What are the Commercial Agents (Council Directive) Regulations 1993 and how do they affect commission agreements in England and Wales?

The Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) implement European Directive 86/653/EEC into UK law and provide important statutory protections for self-employed commercial agents — individuals and entities who have continuing authority to negotiate the sale or purchase of goods on behalf of a principal. The Regulations apply automatically to qualifying agency relationships regardless of what the parties’ contract says, and many of their key provisions cannot be excluded by contract. The most significant rights granted by the Regulations include: the right to written particulars of the agency agreement; minimum notice periods for termination (1 month in year 1, 2 months in year 2, 3 months in year 3 and beyond); the right to commission on transactions concluded during or attributable to the agency; the right to compensation or indemnity on termination (except in cases of the agent’s material breach); and the right to see a statement of commission due. These rights remain in force in England and Wales following the UK’s departure from the EU, as the Regulations have been retained in UK law.

What is the difference between compensation and indemnity on termination under the Commercial Agents Regulations 1993?

Where the Commercial Agents Regulations 1993 apply, a commercial agent is entitled to either compensation or an indemnity on termination of the agency agreement (except in cases of the agent’s material breach or where the agent terminates the agreement without justification). Compensation (the default under English law) is assessed by reference to the damage suffered by the agent as a result of the termination — in practice, this is typically calculated by reference to the value of the agency to the agent on the open market at the date of termination, which can be significant and unpredictable. Indemnity (which must be expressly agreed in the contract) is capped at the equivalent of one year’s average remuneration over the preceding 5 years (or the full period of the agency if shorter) and must be justified by the agent having brought in new customers or significantly increased business with existing customers during the agency. The Lonsdale v Howard & Hallam [2007] UKHL 32 decision by the House of Lords established important principles for calculating compensation under English law, including the “french method” approach based on two years’ commission.

When is an agent entitled to commission under the Commercial Agents Regulations 1993?

Under Regulation 10 of the Commercial Agents Regulations 1993, a commercial agent is entitled to commission on a transaction when: (a) the transaction has been concluded as a result of the agent’s action; (b) a transaction is concluded with a third party whom the agent has previously acquired as a customer for transactions of the same kind; or (c) where the agent has an exclusive territory, a transaction is concluded with a customer from that territory, even if the agent was not directly involved in the negotiation. Commission becomes due when the principal has executed the transaction with the customer, or when the principal should have done so. The right to commission is extinguished only where the transaction with the customer is not executed and the principal is not at fault, or where the contract is cancelled due to breach by the customer (and the principal has taken all reasonable steps to enforce it). Post-termination commission is also due on transactions concluded after the end of the agency that are principally attributable to the agent’s efforts during the agency period.

Are post-termination non-solicitation and non-compete restrictions enforceable in England and Wales?

Post-termination restrictions — including non-solicitation clauses (preventing the agent from approaching the principal’s customers) and non-compete clauses (preventing the agent from working with competitors) — are enforceable in England and Wales as restraint of trade clauses, but only to the extent they are reasonable in scope, duration, and geographical area and go no further than is necessary to protect the principal’s legitimate business interests. English courts apply a two-stage test: (1) does the principal have a legitimate business interest that the restriction is designed to protect? (2) is the restriction reasonable as between the parties and in the public interest? If a restriction is found to be too wide, the court may apply the doctrine of severance to strike out the offending part and enforce the remainder, or may blue-pencil the restriction to reduce its scope. The legitimate business interests that can be protected include trade secrets and confidential information, customer connections, and (in some cases) the stability of the workforce.

What is the tax treatment of commission payments to self-employed agents in the UK?

The tax treatment of commission payments to a self-employed agent in the UK depends on the agent’s legal status. A self-employed individual agent is responsible for registering as self-employed with HMRC, filing a self-assessment tax return, and paying income tax and National Insurance contributions on their commission income. The principal does not deduct PAYE tax from commission payments to a genuinely self-employed agent. Where the agent is a limited company, the commission is subject to corporation tax and the company must account for VAT if it is VAT-registered. It is important to correctly classify the relationship between the principal and agent — HMRC applies the IR35 rules (the off-payroll working rules) where an individual provides services through a personal service company but would be treated as an employee if engaged directly. Misclassifying an employee as a self-employed agent can result in significant PAYE and National Insurance liabilities for the principal.

Do the Commercial Agents Regulations 1993 apply to agents who sell services rather than goods?

The Commercial Agents Regulations 1993 were originally enacted to implement an EU Directive that applied specifically to the sale of goods, and there has been significant debate in England and Wales about whether the Regulations apply to agents who sell services rather than goods. The leading English case on this point is Parks v Esso Petroleum Co Ltd [2000] EWCA Civ 217, in which the Court of Appeal held that the Regulations did not apply to an agent selling petroleum at a service station because the transaction was classified as a service transaction rather than a sale of goods. However, subsequent cases have taken a more expansive approach, and the position is not entirely settled. Where an agent is involved in selling both goods and services, the principal’s component of the arrangement may qualify under the Regulations even if services are also involved. Parties should take legal advice where there is any doubt about whether the Regulations apply to their particular arrangement.

