What is a commercial agency?
A commercial agency is a business relationship where one party (the 'principal') appoints a self-employed intermediary (the 'commercial agent') to sell or purchase goods on their behalf.
The agent has 'continuing authority', which means their role isn't just for a one-off deal but involves an ongoing effort to generate business for the principal, often within a specific area or with a particular group of customers. The relationship between the principal and the agent is usually set out in a relevant agency agreement (like a Sales agency agreement).
What are the Commercial Agents Regulations?
The Commercial Agents (Council Directive) Regulations 1993 (referred to as the ‘Commercial Agents Regulations’ or the ‘Regulations’) set out the minimum rights and obligations between commercial agents and their principals in Great Britain. They were introduced to protect self-employed agents whose livelihood depends on the principal they represent.
The Regulations cover key areas of the agency relationship, including:
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the duties of the agent and the principal towards each other
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the agent’s right to be paid for their work (ie their ‘remuneration’)
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rules around the notice period required to end an agreement
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the agent’s right to receive a payment (either compensation or an indemnity) when the agreement ends
You cannot opt out of the Regulations. If the Regulations apply to your relationship, any term in your agreement that tries to reduce the agent’s rights will be invalid.
When do the Commercial Agents Regulations apply?
The Regulations apply when a self-employed agent is given ‘continuing authority’ to negotiate the sale or purchase of goods on behalf of a principal. It’s important to note that the Regulations only apply to goods, not services (eg where the agent simply introduces customers instead of completing sales). The agent’s activities must also take place in Great Britain.
Continuing authority means the agent is expected to carry out more than just a single transaction. They are usually appointed to develop the principal’s business in a specific territory or with a particular group of customers over a period of time.
When do the Regulations not apply?
The Regulations don’t apply to all agency relationships. For example, they don’t cover:
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agents who are employees, company officers, or partners
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people acting as insolvency practitioners
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agents who are unpaid
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agents whose activities are secondary to their main business (ie their role as an agent isn’t their primary focus)
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agents who operate on commodity exchanges or markets
If your relationship falls into one of these categories, the Regulations won’t apply, and your rights and obligations will be determined solely by the terms of your agreement.
What are the main duties of the agent and the principal?
The Regulations require both the agent and the principal to follow the terms of their agreement and act dutifully and in good faith. This general duty underpins the whole relationship, and each party has specific obligations.
The principal's duties
A principal must:
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provide the agent with all necessary documentation relating to the goods (eg price lists and technical specifications)
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give the agent all the information they need to perform the contract
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tell the agent within a reasonable period if they expect the volume of transactions to be lower than the agent might normally expect
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inform the agent within a reasonable period of their acceptance, refusal, or non-performance of a commercial transaction that the agent has secured for them
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provide the agent with a statement of commission due
The agent’s duties
A commercial agent must:
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look after the interests of their principal and act in good faith
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make proper efforts to negotiate and, where appropriate, conclude the transactions they’re instructed to take care of
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follow the principal’s reasonable instructions
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communicate all necessary information to their principal
What happens when a commercial agency agreement is terminated?
One of the most important protections for agents under the Regulations is the right to a payment when the agency agreement is terminated. This doesn’t apply if the agent ends the agreement (unless termination is justified by the principal's behaviour) or if the principal terminates because of a serious breach by the agent.
When the Regulations apply, the agent is entitled to a payment on either an indemnity or a compensation basis.
What is compensation under the Regulations?
Compensation is the default payment option when an agency ends. An agent is entitled to be compensated for the damage they suffer because the relationship with their principal has ended. The compensation payment is meant to reflect the value of the agency business the agent has lost and the commission they would have earned had the agreement continued. There is no upper limit or cap on the amount of compensation that a court can award. It is not linked to the agent’s performance.
What is indemnity under the Regulations?
An indemnity is an alternative to compensation that must be specifically chosen in the agreement. An indemnity is designed to pay the agent for the goodwill they have generated for the principal’s business, such as by bringing in new, long-term customers. The indemnity payment is capped at a maximum of one year’s average annual remuneration, which is calculated based on the agent's earnings over the previous five years (or a shorter period if the agreement didn’t last that long).
It's crucial to remember that if your agency agreement doesn't say whether indemnity or compensation applies, compensation will automatically be the default position.
If you want to appoint an agent, you can make our Sales agency agreement. If you have any questions about the Regulations or your specific situation, don’t hesitate to Ask a lawyer.
