Be careful what you contract for!

An Overview of Commercial Agents

1.What is the commercial agents directive?

The Council Directive of 18 December 1986 on the coordination of the laws of Member States relating to self-employed commercial agents (the “Directive”) is implemented in Irish law by the European Communities (Commercial Agents, Regulations 1994 and the European Communities (Commercial Agents, Regulations 1997 (the “Regulations”) . The Directive was introduced to harmonize the conditions and remove inconsistencies under which commercial agents and their principals operate in member states. It also introduced in to Irish law the concept of a “commercial agent”.

2. Who is and who is not a “commercial agent”?

A “commercial agent” is defined as:-“a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter called the ‘principal’, or to negotiate and conclude such transactions on behalf of and in the name of that principal”.

Evidently, this is a widely cast definition. There are however some exceptions.

The definition does not include:-

2.1. an officer of a company empowered to enter into commitments binding on a company or association;

2.2. a partner lawfully authorised to enter into commitments binding on his partners;

2.3. a receiver, a receiver and manager, a liquidator or a trustee in bankruptcy;

2.4. commercial agents whose activities are unpaid;

2.5. commercial agents where they operate on commodity exchanges or in the commodity market;

2.6. a consumer credit agent or a mail order catalogue agent whose activities are considered secondary; or

2.7. an agent selling services (the Directive applies to goods only).

3. When is commission payable?

A commercial agent is entitled to be paid commission unless another form of agreement in relation to payment has been reached between the parties.

If commission levels or other payment methods are not agreed in the contract, then the Directive prescribes that such commission as is customary for similar agents in the territory should be paid or where there is no such customary practice, reasonable payment must be made taking into account all the circumstances.

It is therefore in the interest of the principal to agree at the outset what the payment arrangements will be. The right to commission can be limited by agreeing a flat rate of payment to the agent. The Directive sets out the transactions that will give rise to an entitlement to commission.

4. Obligations on the parties

4.1 Obligations on commercial agents:-

4.1.1. Look after the principal’s interest;

4.1.2. Act dutifully and in good faith;

4.1.3. Make proper effort to negotiate and conclude transactions;

4.1.4. Convey information to the principal; and

4.1.5. Comply with reasonable instructions of the principal.

4.2 Obligations of the Principal:-

4.2.1. Act dutifully and in good faith;

4.2.2. Provide the commercial agent with the necessary documentation in relation to the goods concerned;

4.2.3. Obtain such information as is necessary for the commercial agent for the performance of the agency contract

4.2.4. Notify the commercial agent when it is anticipated that the volume of commercial transactions will be significantly lower than the agent might normally have expected;

4.2.5. Advise the commercial agent in a reasonable period of acceptance, refusal or any non-execution of a commercial transaction which the agent has procured for the principal; and

4.2.6. To pay compensation on termination (See paragraph 7 below for further information on the right to compensation).

5. Let’s call a spade a spade

An agency contract must be evidenced in writing otherwise it is not valid.

To ascertain whether the Directive applies to a contract, the courts will analyse the terms and conditions of the contract to ascertain the nature of the particular relationship.

If the meaning of “commercial agent” is satisfied and the terms of the contract are in effect an agency agreement, the terms of the Directive and implementing Regulations will apply.

6. Compensation

The right to compensation is provided for under Article 17 of the Directive. The rationale behind the right to compensation is that the agent will have contributed to growing the goodwill of the principal’s business and in effect the Directive requires that the principal buys out the agent’s interest in that goodwill.

Compensation is payable on expiry or termination of the agency agreement, including by reason of the death of the agent.

It does not arise where:-

6.1 a contract is terminated by the principal due to default attributable to the commercial agent;

6.2 where a commercial agent has terminated the agency contract, unless such termination is justified by circumstances attributable to the principal or on ground of age, infirmity or illness; and

6.3 where the commercial agent assigns his rights and duties under the agency contract to another with the agreement of the principal.

The manner of calculation of compensation has not yet been tested in the Irish courts and there are differing views in various member states. In France, for example, the custom is to calculate it on the basis of 2 years commission whereas in the UK it was ruled that this should be calculated on the basis of future commissions the agency would have brought in.

7. Time is ticking: The 1 year rule

Failure by a commercial agent to invoke their right to compensation within one year following termination by way of notice of their intention to pursue such an entitlement prevents them from making such a claim.

8 How could the provisions of the Directive and Regulations be avoided?

If the Directive applies, the provisions cannot be avoided. Therefore, to fall outside of the Directive, it must be clear from the contract that some other form of relationship applies.

Distribution agreements are commonly used as an alternative. Otherwise, principals may consider establishing an employee/employer relationship.
However, there are pros and cons to each of these scenarios and the effects of employment law and competition law in each of these situations must be given due consideration.

9. Notice Period for Termination
The following notice periods are required to be given to a commercial agent and shorter periods may not be agreed.

Duration Notice

For further information on this topic, please contact Elaine McGrath at emcgrath@reddycharlton.ie or Niamh Gibney at ngibney@reddycharlton.ie