Commercial agent’s right to commission on incomplete orders

Did You Know?
Circumstances exist in
which a commercial agent
remains entitled to
commission – even though
the sale between the
principal and the customer
has not been completed.

The vast majority of commercial agents and
principals will be well aware of the circumstances
in which the commercial agent is entitled to be
paid commission on sales made to customers by
the principal under the Commercial Agents
(Council Directive) Regulations 1993 (“the
Regulations”).
This is largely dealt with under Regulations 7 and 8
and there have been a number of cases in the UK
and European Courts which have clarified the
rights of the commercial agent. While the issue
of entitlement to commission is often
considered following termination, the
entitlement applies throughout the commercial
agency. However, there may be understandable
reluctance on the part of the commercial agent
to raise such issues or bring claims while their
agency is still live.
Much less attention has been paid to Regulation
11, which sets out the circumstances in which a
commercial agent remains entitled to
commission even though the sale between the
principal and the customer has not been
completed.
Again, this entitlement applies throughout the
commercial agency. Regulation 11(1) deals with
this by setting out when the commercial agent’s
right to commission is extinguished, as follows:

11(1) The right to commission can be
extinguished only if and to the extent that-
(a) it is established that the contract between the
[customer] and the principal will not be executed;
and
(b) the fact is due to a reason for which the
principal is not to blame.
There are a few key points which can be drawn
out of the above:

1. THERE MUST BE A CONTRACT BETWEEN
THE CUSTOMER AND THE PRINCIPAL
Despite the use of the word “executed” (see
below), I think it is clear that there must be a
contract in place between the customer and the
principal. In deciding whether there is a contract,
I would need to look at the trading terms of the
principal (and perhaps also the customer) to
determine the point at which an order from the
customer has been “accepted” by the principal.
Generally, it will not be sufficient for the
customer (or the commercial agent on behalf of
the customer) to simply place an order with the
principal. The principal will usually need to take
some positive step to confirm it has “accepted”
the order. That action could involve the principal
issuing an order acknowledgement confirming a
delivery date, taking steps to deliver the order or
issuing an invoice for the goods ordered.
Assessing the point in time at which an order has
been accepted by the principal such that there is
a contract in place can be quite difficult and will
probably require legal advice unless the position
is very clear.
2. MEANING OF “THE CONTRACT …
WILL NOT BE EXECUTED”
The use of the word “executed” is quite confusing
in the context of Regulation 11(1). Under UK law,
using the word “execute” in conjunction with
“contract” usually indicates a requirement for a
contract to be signed by the parties to it.
However, in the context of Regulation 11(1)(a) I
think the word “executed” actually means
“completed” or “fulfilled”. This view is supported
by the wording in Regulation 10, which makes a
number of references to the principal and
customer “executing” the transaction (i.e.
completing or fulfilling their obligations under
the contract).
Logically, therefore, Regulation 11(1)(a) applies
where the contract between the customer and
the principal will not be completed or fulfilled.
3. REASONS FOR THE CONTRACT
NOT BEING EXECUTED
The commercial agent only retains their
entitlement to commission under Regulation 11
if the contract is not completed or fulfilled for a
reason for which the principal is to blame. Those
reasons would include:
• the customer cancelling the order because the
principal has delivered the wrong goods or has
failed to deliver the goods within timescales
specified by the customer.
• the customer rejecting the goods delivered
because they are defective, of poor quality or not
fit for purpose.

Reasons for which the principal would not be to
blame include failure by the customer to pay for
goods received or if the order was cancelled by
the customer for a reason for which the
commercial agent is to blame (e.g. the
commercial agent inserted the wrong goods in
the customer order or placed an order for goods
which the commercial agent knows are out of
stock).
As far as I am aware the right to commission
under Regulation 11 has not yet been addressed
by the Courts in the UK or in Europe. The reason
for this is probably that the circumstances in
which the commercial agent could bring this type
of claim are quite rare.
However, the rights under Regulation 11(1)
should be kept in mind by both the principal and
the commercial agent where sales are not
completed, particularly for example where a new
product proves to be extremely popular and the
principal has difficulty in keeping up with demand
or where the principal is focussing on new
markets and accepts orders but does not give
priority to the UK market.
Under Regulation 11(3), the commercial agent
and the principal are not able to contract out of
Regulation 11(1). Any contrary provisions in the
contract between the commercial agent and the
principal would therefore be overridden by
Regulation 11(1) and would be void.
Another important point for commercial agents
and principals to keep in mind is Regulation 11(2),
which notes that if commission has already been
paid for a particular sale, the commercial agent
will be required to refund that commission if the
sale is not completed or fulfilled for a reason for
which the principal is not to blame.
The most obvious example would be if the
customer fails to pay for goods delivered. Again,
this scenario is likely to be quite rare as the
majority of principals do not pay commission to
their commercial agent until they have received
payment from their customer.

By Kevin Manship – Associate
Morgan Cole LLP

Kevin.manship@morgan-cole.com

Bradley Court, Park Place,
Cardiff CF10 3DR
Tel: 029 2038 5502
www.morgan-cole.com

Disclaimer: This column does not contain legal advice and is for general
guidance only. Agentbase, Morgan Cole LLP, and the writer accept no liability in connection with the general guidance given in this column.

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