The rationale for any business to use an agent is that the relationship is results based – no sale equals no commission payable to the agent.
To protect agents, the EU Agents Directive provides that the right of an agent to commission can be extinguished only if and to the extent that:
1. it is established that the contract between the customer and the principal will not be performed; and
2. that fact is due to a reason for which the principal is not to blame.
Recently these words were considered in a European Court judgment.
The agency agreement in question provided for the agent to receive commission for each contract performed. However, the agreement also stated that any non-payment by a customer would result in a forfeiture or proportional reduction of such commission.
A number of customers failed to pay, claiming that the principal had treated them badly. Unsurprisingly, this resulted in the principal not paying commission to the agent.
The agent claimed that it was entitled to the commission. It relied on the principal being to blame for the fact that the principal had not been paid by the customers.
The European Court first had to consider whether the right to commission can be extinguished only where there is a complete non-performance of the principal (customer contract) or whether the same principle also applies where there has been a partial non-performance of the contract.
The Court decided that the Directive’s intention was to ensure that as the performance of a contract progresses, commission becomes due to the agent.
But what then of the provision in the Directive (and in the Commercial Agents Regulations) that commission received by the agent in a situation where the contract between the principal and the customer will not be performed shall be refunded to the principal? With reference to this, the Court decided that a contractual obligation on the agent to reimburse the principal commission received by the agent where the principal has partially non-performed the contract between principal and customer is enforceable and could be relied on by the principal subject to:
1. the refund commission obligation on the agent is strictly proportionate to the extent to which the contract between principal and customer has not been performed; and
2. such non-performance of such contract is not due to a reason for which the principal is to blame.
The last question before the Court concerned the very essence of the back commission protection given to the agent. The Court was asked to consider whether ‘a reason for which the principal is to blame’ concerns:
1. only the legal reasons that resulted directly in the non-performance of the contract between principal and customer; or
2. covers all legal and factual circumstances for which the principal is to blame and which results in the non-performance of the contract with the customer.
Given the need to avoid possible abuses by the principal, the Court concluded that all legal and factual circumstances relating to the principal must be taken into account.
For agents, the situation is straight forward – there is a need for agents to keep records of situations where they have not been paid commission on orders that they have taken. Failure to do so can prove very costly indeed to the agent.
For principals, the situation is also straight forward – given that their profitability is dependent upon the contracts being performed and payment being received from customers, principals should seek to avoid non-performance situations.
© 2017 Fox Williams LLP