is to compensate the agent for the value of the agency it has lost. It is calculated based on the value of the agency to a hypothetical purchaser at the date of termination.

The method of calculation of the level of compensation is complicated and will take into account the maintainable income stream of the agency, the expenses attributable to the running of the agency and the risk factors associated with the agency.

This is the old method for calculating the level of compensation under Regulation 17. It is no longer the correct way to calculate an agent’s compensation entitlement.  

Indemnity is capped at a maximum of one year’s gross commission and is calculated by reference to the increase in value and goodwill resulting from the agent’s efforts. In most cases, a successful agent will be able to reach the cap of one year’s commission.

An agent may also have claims under Regulations 7, 8 and 15.

Regulation 7 provides that an agent should be paid all commissions due to him during the course of the agency. If your principal has not paid you all commissions due to you up to termination, you would have a claim under Regulation 7.

Regulation 8 entitles you to claim for what are often referred to as pipeline commissions. These are sales mainly attributable to the agent’s efforts concluded during the reasonable period after termination.

You may have a Regulation 15 claim if you have not been provided with sufficient notice of the termination of your agency.

Before a change in policy in 2021, compensation and indemnity payments made under the Regulations were generally treated as not subject to tax. However, new guidance from HMRC stated that this is no longer the case where there is a direct link between the compensation or indemnity payment and the supply of goods or services under an agency contract. It is therefore important to consider whether any settlement offer for a claim for compensation or an indemnity by an agent is being made exclusive or inclusive of VAT, and the agent should always seek independent financial advice from their accountant or tax specialist on this point prior to accepting a settlement offer. 

The country’s courts which will hear any dispute concerning an agency agreement is known as “jurisdiction”.

This is a complex topic.

Where the agent and principal are both based in Great Britain, the English courts will have jurisdiction to hear any dispute. The position may be different where the principal is based abroad.

If there is a written agency agreement, there is likely to be a jurisdiction clause which specifies which country’s courts will hear any dispute.

If an agent or principal is in any doubt as to which jurisdiction applies, advice should be sought.

If you have a written agency agreement, you may have a choice of law clause which specifies which country’s law should apply to any claim or dispute arising out of the agreement.  For example, your written agency agreement may specify that English law should apply to any dispute.

Therefore, if a written agency agreement has a French jurisdiction clause and an English choice of law clause, any claim must be brought in the French Courts, but the French Courts would have to apply English law.

It is possible that you may have to sue your principal in a country other than that in which you reside. If you have a written agency agreement, it is possible that this agreement may specify in which country any claim must be brought; however, other laws may apply which determine which country should decide the dispute and which country’s law should apply. This is a very complex area, and if this applies to your circumstances, we would strongly recommend that you get in touch with us so we may advise.

If your principal is based abroad, you may be required to sue your principal in a country other than that in which you are based. The position in relation to jurisdiction and choice of law is very complicated, and we recommend that you take advice from us on this point, if applicable.

Jurisdiction relates to which country’s courts should hear the dispute, and choice of law relates to which country’s law should apply. It is possible that one country may have to apply the law of another country if the jurisdiction and choice of law clauses conflict.

In the first instance, we recommend that you get in touch with us so we may advise you. We are a member of the MSI Global Alliance and have partner lawyers all over the world.  We also have a network of specialist agency lawyers across Europe who we can put you in touch with. 

If you require legal advice from a lawyer in another country, we will likely be able to put you in touch with an agency specialist in that county who will be able to assist you.

If it is unclear which country’s law applies to your agency contract, we strongly recommend that you get in touch with us in order so we can advise you.