Potential pitfalls for businesses with sales agents
“Don’t allow the Commercial Agents Regulations (1993) to cause you a headache if you’re a seller of anything from greetings cards to building materials!”
Solicitor David Preece is warning businesses to be aware of rules governing the sale of goods via an agent so that they can avoid costly and unforeseen payments should the professional relationship come to an end.
Whilst the appointment of agents, working on a commission basis, has historically been viewed as a cost effective and risk free approach to selling goods, David, a member of FBC Manby Bowdler’s Corporate team, has witnessed a recent increase in enquiries from businesses engaged in such relationships.
He said: “For many businesses, the idea of paying an agent on the basis of results rather than investing in a full time member of staff, has presented itself as an attractive proposition. This was no less the case during the economic downturn as the approach was viewed as a risk-free way of getting goods to market in difficult times.
“However, as the market has improved and companies are again growing, there is a move back to investing in an in-house resource and ending the relationship with the commercial agent. It’s at this stage that many businesses have found that they’re not up to date with the implications of legislation which has been in force for over 20 years.”
When it was introduced in 1993, The Commercial Agents Regulations placed a number of obligations on both the business and the agent acting on their behalf in order to safeguard both parties. However, two of its provisions cause businesses particular difficulties, especially when no formal written agreement exists. David explains:
“The first, and perhaps lesser of the two issues, relates to the termination notice period for such agency arrangements where we’re finding too many businesses are simply unaware of the need to either provide up to three months’ notice of termination, or pay commission in lieu of notice.
“However, of perhaps more significance is the issue of the termination payment which is payable once the arrangement has been terminated. The key point here is whether the business has foreseen this issue and provided for the ‘indemnity alternative’ which is capped at one year’s commission (and often comes in at less), because if they haven’t, they could potentially be faced with the unlimited ‘compensation alternative’.
“We have seen numerous situations recently where businesses have been astonished to find that when terminating an agency arrangement as it is no longer the most effective way to take their goods to market, they’re faced with payments of hundreds of thousands of pounds to achieve this.
“Simply, any businesses considering engaging with agents should seek expert legal advice on the potential pitfalls and how to avoid them. For businesses that already have such an arrangement in place, I’d urge them to take immediate steps to formalise those arrangements by the introduction of a written agreement. Meanwhile, if you’re a business wishing to terminate an agreement you should seek urgent steps to meet with a commercially minded solicitor so that you do not unduly prejudice your position and avoid paying penalties save for those outlined in and required by law.”
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