As many parts of retail remain under pressure (with well publicised failures over the last nine months including Wilko, Wiggle, The Body Shop, Matches and Ted Baker) the use of RTV (return to vendor) – is on the rise. But what does this mean for principals and agents?
RTV agreement or no RTV agreement
RTV covers the situation in which the supplier (say a brand) and the purchaser (usually a retailer) agree on the return goods supplied to the supplier.
Sometimes supplier and stockist will have agreed at the outset that goods will be supplied on a RTV basis. In this situation usually the retailer will have the right to return unsold inventory. Correspondingly the brand will be bound to take back such inventory on the terms set out in the RTV agreement.
For example, if an electronic goods retailer is only able to sell 50 per cent of tablets supplied and an RTV agreement was entered into before the goods were supplied, then depending on the terms of the RTV agreement the retailer may be able to return all or part of the unsold stock at the agreed return price.
Often, however, an RTV agreement is not made before the goods are supplied. In this situation it will usually be the case that the retailer contacts the supplier and depending on the strength of their respective bargaining positions, an agreement is reached to take back stock on specified terms.
Sometimes a brand will be prepared to take back stock in order to preserve any one or more of:
- the relationship with retailer;
- brand reputation – not least to prevent goods being sold through outlets;
- its ESG position and to avoid the goods going to landfill; or
- simply its end of season sell-through figures, particularly from key accounts.
In essence the supplier is preserving a degree of control.
Agents and principals – the position
RTVs are good news for the stockist. It has been able to offload stock which it will not be able to sell. For the supplier the news is not so good. But what about the agent which helped build the relationship with the stockist and procured the order in the first place?
In particular should the agent be subject to a clawback of the commission which was received in respect of the order?
It depends.
If at the outset goods have been supplied on a RTV basis and the agency agreement is carefully drafted then it should be possible for the principal to withhold or clawback commission without being in breach of the agency agreement.
If, however, an RTV agreement is not made before the goods are supplied or the agency agreement does not address the situation, the principal will be unable to withhold or clawback commission.
The reason for the distinction lies in the provisions of the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) and correspondingly in the EU Agents Directive.
The Regulations and Directive provide that commission becomes due (and an agent therefore has a right to receive commission) as soon as, and to the extent that, one of the following circumstances occur:
- the principal has “executed” the transaction;
- the principal should, according to their agreement with the third party, have “executed” the transaction;
- the third party (in this example, the stockist) has “executed” the transaction.
So at what point in time does a principal or a stockist “execute” their part of the transaction, and how does this translate to the practical reality of the order process?
Unfortunately neither the Regulations nor the Directive define “execution”. Whilst given the lack of case law it is likely that “execution” will be deemed to occur at the earliest of:
- delivery of goods to the stockist;
- payment for the goods by the stockist; or
- the due date for delivery of the goods, where the principal has accepted an order but failed to deliver the goods,
Crucially neither the Regulations nor the Directive prohibit the agency agreement providing something else – in other words stating what is meant by “execution” and addressing the ability of the principal to supply goods on the basis of a RTV agreement.
But where the agency agreement fails to do so, what then? In somewhat complex drafting both the Regulations and Directive provide the circumstances in which an agent’s entitlement to commission will be extinguished. Specifically the legislation provides that an agent will not be entitled to commission where:
- it is established that the contract between the principal and the third party will not be executed; and
- that fact is due to a reason for which the principal is not to blame.
Unfortunately for the principal this amounts to bad news. This is because:
- by accepting the stockist’s RTV for (by way of example) the sake of preserving goodwill, the principal is not in the situation where the reason for non-execution of the transaction is a reason for which the principal is not to blame; and
- the Regulations and Directive make clear that any provision in the agency agreement to derogate from this position to the detriment of the agent is void!
Agents and principals – why does this matter?
Whether, under the terms of the agency agreement, the principal is able to withhold commission or clawback commission which has already been paid matters in a number of respects.
First, in terms of the principal’s overheads. A principal which has not been paid for goods delivered will incur the further cost of commission unless a RTV agreement was entered into at the outset with the stockist and the agency agreement has been drafted to address the situation.
Second, where the principal has failed to pay commission which was due, the agent will have a claim for “back commission” (that is, commission where an order accepted by the principal has not been fulfilled for a reason for which the principal is to blame). Sometimes it will suit the agent only to claim “back commission” after the agency agreement has ended.
Third in most situations where the agency agreement is terminated the agent will be able to claim either compensation or indemnity in respect of the loss of the agency. Where the agent is able to do so, the agent’s entitlement to back commission will be taken into account in calculating both compensation and indemnity.
In part two, coming soon, we will consider what RTVs mean for distributors and their suppliers.
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