If at the outset goods have been supplied on a RTV basis and the agency agreement is carefully drafted, then it should be possible for the principal to withhold or clawback commission without being in breach of the agency agreement. If, however, a RTV agreement is not made before the goods are supplied or the agency agreement does not address the situation, the principal will be unable to withhold or clawback commission. The reason for the distinction lies in the provisions of the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) and correspondingly in the EU Agents Directive. The Regulations and Directive provide that commission becomes due (and an agent therefore has a right to receive commission) as soon as, and to the extent that, one of the following circumstances occur: 1 – the principal has “executed” the transaction; 2 – the principal should, according to their agreement with the third party, have “executed” the transaction; or 3 – the third party (in this example, the stockist) has “executed” the transaction.
So at what point does a principal or a stockist “execute” their part of the transaction, and how does this translate to the practical reality of the order process? Unfortunately, neither the Regulations nor the Directive define “execution”, so given the lack of case law it is likely that “execution” will occur at the earliest of: 1 – delivery of goods to the stockist; 2 – payment for the goods by the stockist; or 3 – the due date for delivery of the goods, where the principal has accepted an order but failed to deliver the goods.
Crucially, neither the Regulations nor the Directive prohibit the agency agreement providing something else – in other words, stating what is meant by “execution” and addressing the ability of the principal to supply goods on the basis of a RTV agreement. But where the agency agreement fails to do so, what then? Both the Regulations and Directive provide the circumstances in which an agent’s entitlement to commission will be extinguished. Specifically, the legislation provides that an agent will not be entitled to commission where: 1 – it is established that the contract between the principal and the third party will not be executed; and 2 – that fact is due to a reason for which the principal is not to blame.
Unfortunately for the principal this amounts to bad news – for several reasons. But mainly this is because, by accepting the stockist’s RTV for (by way of example) the sake of preserving goodwill, the principal is not in the situation where the reason for non-execution of the transaction is a reason for which the principal is not to blame. Or the Regulations and Directive make clear that any provision in the agency agreement to derogate from this position to the detriment of the agent is void!
Agents and principals – why does this matter? Why does this matter indeed? Whether under the terms of the agency agreement the principal is able to withhold commission or clawback commission which has already been paid matters in a number of respects.
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First, in terms of the principal’s overheads. A principal which has not been paid for goods delivered will incur the further cost of commission unless a RTV agreement was entered into at the outset with the stockist and the agency agreement has been drafted to address the situation.
Second, where the principal has failed to pay commission which was due, the agent will have a claim for “back commission” (that is, commission where an order accepted by the principal has not been fulfilled for a reason for which the principal is to blame). Sometimes it will suit the agent only to claim “back commission” after the agency agreement has ended, which not everyone realises. Third, in most situations where the agency agreement is terminated the agent will be able to claim either compensation or indemnity in respect of the loss of the agency. Where the agent is able to do so, the agent’s entitlement to back commission will be taken into account in calculating both compensation and indemnity.
Four, and finally, the issues which apply to RTVs also apply to retrospective discounts which may be given by the supplier to the stockist – something to remember.
Hannah McCullagh is an Associate and Stephen Sidkin is Partner at Fox Williams LLP (
www.agentlaw.co.uk; www.
fashionlaw.co.uk;
www.foxwilliams.com)
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