SaaS suppliers often use partners to find prospects, refer leads, assist with the sales process or to conclude sales with SaaS customers on their behalf. Many SaaS suppliers are not aware that the terms of the Commercial Agents Regulations 1993 may apply to the terms of the agreement between the SaaS supplier and its commercial agent.
What is a Commercial Agent?
A commercial agent is a person or company who acts on behalf of a SaaS supplier to find leads and/or assist with sales of the supplier’s SaaS software. SaaS suppliers usually use agents where they need to find customers outside of their territory or business sector. The agent has no legal relationship with the customer – the contract with the customer is made with the SaaS supplier.
Commercial Agents Regulations 1993
These Regulations apply to all agency agreements made with a commercial agent based in the EU in relation to goods. If you are a SaaS supplier who only supplies services and no goods then the Regulations will not apply. The rules apply regardless of where the SaaS supplier is based. For example if you are a SaaS supplier located in the USA using an agent in the UK, the Regulations will still apply to your agency agreement.
The Regulations include mandatory rules on notice periods that have to be given to agents, payment terms and compensation or indemnities payable to the agent if the agency agreement is terminated.
Mandatory Payments on Termination
If the agent is located in the EU, the SaaS supplier must pay commission for up to a year after termination of the agency agreement (regardless of the reason for termination) or an indemnity. Compensation will be paid unless the agency agreement states than an indemnity should be paid.
If an indemnity is specified in the agency agreement, the amount payable is limited by the Regulations to a maximum of 1 year’s gross commission. This will be based on the average commission paid to the agent over the last 5 years. In calculating the amount of an indemnity, unless the parties have agreed otherwise, the benefits accruing to the SaaS supplier’s corporate group are not considered to be benefits of the SaaS supplier and can be ignored.
If the agency agreement is silent or the SaaS supplier specifies the payment of compensation, a court will determine how much compensation the agent is entitled to. There is no cap on the amount that can be awarded to an agent. In McQuillan v McCormick 2010 the High Court identified the following factors which should be considered when determining how much compensation an agent should be paid on termination:
- loss of value of the agency relationship;
- state of the market;
- no cap on the amount;
- future possible income stream to the SaaS supplier after termination;
- whether the agreement is exclusive or non-exclusive.
In this case the agent received approximately one year’s commission from the court.
Limitation Period for Claims
Agents lose the right to claim compensation or an indemnity if they fail to serve notice of their intention to make a claim within one year of termination of the agency agreement.
Notice Period and Termination
If the agency agreement is for an indefinite period it can be terminated by either party giving notice. This also applies where a fixed term agency agreement is converted into an indefinite agreement.
Mandatory minimum notice periods are specified under the Regulations. These are:
- one month for the first year;
- two months for the second year; and
- three months for any third or subsequent years.
The parties may agree longer notice periods, but the notice provisions imposed on the agent must be no longer than those which the supplier has to give.
What if the Agency Agreement is not Governed by English law
Often agency agreements state that the laws of a non-EU country e.g. USA or Canada apply to the agreement or that disputes should be referred to arbitration outside of the EU. Usually the Courts in a country outside the EU will not recognise a claim for compensation or an indemnity under the Regulations. However, if you have an agreement with an agent based in the UK, the fact that your agreement is subject to the law of a non-EU country does not mean that the Regulations do not apply to the agency agreement.
For example, the right of the agent to claim compensation or an indemnity on termination under the Regulations cannot be excluded. Even though your agency agreement may be governed by non-EU laws, an agent located in the UK will still be entitled to bring a claim in the English Courts for compensation or an indemnity under the Regulations. If the agent is located in another EU country, then the local law version of the Regulations applicable to that EU country will apply.
How to Avoid Paying Compensation after Termination
The SaaS supplier is not required to pay compensation if the agent has terminated the agency agreement “because of default attributable to the commercial agent which would justify immediate termination of the agency agreement”. For example if the agent has committed a serious breach of contract, such as ignoring an exclusivity provision. However, such exclusions are very limited.
Irene Bodle is an IT lawyer specialising in SaaS agreements with over 10 years experience in the IT sector. If you require assistance with any SaaS, ASP, software on demand contracts or any other IT legal issues contact me:
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