Businesses with agents are currently experiencing COVID-19 (coronavirus) induced cancellation of orders obtained by their agents. But where cancellation occurs, are these businesses still liable to pay commission to their agents?
It depends. First on the terms of agency agreement. Second on the terms of the contract with the customer which has been cancelled.
Many agents have written agency agreements. Usually these will set out when commission which has been earned is payable to the agent. However, irrespective of what is set out in the agency agreement, it is the case that the Commercial Agents Regulations provide certain rules to determine:
- when commission becomes due; and
- when commission which has become due is payable to the agent.
The Regulations go on to provide that any agreement between the principal and the agent to derogate from these rules to the detriment of the agent will be void. As a result, such an agreement will be incapable of being relied upon by the principal.
It follows that the standard provision in many agency agreements that the agent will be paid commission when the principal is paid by the customer may – depending on the facts – simply not work.
Where the principal decides to accept a request from a customer to cancel an accepted (or confirmed) order and a contract is in place between them, the Regulations distinguish between:
i. the situation where the contract for the sale of goods to the customer is not fulfilled for a reason for which the principal is not to blame – in which case commission is not payable to the agent; and
ii. the situation where the principal is to blame – in which case commission is payable to the agent.
Whilst there is a lack of case law as to what is “blame”, it appears that the issue is one of responsibility for the contact not being executed, in other words fulfilled. Accordingly where the principal has entered into a contract for the sale of goods but then decides to accept the request of the customer to cancel the order, it may (depending on the terms of the contract) have been open to the principal to hold the customer to the contract and enforce the contract. The fact that the principal decides to accept the customer’s request means that it is the principal’s decision not to proceed to fulfil the contract in which case the principal is still liable to pay commission to the agent.
This can be contrasted with the situations where:
- the customer becomes insolvent; or
- the customer cancels the contract unilaterally and the principal is unable to recover damages from the customer,
in which case commission is not payable to the agent.
Take home points
- For a principal to be faced with a situation where it will not be paid by a customer but still has to pay commission to the agent is double jeopardy.
- To avoid such double jeopardy it is better for a principal minded to accept a cancellation request from a customer to instead be presented with the customer’s unilateral cancellation. However, unsurprisingly a customer may be unwilling to put itself in a position where it acts unilaterally and then faces a claim for damages for breach of contract.
- For an agent knowledge is key – knowing why the principal is not fulfilling a contract will put the agent in a position where it may pursue a claim for unpaid commission.
Articles and commentary by our legal experts on the impact of COVID-19 are all available here.