Manufacturers often appoint sales representatives to promote, market and sell products on their behalf. These can be employees acting under a contract of employment. However, there is another category of sales representative known as commercial agents. These are self-employed persons (acting by themselves or by limited companies) who sell products for the manufacturer in return for a commission or some other form of remuneration.
Special rules apply to commercial agents. These are the Commercial Agents (Council Directive) Regulations 1993 (the Regulations).
If the Regulations apply, this can have a profound effect on manufacturers, especially where the agency agreement is terminated without cause and/or the agent eventually retires.
We, therefore, recommend that all manufacturers with a salesforce comprising of sales agents have a good working knowledge of the Regulations.
This article will answer some frequently asked questions regarding commercial agents and the law.
The Regulations are European Law written into UK law before Brexit. They cover the rights and obligations of both agents and principals as well as providing agents several protections.
Commercial agents must be self-employed and independent from their principal. Agents must have continuing authority to negotiate contracts on behalf of their principal and sell to potential customers (however, that does not necessarily extend to negotiating price).
Agents are usually remunerated by way of a commission-based upon the value of sales they make for the principal but are also sometimes paid a fixed retainer.
Agents will not normally be a party to a sales contract with the end customer, making them different from independent distributors.
Usually, a commercial agent will have a written contract that spells out their role as a commercial agent and the application of the Regulations. But this is not always the case.
In the absence of a written contract, the Regulations still apply as long as the agent fits the criteria for a self-employed sales agent under the Regulations.
The Regulations provide agents with specific rights and entitlements during their agency and after termination. These govern the principal’s conduct and behaviour towards the agent (imposing a duty to act in good faith), the timing and payment of commissions; minimum notice periods before termination; and protection to agents from being dismissed without due compensation. This last point is perhaps the most important factor between an agent and a principal’s relationship because it means that a principal may be liable to pay the agent compensation upon termination of the commercial agency. Such claims for compensation can be substantial, especially if the agency is high performing and long-running.
If a sales agent has been terminated or the agency has come to an end either because of the ill health of the agent or retirement, then the agent may have a right to bring a claim against their principal for compensation or an indemnity under the Regulations.
Compensation is a sum of money payable to the agent to compensate for the loss of the agency. This is usually calculated by reference to the value of the agency to a hypothetical purchaser at the date the agency terminates.
An indemnity payment is similar to compensation in that it is designed to compensate an agent for the loss of their agency. However, the calculation is different and is capped at one year’s gross commission.
In addition to compensation and indemnity, the agent is entitled to all commissions earned up to the date of termination, a month notice period of up to 3 months (depending on the length of the agency), and commission on sales made after termination that the agent generated as a result of their efforts during the agency (aka pipeline commission).
Our expert team of Commercial Agency Solicitors can assist in all aspects of commercial agency law. We are always happy to have a chat to help guide you in the right direction. You can contact us on 0161 941 4000 or you can email the Commercial Agency team for more information.