What You Should Know About Commission Agreements

Many new businesses and start-ups find themselves discussing the legalities of a commission agreement but what exactly is it? What should you know before signing and how can you make a commission agreement work in your favour?

A Commission Agreement is a legal agreement between two parties where an Introducer brings clients to a business. The relationship benefits both parties because the Introducer is paid a Commission for introducing clients and the business (supplier) has the opportunity to increase sales. The agreement sets out how both parties will benefit from this arrangement.

A Commission Agreement is in some ways an agency agreement, where the Introducer is independent but acts on behalf of the Supplier. The Introducer cannot sign contracts on the Supplier’s behalf and does not sell their products or services. The relationship is purely about making the introduction and once this has happened the Supplier takes over the client relationship and makes the sale.

It basically sets out the nature of the relationship between the Introducer and Supplier and clearly states the rights and obligations of both parties. Under this Commission Agreement the Introducer is only paid once the new client enters into a contract with the Supplier. It is favoured as it allows flexibility in how Commission will be calculated, which is generally based on the income that the Supplier receives from the new client during a specified period of time, known as the Introduction Period.

It will cover introductions made when the agreement was in force even if the contract is later terminated. This means that Commission cannot be reneged on, which protects the Introducer. The Agreement also ensures that payments are only made to the Introducer on income that is actually received by the Supplier, which protects the Supplier in the event that they do not receive any or all of money due.

When written in plain English, it provides for a complete statement of the limits of the Introducer’s authority and sets a boundary between the two parties so that the Supplier avoids any unexpected obligations under the arrangements. It also makes clear what the Introducer’s authority will be when marketing to potential clients, e.g. within a certain sector or geographical area. This avoids situations where the Introducer oversteps their authority and also prevents competition with the Supplier’s own sales or marketing initiatives.

Many legal firms will supply a template for Commission Agreements, when choosing this avenue for your own ensure that it complies with the latest legislation. This includes the Bribery Act of 2010.

Commercial Law – Payment of Commission – Commercial Agency Regulations – Commercial Agent

The case of Heirs of Paul Chevassus-Marche v Groupe Danone and Others (Case C-19/07) [2008], involved a determination on community laws relating to commercial agents. According to Article 7(2) of Council Directive (EEC) 86/653 (On the coordination of the laws of the member states relating to self-employed commercial agents) (“the Directive”):

“A commercial agent shall also be entitled to commission on transactions concluded during the period covered by the agency contract either where he was entrusted with a specific geographical area or group of customers… And where the transaction has been entered into with a customer belonging to that area or group…”.

Article 10 provides as follows:

“(1) The commission shall become due as soon as and to the extent that one of the following circumstances obtains:

(a) the principal has executed the transaction; or the principal should, according to his agreement with the third party, have executed the transaction; or…

(c) the third party has executed the transaction.

(2) The commission shall become due at the latest when the third party has executed his part of the transaction or should have done so if the principal had executed his part of the transaction, as he should have”.

In 1987, the first respondent in this case concluded an exclusive mandate with C. The applicants in this case were heirs to C’s estate. The exclusive mandate concerned the first respondent’s representation of C’s subsidiaries, namely the second and third respondents, in their dealings with the importers, wholesalers and retailers of their goods in a specific geographical area.

Before the termination of that contract, C requested payment of various sums. Such sums included commissions relating to purchases made by two companies established in his geographical area.

The requests for payment were refused on the ground that the purchases concerned had been made from central buying officers or dealers in metropolitan France, an area outside the control of the respondents, and without any action on C’s part.

C then brought an action concerning payment of commission.

The national court made a reference to the Court of Justice of the European Communities. The question concerned a request for a preliminary ruling on the interpretation of Article 7(2) of the Directive. The question referred by the national court was as to whether Article 7(2) of the directive was to be interpreted as meaning that:

“A commercial agent entrusted with a specific geographical area was entitled to commission where a commercial transaction between a third party and a customer belonging to that area had been concluded without any action, either direct or indirect, on the principal’s part”.

It was held as follows:

The court was of the opinion that

· Article 7(2) of the Directive had to be interpreted as meaning that a commercial agent entrusted with a specific geographical area did not have the right to a commission for transactions concluded by customers belonging to that area without any action, direct or indirect, on the part of the principal.

· Article 7(2) merely refers to any transactions concluded during the period covered by the agency contract. There is no requirement that those transactions had to be entered into with a customer belonging to a geographical area or a group of customers for whom the commercial agent was responsible.

· There is not an express requirement for action on the part of the principal, and there is no requirement for action on the part of the commercial agent.

· However, it should be noted that when considering Article 7(2) in conjunction with Article 10, the commercial agent’s right to commission arises either:

§ when the principal has (or should have) carried out his obligation; or

§ when the third party to the agency contract, namely, the customer, has (or should have) carried out his obligation.

· The presence of the principal in the transactions for which the commercial agent could claim commission was indispensable. It therefore followed that the commercial agent could claim commission. The commercial agent’s claim for commission could be made on the basis of a transaction only to the extent that the principal had acted, directly or indirectly, in the conclusion of that transaction.

· As a result, this meant that it was for the national court to establish:

“Whether or not the evidence before it, assessed in the light of the aim of protecting the commercial agent and of the obligation on the principal to act dutifully and in good faith, allowed it to establish the existence of such action, be that action of a legal nature”.

© RT COOPERS, 2008. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.

Agent’s Commission – How Much Should A Seller Pay?

When selling a house – is it practical for you to have it done through a real estate agent? If you want it sold fast, then the most logical thing to do is have it listed through an agent. These professional experts have experiences that can expedite the sale. But some are wary about employing an agent because of the commission outlay, an amount which could be quite material.

How much commission does a house seller have to pay to his agent? This has been a perennial question asked by a seller? Maybe there had been no straightforward answer given to this. All that has been divulged is that the agent’s commission is a percentage of the total contract price of the property sold. And that the commission is paid upon culmination of the transaction.

The truth about commission- there is no standard and legal commission rate. In reality, the setting of a fixed commission by real estate agencies is prohibited. This could be the reason why the amount of commission is not clear. Each agency has its own rate.

Real estate agencies can actually charge any commission they would want. It all depends on the people, the seller for that matter – how much this seller is willing to share to his or her agent from the proceeds of the sale. The commission can be very high as there is no ceiling. What keeps it down and reasonable is competition. Even in this setting of commission – the economic law of supply and demand seems to penetrate. The presence of many agents keeps the price down.

The commission is internal arrangement between the agency and the agents. The company can set a maximum and minimum rate for the agents and the latter are allowed to negotiate the commission with the clients. If the agent is under a broker, the commission has to be shared between them. Upon listing of the property, the agent already has stipulated the percentage of commission to be set upon sale. If this agent wants to lower this percentage, he has first to seek approval from his supervising broker. This can be done as there really is no fixed commission rate and the arrangement of rate is just internal.

But then there is one restriction – the agent can never divulge to other real estate agents the amount of commission to be put on top of the selling price. And in the same manner, real estate companies are not supposed to expose to any agent outside of the company their implemented rate. The commission earned on the sale is a split between the listing company or broker and the agent. The sharing between them is again a matter of agreement in-between.

Whatever is the amount of commission, a seller should know that he or she can haggle with it. The rate of commission, in this stiff competition, is negotiable. The seller can always search for better deal which will mean less expense for him or her.