A Commercial Agent’s entitlement to Pipeline Commission: Can it be limited or excluded?

When an agency ends, the agent’s work often does not stop earning: orders they set in motion can land on the principal’s desk days or weeks later. Regulation 8 gives the agent a right to commission on that “pipeline” of post-termination business. But the right comes with tests to satisfy, an open question over whether a principal can contract it away, and a separate issue about how it interacts with the indemnity calculation.

The contributions below, from specialist commercial agency solicitors, cover each of these. Each is reproduced in full and attributed to its author.

Pipeline Commission or Pipe Dream?

The foundation: what pipeline commission is, and the two tests an agent must satisfy under Regulation 8.

Most commercial agents who sell goods know that if their agency is terminated, then under the Commercial Agents (Council Directive) Regulations 1993 they can claim compensation/an indemnity unless the agent’s behaviour has been so serious that the principal is justified in terminating the agency.

What is less well known, is that even if the principal is justified in terminating the agency so that the agent has no claim to compensation/an indemnity, the agent can still make a claim under Regulation 8 of the 1993 Regulations. This right under Regulation 8 is commonly referred to as the right to “pipeline commission”. So far as relevant, Regulation 8 provides as follows: “Subject to regulation 9 below, a commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated if – (a) the transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contact terminated;” There is no express provision in the 1993 Regulations prohibiting a principal from excluding the rights of the agent under Regulation 8. This is in contrast to the position under Regulation 17 which is the regulation which provides for payment of compensation/an indemnity.

There, the Regulations expressly state that the parties may not derogate from the agent’s right to compensation/an indemnity.

This has led most commentators to conclude that because there is no prohibition which expressly refers to Regulation 8, therefore the parties are free to exclude the rights of the agent to pipeline commission. However, it is not clear if Regulation 8 can be excluded in the agency agreement and whilst the consensus is that it can be, the question awaits a definitive court decision. If there is no exclusion in the agency agreement of the agent’s right to pipeline commission (or if the exclusion is held to be of no effect) the agent has to show that the transaction was “mainly attributable” to his efforts during the agency and that it was entered into within a “reasonable period” after the agency ended. The agent would have to satisfy both of these requirements and not just one of them. There is nothing in the Regulations which gives any guide as to what is “mainly attributable” or what is a “reasonable period”. This is not surprising given the wide range of industries which use agents and the products sold within those industries. Thus everything is fact specific and what may be a “reasonable period” in one set of circumstances will not be so in another. The transaction must be “concluded” within the reasonable period. The view has been taken in at least one court case, that a transaction is concluded when the relevant order is placed, as distinct from when the goods are delivered to the customer. The transaction also has to be “mainly attributable” to the agent’s efforts during the existence of the agency. The dictionary definition of “attributable” is “to regard as arising from a particular cause or source”. The phrase is “mainly attributable” and not just “attributable” and much would depend on the technical complexity/reputation/comparative pricing of the product and on the standing of the agent within that particular industry.

It is commonsense that there has to be some form of causative link between the efforts of the commercial agent and the conclusion of the transaction, but it is not clear how direct that link has to be. An agent could be expected to argue that Regulation 8(a) should be applied to all orders placed by customers who were initially introduced by the agent to the principal. A principal could be expected to argue that what occurred after the original introduction e.g. the principal’s attendance at trade shows, product improvements, credit arrangements, should be looked at so as to decide whether the sale was mainly attributable to the original introduction of the customer. Also the concept of “mainly attributable” and “reasonable period” are related in the sense that after a passage of time the agent’s influence on the customer would be likely to have waned. Moreover a sale might still be held to be mainly attributable to the efforts of the agent yet not attract pipeline commission because it was not entered into within a reasonable period of the termination. A principal could be expected to exclude the agent’s right to pipeline commission in the agency agreement and a well advised agent to object to the exclusion. If this impasse was reached, it would be open to the parties to specify in the agency agreement what is a reasonable period for the purposes of calculating the pipeline commission.

Article written by Paul Samuel of Ashby Cohen LLP, a leading law firm operating in all areas of employment law, partnership law and in matters arising out of the Commercial Agents (Council Directive) Regulations 1993

Ashby Cohen Solicitors Ltd, 18 Hanover Street, London W1S 1YN
Tel: 0207 408 1338
Email: info@ashbycohen.co.uk
www.ashbycohen.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen LLP and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in this article. For example, please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon

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A Commercial Agent’s entitlement to Pipeline Commission: Can it be limited or excluded?

