How to spot a commercial agent (and why you need to know how to spot one)

22 January 2020

Commercial agents are special. They enjoy a unique legal position and enjoy a suite of legal rights and protections[1]. A number of the core rights and protections enjoyed by commercial agents are absolute and will endure regardless of what the commercial agent and principal agree. But what does this mean in practice, and how can you identify whether you are, or have retained, a commercial agent to which such rights apply?

The rights enjoyed by commercial agents will apply even if there is no written contract. They will apply even if the commercial agent and/or the principal has no idea that their oral agreement creates a commercial agency. A commercial agency comes into being automatically by operation of law. A party (an individual or a limited company: it makes no difference) will be deemed to be a commercial agent if they are:

  1. a self-employed intermediary;
  2. with continuing authority to negotiate the sale or purchase of goods;
  3. on behalf of another person (the ‘principal’), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.

What does this mean? The courts have interpreted the definition widely. The classic commercial agent would be a lone individual who enters into an agreement with a manufacturer to negotiate sales contracts on their behalf. For example, commercial agents are common in the medical devices industry. Many medical sales reps are employed (and so do not constitute commercial agents), but often medical device manufacturers will engage third party sales agents who market the manufacturer’s products to hospitals and other potential customers in return for commission on all sales achieved. “Continuing authority” will usually be established so long as the agent is engaged for more than a single transaction. The courts have also interpreted ‘negotiate’ widely. A self-employed intermediary who uses their skills to market a product and to seek to achieve sales for their principal will therefore very likely fall within the definition of a commercial agent.

Many manufacturers or distributors make a conscious decision to use commercial agents, reasoning that a self-employed intermediary is preferable to engaging an in-house sales rep. Sensible principals will negotiate a formal agency agreement that limits their exposure if, for example, the agency terminates. The real danger for principals is when they unwittingly enter into an informal arrangement with a party that meets the definition of a commercial agent. The principal may have no intention of engaging that person for a prolonged period, but once the agency is created, the principal will be potentially liable to pay compensation if it decides to bring the relationship to an end for whatever reason (other than complete non-performance by the agent).

That compensation can be very significant. The general approach of the courts is to assess compensation as if the agent were selling their business. So, for an agency generating profits of £100,000 a year, the typical compensation payment could easily exceed £300,000.

Business acquisitions often lead to the discovery of a commercial agent issue. We have seen many examples of business acquisitions where the new owner decides to make cost savings by merging the sales teams of their existing business and the recently acquired company. In this scenario, the principal must be exceptionally careful to ensure that they understand their potential liability to pay compensation to sales agents with whom they no longer wish to do business. Restructuring sales networks must be handled with caution. The risk of a liability to pay compensation to commercial agents should also be factored into the risk allocation agreed in the Share Purchase Agreement. If the purchaser of a business discovers that they have been saddled with a network of underperforming commercial agents, there are various ways to minimise the potential exposure, but if hasty action is taken to terminate long standing sales relationships without proper care, the potential liabilities can be enormous.

For practitioners who deal regularly with commercial agents, they are easy to spot. A ten minute conversation will usually be sufficient to advise on whether a party falls within the definition contained in the Regulations. When a company takes on any new external sales representative – or indeed an external buying representative – they need to be conscious that they may unwittingly be creating a commercial agency and should take advice to minimise their potential exposure.

[1] Under the Commercial Agents (Council Directive) Regulations 1993

Tom Bolam Author
Tom Bolam
Senior Associate
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