Commercial agents are generally used by businesses as an alternative to traditionally employed salespeople. In this case, the business is known as the “principal”. Commercial agents are independent people who do one of two things, usually in exchange for commission:
- sign customers up to a contract between the customer and the principal; or
- introduce the customer to the principal, for the principal to then decide whether to sign up to a contract with the customer.
There are certainly some advantages to using commercial agents. They allow a business greater flexibility in some circumstances than employing salespeople, and can allow businesses to expand into regions or countries that would not be practical for that business to reach by other methods. There are also disadvantages to the use of agents – less control than when using an employee, and greater risk than when dealing with a distributor. A distributor would buy the products directly from the business and sell it on to the customer.
Leaving aside the usual debate about how to structure the sales function within a business, there are three specific issues that I am seeing come up time and time again with commercial agents. None of these issues are new; however, they are becoming much better known (particularly to commercial agents themselves), and so if your business uses or is considering using a commercial agent, you need to be aware of them:
- The Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) – the Regulations set out two alternative payments that the principal must make to a commercial agent at the end of the agency agreement – even where a fixed term agency agreement expires. In other words, you pay commission to the commercial agent properly throughout the term of your agency agreement, and then have a further bill to pay at the end of the term! The payments can be significant – I have been involved in a couple of cases recently where sums well into six figures were claimed.It is important that you understand the risk here, because this can significantly increase the overall cost of using a commercial agent – cost is usually one of the primary arguments in favour of that arrangement as opposed to employed salespeople. The other important point here is that your cost under the Regulations will be increased if you do not have the correct language in your agency agreement choosing between the two alternative payments. If the agreement is silent, or there is no written agreement, then the commercial agent is entitled to the more generous of the two alternatives.
- Foreign Laws – where you are engaging a commercial agent to expand your sales into another country, you should ensure that your agency agreement is governed by English law and courts. However, where the commercial agent conducts all or most of their business in a particular country, there may be a risk that the local courts would accept a claim from the commercial agent on termination of the agency agreement. This is important, because some countries (for example France) can offer much more generous payments to commercial agents than the English courts.
- Employment risk – part of the essence of a commercial agent is that they are not an employee. Nevertheless, we are seeing a marked rise in the number of commercial agents claiming that they are actually employees of the principal. This is most commonly claimed when the agency agreement is terminated, and is most likely to be successful where a business has prepared their own agency agreement – as usually these are more restrictive than an agreement prepared professionally by a solicitor. Such a claim can lead to significant expense, and (where the agent is based overseas) to significant potential tax consequences.
There is definitely still a place for commercial agents. I hope however that this article has indicated why it is so important that you have your agency agreement prepared by a solicitor, in order to help you to avoid these pitfalls. If you would like to talk about your Agency Agreement, or any other matters relating to your commercial agency arrangements, then please give me, Euan McLaughlin - Partner Commercial Department, a call or send me an email.