By Ben Griffin of DWF Law LLP
The invasion of Ukraine and the COVID-19 pandemic have had a significant impact on commercial relationships and have focused minds on what might happen if external events impact on their contracts.
For principals and sales agents, it raises the question of when such events might impact on the payment of commission, or even bring an agency contract to an end.
When is an agent entitled to commission?
Commercial sales agents are entitled to commission on transactions concluded during the period covered by the agency contract, where:
- the transaction has been concluded as a result of the sales agent’s action; and/or
- the transaction is concluded with a third party whom the sales agent has previously acquired as a customer for transactions of the same kind (i.e. repeat customers); and/or
- the sales agent has an exclusive right to a specific geographical area or to a specific group of customers, and where the transaction has been entered into with a customer belonging to that area or group.
When can a principal withhold commission?
A sales agent’s right to commission is lost where the principal and the customer do not execute the transaction and the principal is not to blame for the transaction not taking place.
This means, for example, that if the customer refuses to take delivery, or does not pay, through no fault of the principal, then no commission is payable and any commission paid can be recovered from the sales agent or, more likely, will be set off against future commissions. However, if the order is cancelled because of non-delivery, late delivery or delivery of faulty goods, the agent generally remains entitled to commission.
So if external events, for which the principal is not to blame, intervene and prevent the principal performing its contract with the customer, commission is not likely to be payable. It is clear to see how the effects of a war or pandemic might cause this to happen and therefore relieve the principal of the obligation to pay commission.
Force majeure clauses – can an agency contract vary these rules?
Principals and agents cannot agree in a contract that the rules set out above do not apply.
However, a contract between a sales agent and principal may contain a “force majeure” clause, which is a clause which will excuse one or both parties from performing their obligations should certain events outside their control happen.
This means that the parties can agree that specific events are not the principal’s fault and therefore commission is not to be paid if they happen. That said, a Court will be concerned with substance rather than form and if, despite the terms of the contract, the non-performance is the principal’s fault, commission is very likely to be payable.
What if an external event makes performance of the contract impossible?
If there is no force majeure clause, then a contract may be “frustrated”. A contract will be frustrated if a sales event / circumstances make it impossible to perform, through no fault of either party. It a court concludes that a contract has been frustrated, both parties are relieved of their obligations. It should be noted, however, that frustration very rarely arises in practice.
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DWF’s Ben Griffin specialises in work in the field of commercial agency. The legal directory Legal 500 noted that “Ben Griffin is noted for his expertise in commercial agency disputes, and he has ‘a deep knowledge and understanding of the case law in this field.” Ben has co-authored a textbook on commercial agency with Oliver Segal QC (‘Commercial Agency – A Practical and Legal Guide’ by Oliver Segal QC & Ben Griffin – Law Brief Publishing).
If you would like to discuss any issues relating to commercial agency, please contact Ben on T: +44 333 320 3147; M: +44 (0)7712 356 402; or E: ben.griffin@dwf.law.
The content of this article is intended for information only and should not be used as a substitute for legal advice.
Further Reading
When commission can be withheld only makes sense against the general rule on when it is earned. For that rule, and when payment must be made, see when a commercial agent is entitled to commission.
A disruptive event may also raise the question of ending the relationship altogether. For whether Covid and Brexit can cut the cost of termination, see terminating sales agents and distributors.
If the principal treats withheld commission as a breach point, the payment on termination can turn on who was at fault. For how that works, see how breach affects the agency termination payment.