The core question: how far a principal can limit, or exclude altogether, an agent’s Regulation 8 entitlement by contract.

This article considers whether it is possible for agents and principals to seek to limit or exclude the application of the Commercial Agents (Council Directive) Regulations 1993 (the Regulations) to an agent’s post-termination commission entitlement, more commonly known as ‘pipeline’ commission.

Pipeline Commission

Most agents are now aware of their entitlements pursuant to the Regulations.

One of the main entitlements for an agent after termination of their agency is a claim for ‘pipeline’ commission pursuant to Regulation 8 of the Regulations. Regulation 8 states as follows:

“a commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated if—

(a) the transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contract terminated; or

(b) in accordance with the conditions mentioned in regulation 7 above, the order of the third party reached the principal or the commercial agent before the agency contract terminated.”

In summary, Regulation 8 entitles an agent to commission, for a ‘reasonable period’, on orders which the principal receives after termination where such orders are mainly attributable to the efforts of the agent. The clearest example of this is where an agent secures an order before the agency terminates and such order is subsequently processed after termination. In these circumstances, the agent should be entitled to commission on this order.

With high earning agencies with a steady revenue stream or big ticket goods for sale, a Regulation 8 claim for ‘pipeline’ commission can be very lucrative for an agent where the agency terminates.

So far so good. But what is the position where the agent or principal seek to agree in advance what the ‘reasonable period’ is; or where a principal seeks to disapply Regulation 8 altogether?

To answer that question, one must consider the extent to which it is possible to limit or contract out of Regulation 8.

By their very nature, the Regulations are designed to protect commercial agents by providing them with significant rights, such as ensuring they receive reasonable compensation for the loss of their agency. An attempt to derogate from a particular entitlement prescribed by the Regulations is therefore at odds with the key purpose of the Regulations.

It follows that if an agent has worked hard on securing a large order, it would go against the purpose of the Regulations if the principal were able to deprive the agent of the benefits of that deal by terminating the agency. Hence, Regulation 8 comes into play.

The mandatory nature of the Regulations

Certain provisions of the Regulations are stated to be mandatory, that means the principal cannot override or exclude that part of the Regulations to the detriment of the agent, even where the agent agrees to do so by virtue of a term of their agency agreement.

An example is where a principal seeks to limit the minimum statutory notice period required to be given to an agent to terminate the agency by and inserting a clause in the agency agreement to this effect. Such a clause would be a clear derogation from the minimum notice period provided by the Regulations and would be void.

The Regulations also state that the parties cannot agree to disapply the entitlement to compensation or an indemnity pursuant to Regulation 17 upon termination of the agency. Any contractual term which says that an agent is not entitled to compensation or an indemnity upon termination is therefore void.

But what of Regulation 8? The Regulations do not contain express wording that prevents parties from contracting out or modifying an agent’s entitlement under that provision. Are the parties therefore free to limit the scope and operation of Regulation 8?

Contracting out of Regulation 8

Many agency agreements contain a term which seeks to modify the application of Regulation 8 upon termination. For example, the agency agreement might specify a cap on the value of the Regulation 8 entitlement, or it might seek to limit the ‘reasonable period’ to orders for a fixed period after termination or limit compensation under Regulation 8 to orders from specific customers.

That, in and of itself, may not be a bad thing for an agent. Regulation 8 claims are often fertile ground for disagreement between agents and principals, especially in respect of the length of the ‘reasonable period’. Having express contractual terms in place setting out the scope of the Regulation 8 entitlement could provide the agent (and the principal) with certainty regarding the agent’s Regulation 8 claim in the event of termination, and therefore avoid unnecessary litigation and cost. Provided the limit on the scope of the Regulation 8 entitlement is reasonable, a court is likely to view such a term being indicative of what the parties considered to be “reasonable” in the circumstances.

A clause which seeks to disapply Regulation 8 in its entirety is different. Such clause would be what is known as a derogation from Regulation 8. The disapplication of pipeline commission is at odds with the underlying purpose of the Regulations which is to ensure an Agent is protected and reasonably compensated.

However, since Regulation 8 does not contain wording which expressly prevents parties from disapplying its effect, principals often argue that an agent’s entitlement to ‘pipeline’ commission is capable of being excluded in this way. Indeed, it is a question which has caused much debate among practitioners and there is no definitive answer.

