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This article considers whether it is possible for agents and principals to seek to limit or exclude the application of the Commercial Agents (Council Directive) Regulations 1998 (the Regulations) to an agent’s post-termination commission entitlement - more commonly known as ‘pipeline’ commission.
Pipeline Commission
Most agents are now aware of their entitlements pursuant to the Regulations.
One of the main entitlements for an agent after termination of their agency is a claim for ‘pipeline’ commission pursuant to Regulation 8 of the Regulations. Regulation 8 states as follows:
“a commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated if—
(a) the transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contract terminated; or
(b) in accordance with the conditions mentioned in regulation 7 above, the order of the third party reached the principal or the commercial agent before the agency contract terminated.”
In summary, Regulation 8 entitles an agent to commission, for a ‘reasonable period’, on orders which the principal receives after termination where such orders are mainly attributable to the efforts of the agent. The clearest example of this is where an agent secures an order before the agency terminates and such order is subsequently processed after termination. In these circumstances, the agent should be entitled to commission on this order.
With high earning agencies with a steady revenue stream or big ticket goods for sale, a Regulation 8 claim for ‘pipeline’ commission can be very lucrative for an agent where the agency terminates.
So far so good. But what is the position where the agent or principal seek to agree in advance what the ‘reasonable period’ is; or where a principal seeks to disapply Regulation 8 altogether?
To answer that question, one must consider the extent to which it is possible to limit or contract out of Regulation 8.
By their very nature, the Regulations are designed to protect commercial agents by providing them with significant rights, such as ensuring they receive reasonable compensation for the loss of their agency. An attempt to derogate from a particular entitlement prescribed by the Regulations is therefore at odds with the key purpose of the Regulations.
It follows that if an agent has worked hard on securing a large order, it would go against the purpose of the Regulations if the principal were able to deprive the agent of the benefits of that deal by terminating the agency. Hence, Regulation 8 comes into play.
The mandatory nature of the Regulations
Certain provisions of the Regulations are stated to be mandatory - that means the principal cannot override or exclude that part of the Regulations to the detriment of the agent, even where the agent agrees to do so by virtue of a term of their agency agreement.
An example is where a principal seeks to limit the minimum statutory notice period required to be given to an agent to terminate the agency by and inserting a clause in the agency agreement to this effect. Such a clause would be a clear derogation from the minimum notice period provided by the Regulations and would be void.
The Regulations also state that the parties cannot agree to disapply the entitlement to compensation or an indemnity pursuant to Regulation 17 upon termination of the agency. Any contractual term which says that an agent is not entitled to compensation or an indemnity upon termination is therefore void.
But what of Regulation 8? The Regulations do not contain express wording that prevents parties from contracting out or modifying an agent’s entitlement under that provision. Are the parties therefore free to limit the scope and operation of Regulation 8?
Contracting out of Regulation 8
Many agency agreements contain a term which seeks to modify the application of Regulation 8 upon termination. For example, the agency agreement might specify a cap on the value of the Regulation 8 entitlement, or it might seek to limit the ‘reasonable period’ to orders for a fixed period after termination or limit compensation under Regulation 8 to orders from specific customers.
That, in and of itself, may not be a bad thing for an agent. Regulation 8 claims are often fertile ground for disagreement between agents and principals, especially in respect of the length of the ‘reasonable period’. Having express contractual terms in place setting out the scope of the Regulation 8 entitlement could provide the agent (and the principal) with certainty regarding the agent’s Regulation 8 claim in the event of termination, and therefore avoid unnecessary litigation and cost. Provided the limit on the scope of the Regulation 8 entitlement is reasonable, a court is likely to view such a term being indicative of what the parties considered to be “reasonable” in the circumstances.
A clause which seeks to disapply Regulation 8 in its entirety is different. Such clause would be what is known as a derogation from Regulation 8. The disapplication of pipeline commission is at odds with the underlying purpose of the Regulations which is to ensure an Agent is protected and reasonably compensated.
However, since Regulation 8 does not contain wording which expressly prevents parties from disapplying its effect, principals often argue that an agent’s entitlement to ‘pipeline’ commission is capable of being excluded in this way. Indeed, it is a question which has caused much debate among practitioners and there is no definitive answer.
There has been recent case law where the exclusion of an agent’s Regulation 8 claim was upheld by the court, and there are certainly arguments to be made that Regulation 8 is capable of exclusion. However, there are also good arguments to the contrary. For example, Regulation 11 provides that the right to commission can only be extinguished in certain circumstances, and that a derogation from Regulation 11 to the detriment of an agent is void. An exclusion of an agent’s right to pipeline commission is almost certainly an extinction of the right to commission to the detriment of the agent and is not one of the categories permitted by Regulation 11. On this basis a derogation from Regulation 8 may be indirectly prohibited by Regulation 11.
The reality is that agents should only agree to a term which modifies the operation of Regulation 8 if such term does not significantly deprive the agent of its entitlement to ‘pipeline’ commission, or the agreement is advantageous because it provides the agent with certainty as to what is likely to be considered to be ‘reasonable’ in the circumstances.
Agents should be mindful of attempts by principals to contract out of the Regulations generally, and more specifically in respect of Regulation 8 which contains no express wording preventing derogation by contract. A term which excludes an agent’s pipeline commission may ultimately be found to be invalid by the courts, but is it a chance worth taking? If an agent is in any doubt as to the effect of the terms of an agency agreement, then legal advice should be sought. This will assist the agent in understanding the likely position on termination and should avoid an unexpected and uphill battle when it comes to claiming ‘pipeline’ commission.