Commission Agreement (UK) — Canada

Create a Commission Agreement for England and Wales appointing a self-employed commercial agent to promote and sell your products or services in exchange for commission. Drafted in compliance with the Commercial Agents (Council Directive) Regulations 1993 and English common law.

What Is a Commission Agreement (UK)?

A Commission Agreement is a legally binding contract used in England and Wales to govern the relationship between a Principal — the party who wishes to promote and sell its products or services — and an Agent — a self-employed individual or business that is appointed to generate sales, leads, or customers for the Principal in exchange for commission payments based on the value of the business they introduce.

In England and Wales, commission agreements involving self-employed commercial agents who are appointed to negotiate the sale of goods on behalf of a principal may be subject to the Commercial Agents (Council Directive) Regulations 1993 (the “Commercial Agents Regulations”). These Regulations implement EU Directive 86/653/EEC into UK domestic law and remain in force following the UK’s departure from the European Union. They provide important statutory protections for qualifying commercial agents, including minimum notice periods for termination, the right to commission during and after the agency, and the right to compensation or indemnity on termination. Many of these protections cannot be excluded by the parties’ contract.

A commission agreement is distinct from an employment contract (where the agent would be classified as an employee with the associated PAYE and National Insurance obligations) and from a fixed-fee consulting or service agreement (where remuneration is not linked to the results achieved). The commission structure aligns the interests of the Principal and the Agent by rewarding the Agent directly for the business they generate.

Our UK Commission Agreement template is drafted in compliance with the Commercial Agents Regulations 1993 and English common law. It covers the agent’s appointment and territory, commission rate and payment terms, post-termination commission, compensation or indemnity on termination, optional exclusivity and non-solicitation clauses, and governing law confirming the jurisdiction of England and Wales.

When Do You Need a Commission Agreement (UK)?

A Commission Agreement is appropriate whenever a business or individual wishes to appoint a self-employed sales agent or commercial agent to promote and sell its products or services on a commission-only or commission-based basis in England and Wales.

Common situations where a UK Commission Agreement is required include: businesses expanding into new geographical territories who wish to appoint local agents with established contacts and market knowledge; businesses that prefer a variable-cost sales model where remuneration is directly linked to sales performance rather than a fixed salary; manufacturers and distributors who appoint independent sales representatives to sell their products to retailers, wholesalers, or end users; technology and software companies who appoint business development agents to introduce enterprise clients; and service businesses, recruitment firms, and financial services intermediaries who pay referral or introduction fees for new client introductions.

A commission agreement is particularly important where the Agent is an individual who could be classified as an employee if the relationship is not properly structured. An incorrectly classified employment relationship can expose the Principal to significant HMRC liabilities for unpaid PAYE tax and National Insurance contributions, as well as employment law claims for unfair dismissal, holiday pay, and other statutory entitlements. A well-drafted commission agreement that clearly establishes the self-employed status of the Agent and the commercial nature of the relationship is essential to manage this risk.

A commission agreement is also important where the Agent operates within a specific territory and the parties wish to establish the scope of any exclusivity, the territorial boundaries of the Agent’s authority, and the consequences of the Principal making direct sales within the Agent’s territory.

What to Include in Your Commission Agreement (UK)

A well-drafted Commission Agreement for use in England and Wales must address several key provisions, particularly where the Commercial Agents (Council Directive) Regulations 1993 apply to the relationship.

The appointment clause clearly defines the scope of the Agent’s authority: the products or services the Agent is authorised to promote, the geographical territory within which the Agent may operate, and the basis on which the Agent is appointed (exclusive or non-exclusive). Clarity on these points is essential to avoid disputes about whether the Agent is entitled to commission on particular transactions or customers.

The commission clause is the most commercially important provision: it must specify the commission rate (as a percentage of the invoice value or net revenue, or as a fixed amount per transaction), the basis on which commission is calculated, the payment schedule, and the Agent’s entitlement to commission on post-termination transactions. Under the Commercial Agents Regulations 1993, the right to post-termination commission on transactions principally attributable to the Agent’s efforts during the agency cannot be excluded.

The termination and compensation clause must reflect the mandatory requirements of the Commercial Agents Regulations 1993 where they apply: minimum notice periods (1 month in year 1, 2 months in year 2, 3 months in year 3 and beyond), and the Agent’s right to compensation or indemnity on termination. The indemnity route — which is capped at one year’s average remuneration — is often preferred by principals as it provides more certainty than the open-ended compensation calculation.

The independent contractor clause is critical for tax and employment law purposes: it must clearly establish that the Agent is a self-employed independent contractor, not an employee or worker, and that the Agent is responsible for its own HMRC obligations.

The confidentiality clause, the post-termination non-solicitation clause (where included), the exclusivity clause (where included), and the governing law and jurisdiction clause specifying England and Wales are all standard provisions in a properly drafted UK Commission Agreement.

What Is a Commission Agreement (UK)?

When Do You Need a Commission Agreement (UK)?

What to Include in Your Commission Agreement (UK)

Frequently Asked Questions

Related Documents

Agency Agreement (UK)

Service Agreement (UK)

Supply Agreement (UK)

Non-Compete Agreement (UK)

Consultancy Agreement (UK)