Commission Without Captivity: The File a UK Board Should Hold Before Granting an Overseas Territory

A UK manufacturer appoints an agent in a new market. The arrangement begins as most do: a schedule of commission rates agreed by email, a note confirming territory and product lines, and a shared assumption that the lawyer's version can wait until volumes justify the cost. Two years later the agent writes to say the relationship has broken down, that the territory was never properly supported, and that a termination payment is due. The board's first question is what was actually agreed. The second, considerably harder question is what the law will imply where nothing was agreed at all.

Agency is one of the few cross-border relationships in which silence carries a price. Granting a territory should therefore be treated as a governance event rather than a sales convenience, with a defined owner, a documented mandate and a view of the exit cost taken before the first commission is paid.

Three relationships that resemble one another

A board considering overseas representation is choosing between instruments that look similar on an organisation chart and behave very differently in law.

An agent is an intermediary with continuing authority to negotiate, and sometimes to conclude, contracts on the principal's behalf. The principal retains the customer relationship, the credit risk and the pricing decision, and pays commission for access.

A distributor buys and resells in its own name. It carries inventory and credit risk, earns margin rather than commission, and generally falls outside agency-protection regimes. The price of that legal distance is a loss of control over end-customer pricing and service.

An employee is engaged under a contract of service, with the payroll, pension and unfair-dismissal consequences that follow.

The difficulty is that labels do not decide the question. A consultant described as an introducer, who nonetheless has continuing authority to negotiate sales of the company's goods in a defined territory, may be a commercial agent in substance. Boards should test the arrangement against the authority actually conferred, not the heading on the document.

What the 1993 Regulations actually confer

The Commercial Agents (Council Directive) Regulations 1993 remain in force in the UK as assimilated law, and they supply a set of minimum protections that the parties cannot reduce by agreement before the relationship ends. In outline they provide for written terms on request, rules on when commission becomes due, minimum notice periods for open-ended appointments that step up from one month to three over the life of the relationship, and a payment on termination in the form of either an indemnity or compensation for damage.

Two points are frequently missed. First, the Regulations are concerned with the sale of goods; a business exporting services or software subscriptions may fall outside them, though it should not assume that no local analogue applies. Second, the indemnity is ordinarily capped at one year's commission, calculated by reference to the preceding five years or the whole term if shorter. That cap is a planning figure, and boards should carry it as a contingent liability from the day the territory is granted.

The local overlay

English law is only the starting point. Germany's commercial code gives an agent an equalisation claim of up to one year's average commission and is interpreted generously by the courts. France requires an agent commercial to be entered on a dedicated register and awards termination damages as a matter of course. In the Gulf, both the UAE and Saudi Arabia maintain compulsory registers of commercial agencies, and deregistration is a process rather than a formality; a termination recorded improperly may be treated as ineffective. Several US states have their own termination and compensation statutes. A board should establish which regime will govern before signature, because after signature the answer is usually the least convenient one.

Commission that outlives the contract

Commission is rarely the disputed item during the relationship. It becomes the disputed item at the end. The Regulations provide for commission on certain transactions concluded after termination, typically where the agent was the effective cause and the customer's order reached the principal before the appointment ended, and for renewals of contracts the agent had secured. Those entitlements are subject to time limits that reward early, documented claims.

The commercial answer is to remove the ambiguity in drafting. The contract should identify the commission trigger, whether that is order acceptance, invoice or cash receipt, and should explain what happens on returns, bad debt and currency movement. A trigger tied wholly to cash receipt gives the principal control but invites a dispute about collection effort that was never agreed. A post-termination window stated in months and tied to named accounts is preferable to an appeal to fairness.

The tax question that follows the agent

An agent with authority to habitually conclude contracts in the principal's name can create a dependent-agent permanent establishment under most of the UK's tax treaties, with profit attribution and local filing obligations following behind. The same authority that makes the agent commercially useful is the authority that creates the exposure. Commission payments may also attract withholding tax in some markets and raise place-of-supply questions for VAT.

Beyond tax, the appointment engages the Bribery Act 2010, under which a company may be liable for the conduct of an associated person, and requires sanctions screening of the counterparty and its principals. These are not reasons to avoid agency. They are reasons to write the relationship down.

Termination and the exit bill

Termination is where the file assembled at the outset determines the cost. An open-ended appointment carries a statutory notice schedule. A fixed-term appointment that continues to be performed after expiry may convert into an open-ended one, which is why renewal should be an active decision rather than a lapse. Post-termination restraints on competition are enforceable only to the extent they are reasonable in scope, duration and territory, and a badly drafted restraint can fail entirely while still signalling bad faith.

Three practical items tend to remain unresolved. What happens to samples, demonstration equipment and marketing material? Who owns the customer data held by the agent, and on what basis was it transferred under data protection law? And who pays for the pipeline that was quoted but not closed? Each has a cheap answer at signature and an expensive one afterwards.

The file a board should hold

Before a territory is granted, a mid-market board should be able to produce:

• A minute recording the decision, the delegated authority and the approved commercial parameters.
• A written agreement, executed in the local language where required, with a governing law and dispute forum explicitly chosen.
• A definition of territory, product scope and exclusivity, together with any performance thresholds that justify exclusivity continuing.
• A commission schedule covering trigger, frequency, currency, FX reference and post-termination entitlement.
• An explicit statement of which agency regime applies and, where the parties may elect between indemnity and compensation, a recorded election.
• The termination schedule, notice mechanics and any post-termination restraints.
• Confirmation of local registration or filing, with the certificate retained.
• A permanent-establishment and withholding-tax analysis signed off by tax.
• Anti-bribery, sanctions and data protection provisions, and evidence of counterparty due diligence.
• A stated exit provision in the group risk register, reviewed annually.

A governance discipline, not a legal formality

The board that holds this file has not eliminated risk. It has made the risk visible, priced and reviewable, which is the most that governance can reasonably promise. An agent is not a cheaper version of a subsidiary. It is a different instrument, governed by a protective body of law, and it should be commissioned with the same discipline the board would apply to any appointment carrying an exit bill it cannot see.