CORONAVIRUS AND SALES AGENT COMMISSION
by Kevin Manship
of Blake Morgan LLP
These are two subjects that, perhaps, you don’t instinctively link to each other but the current COVID-19 pandemic and the extremely challenging market conditions that are resulting from lockdown are having a significant impact on the payment of commission by principals to their sales agents.
There are a number of reasons for this and we are being asked by principals and sales agents alike what their rights and obligations are in this situation.
The Commercial Agents Regulations include provisions which determine:
1) When commission becomes due to the sales agent; and
2) The time limits within which commission which is due has to be paid to the sales agent.
The Regulations also make clear that any attempt in a sales agency contract to opt out of these obligations to the detriment of the agent will be void (ie it would have no effect and could not be relied upon by the principal).
Under the Regulations, commission becomes due to the commercial agent when the contract for the sale of goods between the principal and the customer has been “executed” (ie “completed”). In practice, this means that the goods have been delivered to the customer and the customer has paid the principal in full.
In some situations, the principal has received payment from the customer but is not passing that payment down the chain to the sales agent by way of commission. This seems to be happening in an attempt to preserve the principal’s cashflow, which is being squeezed from all directions. While such steps may be understandable from the principal’s perspective, this would be a clear breach of the principal’s obligations to the sales agent and the agent would have a strong claim for breach of agency contract against the principal.
In other situations, customer orders that were placed before the COVID-19 pandemic erupted have been cancelled before they are completed. In such situations, the sales agent may still be entitled to be paid commission, but only if they can establish that the reason for cancellation was one for which the principal is to blame. There is a distinct lack of case law on what “blame” means in these circumstances, but it seems likely that Courts would look at “fault” or some form of wrongdoing or “responsibility” for the contract not being completed. This could lead to some tricky assessments of whether commission to the sales agent is still payable. Some examples:
- A customer cancels an order because the principal has failed to deliver the goods by the specified date. In normal circumstances, this would be a fairly clear cut example of the principal being to “blame” for the sale not completing. However, what if the reason for the principal failing to deliver the ordered goods is that the principal’s factory in the Philippines has had to shut down as part of the COVID-19 lockdown or is unable to source materials due to COVID-19 lockdown? Each of those situations would be beyond the principal’s control, so would the principal still be to “blame” for the sale not completing? While the reason for the sale not completing would be the principal’s inability to deliver goods, I think there would be a very good argument that the principal would not be to “blame” here.
- A customer cancels an order before delivery takes place because it is unable to open its stores under the UK’s current lockdown. In theory, the principal could enforce its contractual rights and hold the customer to paying for the order. However, in practice this is unlikely to be realistic. If the principal took those steps, what would the customer’s reaction be when things go back to normal? Would the customer continue to order from the principal or would the principal lose the business? There may also be concerns about the customer’s continuing ability to trade if they have to pay for goods they can’t sell. If the principal took steps in those circumstances to preserve its relationship with its customers, would it be to “blame” for the specific sale not proceeding?
- What if a customer seeks to cancel an order after delivery has taken place, again because it is unable to open its stores due to lockdown? All of the points outlined above would still apply, but there would also be an added layer in relation to the stock that has been delivered to the customer. If the customer ceased trading and became insolvent, would the principal be able to secure the return of its stock? As a condition of agreeing to cancel the order, the principal could insist on the return of the delivered stock. That would at least enable the principal to retain some assets that could still be utilised when things start to improve.
It can be seen from these examples that there can be powerful practical and commercial arguments which could have a significant impact on the question of whether the principal is to “blame” for a sale not completing. Answering that question is not straightforward in the current circumstances and there could be some very bitter disputes around these issues if principals and sales agents are not able to work together through these tremendously tough times.
Kevin Manship, Legal Director
Blake Morgan Solicitors LLP, One Central Square, Cardiff, CF10 1FS
Direct Tel: 029 2068 6126