There has been recent case law where the exclusion of an agent’s Regulation 8 claim was upheld by the court, and there are certainly arguments to be made that Regulation 8 is capable of exclusion. However, there are also good arguments to the contrary. For example, Regulation 11 provides that the right to commission can only be extinguished in certain circumstances, and that a derogation from Regulation 11 to the detriment of an agent is void. An exclusion of an agent’s right to pipeline commission is almost certainly an extinction of the right to commission to the detriment of the agent and is not one of the categories permitted by Regulation 11. On this basis a derogation from Regulation 8 may be indirectly prohibited by Regulation 11.

The reality is that agents should only agree to a term which modifies the operation of Regulation 8 if such term does not significantly deprive the agent of its entitlement to ‘pipeline’ commission, or the agreement is advantageous because it provides the agent with certainty as to what is likely to be considered to be ‘reasonable’ in the circumstances.

Agents should be mindful of attempts by principals to contract out of the Regulations generally, and more specifically in respect of Regulation 8 which contains no express wording preventing derogation by contract. A term which excludes an agent’s pipeline commission may ultimately be found to be invalid by the courts, but is it a chance worth taking? If an agent is in any doubt as to the effect of the terms of an agency agreement, then legal advice should be sought. This will assist the agent in understanding the likely position on termination and should avoid an unexpected and uphill battle when it comes to claiming ‘pipeline’ commission.

Suzanne Carr, Senior Associate, Myerson Solicitors LLP
Grosvenor House, 20 Barrington Road, Altrincham, WA14 1HB
Tel: 0161 941 4000
www.myerson.co.uk
Suzanne.Carr@myerson.co.uk

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Good housekeeping: Keeping pipelines very clear!

Two practical lessons: watch for exclusion clauses, and keep the paper trail needed to prove a claim.

One of the potential benefits to agents following an agency termination situation, is the right to pursue against the principal a claim for commissions in the pipeline. In other words, the potential right to be entitled to commissions in respect to transactions concluded within a reasonable period after the termination date, and where such transactions can be shown to have been mainly attributable to the agent’s efforts (as opposed to anyone else’s). The above referred to right is pursuant to Regulation 8 of the Commercial Agents Regulations, and is potentially quite lucrative from an agent’s point of view (in supplementing other claims, such as any claim to, as appropriate, compensation/an indemnity), but a couple of points need to be carefully noted:

Firstly, the right to these so-called pipeline transaction commissions can in fact be entirely excluded where the parties [i.e:- the principal concerned and the agent] have agreed such an exclusion or carveout. Put another way, if any agent has an agreement with his principal which, via any relevant (obvious or less obvious but nonetheless) effective wording, excludes the right to claim (following termination) Regulation 8 commissions, then such a clause would likely be valid and the agent would not then be able to pursue any such rights. Secondly, and in practice, establishing the right to claim a specific amount by way of pipeline commissions may become quite difficult for those agents who haven’t maintained a clear paper trail to enable them to effectively prove, when any relevant transaction may be concluded post termination, that that transaction was down to their [the agent’s] efforts, as opposed to anyone else’s.

The lessons from the above therefore are:

• One: Check agreements before you enter into them (and I’m bound to say, take legal advice) to ensure that your prospective right to claim Regulation 8 pipeline transaction commission is not in fact excluded (and to otherwise be clear as to what terms/conditions may apply to any included right to Regulation 8 commission), and take further note that any effective exclusionary wording may not actually directly refer to “Regulation 8”.
• Two: Maintain the clearest and most detailed proper trail possible, to hopefully then enable you to straightforwardly establish that any relevant transaction concluded (within a reasonable period) following termination was indisputably predominantly as a result of your efforts.

David Bentley is a Partner with Bentley and Co. Solicitors and specialises in agency law.
7 Littlemoor Road, Pudsey, Leeds LS28 8AF
Tel: 0113 236 0550
Fax: 0113 236 2511
Email: db@bentleyandco-solicitors.com
www.bentleyandco-solicitors.com

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Bentley and Co. Solicitors and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in the article. For example please be clear that the answers given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon.

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New developments in an agent’s entitlement to post-termination commission?

A separate development on the indemnity side, from a Court of Justice of the EU decision on how post-termination commission interacts with the indemnity calculation.

