All too often it is only when the agency agreement comes to an end that agents will consider the protections provided by the Commercial Agents Regulations. But preparing the ground for a strong claim – whether it is for compensation or indemnity as well as the other entitlements provided by the Regulations – should begin before termination occurs.
Commission that is still the agent’s
Orders confirmed after termination:
Even after the termination of the agency agreement, an agent can have an entitlement under the Regulations to commission on sales made by their principal after termination. Where the agent initiated or largely influenced an order which reaches the principal within a reasonable period after termination, then in principle the agent is entitled to commission. What is reasonable is subject to market or industry norms.
It can also occur where the order reached the principal or the agent before termination but was accepted by the principal after termination had occurred.
Such commission is sometimes called ‘post-termination commission’ or ‘pipeline commission’. But irrespective of its name, for an agent to claim such commission it is important that the agent:
- can point to actions taken before termination which led to the order being received after termination. The key here is keeping good records as well as keeping the principal updated as to what the agent is doing to obtain orders; or
- is aware of what orders received before termination are likely to be accepted by the principal after termination. The key here is keeping in regular contact with customers and maintaining records of such contacts.
It is also worth noting that it is possible to exclude or limit post-termination commission in the agency agreement. However, many principals do not do so. As a result, an agent may be able to rely on what is provided by the Regulations.
The issue of non-fulfilment:
Back commission is another entitlement. This commission arises where a principal has accepted an order but then fails to fulfil the order for a reason for which the principal is to blame. Examples can arise in terms of defective goods, late delivery, or simply a failure to order enough stock to fulfil all orders accepted from customers!
In this situation the customer will not pay the principal and, as a result, the principal will not pay commission to the agent. However, despite this the agent has a right to such commission. This right is not capable of being contracted out by the agency agreement. But if at the time of termination an agent has incomplete records of orders received from customers and as to whether they have or have not been fulfilled, an agent can miss out on commission – going back up to 6 years!
Compensation or indemnity
Before the agency agreement ends the agent should ensure that they know whether they are entitled to claim either indemnity or compensation under the Regulations. The two are different although urban myths abound as to how they are to be determined.
For indemnity to apply principal and agent must have made an election for indemnity and recorded this in the agency agreement. If this is not the case, then compensation will apply by default.
Indemnity and compensation are different – not least as indemnity is subject to a cap equal to the annual average of the commission earned by the agent in the 5 years preceding termination (or a shorter period if the agency agreement has existed for less than 5 years). If an election for indemnity has been made, the agent must be able to show that they have introduced new customers or significantly increased business from existing ones and that the principal continues to benefit. Further payment of the indemnity must be fair having regard to all the circumstances and, in particular, to the commission lost by the agent in respect of such customers as a result of termination of the agency agreement.
In contrast compensation is forward looking and based on what a hypothetical third‑party purchaser would pay for the agency at or immediately before termination, factoring in net income, prevailing market conditions, and industry multiples.
What is evident is that an agent is more likely to succeed with their claim for either indemnity or compensation where good records have been kept including:
- Customer introductions
- Invoices
- Reports
- Delivery records
- Receipts for investments made
- Correspondence confirming instructions received from the principal
Finaly in respect of compensation and indemnity an agent must bear in mind that (unlike other entitlements under the Regulations) the clock starts ticking as soon as the agency agreement ends. Notification of an intention to claim compensation or indemnity must be given no later than with a year after the termination of the agency agreement. It is therefore important that the date on which the agency agreement ended must be determined as soon as possible so as to know the period in which such a notice must be given. This may sound straightforward but sometimes it is not as there can arguments as to when the agency agreement came to an end.
It follows that this is a case of miss it and lose it!
Investment at the principal’s request
What of the situation where the agent has invested at the principal’s behest—perhaps financing marketing initiatives, adapting premises to suit a new product, or acquiring software and equipment on the principal’s instructions. These costs need to be tracked closely as an agent may be able to claim for wasted investment. Indeed the Regulations refer to the inability to amortise costs “incurred in the performance of the agency contract on the principal’s advice” as a factor in calculating compensation. The upshot? Such investment may amplify the agent’s claim provided that it has been suitably documented in real time.
Summary
When looked at from a distance, an agent’s entitlements under the Regulations form a portfolio: post-termination commission for deals closed later, back commission for principal-caused failures to fulfil, compensation or indemnity, and reimbursement for investment requested by the principal.
By managing these matters whilst the agency agreement is still in existence – collecting data, preserving correspondence, documenting requests, defining timelines – the agent is likely to be in a better position to maximise their claims under the Regulations.
How we can help
Whether you’re approaching the end of your agency agreement or simply want to be prepared, our agentlaw specialists are here to help. Contact us today to find out more.
