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.