Earlier this year the Court of Justice of the European Union (“CJEU”) gave its judgment in a case concerning the mobile phone company O2 Czech Republic and its former agent, QT.

The key question for the Court was the scope of the agent’s entitlement to an indemnity under the European Agents Directive (the “Directive”) following the termination of the agency agreement.

The Facts

O2 had entered into an agency agreement with QT concerning the sale of mobile telephones, mobile telephone accessories, and other products and customer services.

Throughout the term of the agreement, QT successfully concluded contracts with customers for O2 for which the agent received “one off” commission payments for each individual contract that was concluded.

The agency agreement was terminated by O2 on 31 March 2010 and QT received commission from O2 on transactions that had been completed up to the expiry date of the agency agreement.

However, the extent of QT’s entitlement to an indemnity was disputed as QT claimed that commission for hypothetical future transactions between O2 and its customers following termination of the agreement should also be taken into account.

So what does the Directive say?

The Directive states that, upon termination of an agency agreement, an agent is entitled to be indemnified if and to the extent that:

• it has brought the principal new customers or has significantly increased the volume of business with existing customers, from which the principal continues to derive substantial benefits from; and
• the payment of an indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers.

The right to an indemnity under the Directive is separate to another right of an agent under the Directive, namely the right to receive commission in respect of commercial transactions which are negotiated by the agent before, but concluded (that is, entered into) after, the agency agreement has terminated.

The result

The CJEU was satisfied that the agent was entitled to compensation in respect of commission which the agent would have hypothetically received in respect of transactions which the principal would hypothetically carry out with its customers following termination of the agency agreement.

In reaching this conclusion, the CJEU gave significant weight to the rationale behind the indemnity provisions in the Directive, that is, compensating the agent for the loss of the goodwill which it has generated for the principal and which the principal will enjoy after termination of the agency agreement.

Failing to take account of commission in respect of future transactions following termination of the agreement would, in the CJEU’s view, risk depriving an agent of a considerable share of the profits earned by the principal following termination. The CJEU was satisfied that QT had generated sufficient goodwill for O2, in respect of both maintaining O2’s existing customer base and also generating new customers for O2.

With reference to this view the CJEU considered the meaning of “commission lost” by the agent.

In doing so, it was careful to distinguish between the effect of the provisions in the Directive which cover the agent’s entitlement to commission in respect of transactions which are entered into before or following the termination of the agency agreement from the hypothetical commission which the agent would have received had the agency agreement continued.

It decided that, “commission lost” relates to the goodwill which would have been generated by the agent had the agency agreement continued. This therefore supported the agent’s claim for commission based on the conclusion of “hypothetical” transactions concluded following the termination of the agency agreement.

In reaching this view the CJEU also confirmed a report prepared by the European Commission some years ago which was intended to facilitate a uniform interpretation across the EU of the indemnity provisions of the Directive.

What does this mean for agents and principals in the UK?

It has been thought that generally the entitlement of an agent to compensation under the Commercial Agents Regulations (which implemented the Directive) following the termination of the agency agreement is better than the remedy of indemnity, and vice versa for a principal. One of the reasons for this being that compensation is uncapped whilst indemnity is subject to a cap.

The view has also been expressed that a way of testing whether a proposed amount of compensation is appropriate is to calculate what the terminated agent would have been entitled to if principal and agent on entering into the agency agreement had elected for indemnity. If the test results in a similar figure, then it may be claimed that the compensation figure is correct. However, sometimes this test has presupposed that the entitlement to post-termination commission should be ignored as it would lead to the double counting of post-termination commission and commission lost as was recognised by the CJEU.

It follows that the CJEU’s judgment has exposed the defect in the above view, and despite views which have been expressed in the English courts from time to time, an agent’s entitlement to post-termination commission is separate from the taking account of commission lost for the purpose of calculating indemnity. Put another way, it is not a question of double counting.

Therefore, we recommend that:

• UK principals should always consider whether an election for indemnity (as opposed to compensation) under the Regulations will provide for a smaller exposure following termination;
• UK agents should be alert to being subject to a capped indemnity entitlement; and
• Both UK principals and agents when entering into agreements with agents and principals outside of the UK, should consider how best to minimise their exposure (principals) or maximise the entitlements (agents).

Hannah McCullagh is an associate and Stephen Sidkin is a partner at Fox Williams LLP (www.foxwilliams.com)
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