Business Forms: Commission Agreement

A commission agreement is a contract between a business and an introducer. The introducer brings in new customers or suppliers, and in return earns a fee or commission for each successful introduction.

It's a straightforward arrangement in principle, but getting the terms right in writing matters. A clear agreement protects both sides and sets out exactly what's expected before any introduction is made.

Key Takeaways

• A commission agreement is used when one party wants to pay another for introducing new customers or suppliers, not for selling on their behalf.
• The introducer's role ends once the introduction is made. The business handles all selling, supply, and ongoing customer relationships itself.
• Commission is typically earned on all transactions that result from an introduction within a defined period, not just the first one.
• If no introduction is made, no commission is earned. This makes it a performance-based arrangement with no upfront cost to the business.
• A commission agreement is not suitable for financial services introductions, including insurance or investment products, which are subject to FCA regulation.
• It differs from an introducer agreement, which targets a specific customer or market, and from a referral fee agreement, which pays a one-off fee for the first transaction only.

What Is the Difference Between a Commission Agreement and an Agency Agreement?

These two types of contract are often confused, but they work quite differently. An introducer under a commission agreement does not sell the client's products or services. They simply refer a potential customer to the business and step back. Once the introduction is made, the introducer has no further involvement.

An agent, by contrast, actively sells on behalf of the business and operates within a principal-agent relationship. If you need someone to sell your products or negotiate contracts on your behalf, you need an agency agreement, not a commission agreement.

When Should I Use a Commission Agreement?

A commission agreement works best when a business wants to expand its customer base or reach a new market through introductions, without taking on a salesperson directly.

It suits situations where the business does not have a specific target customer in mind. The introducer is simply tasked with finding new customers generally. If you're targeting a specific customer or type of customer, a more tailored introducer agreement may be more appropriate.

How Is Commission Calculated Under This Agreement?

The introducer earns a fee or commission on all transactions that take place between the business and any customer they have introduced, within a set period defined in the agreement.

This is different from a referral fee agreement, which pays a one-off fee only in respect of the first transaction between the business and the introduced customer. A commission agreement rewards ongoing commercial relationships, not just the initial sale.

If the introducer fails to bring in any new business, they earn nothing. This is what makes it a no-win, no-fee type arrangement for the business.

What Does a Commission Agreement Cover?

A well-drafted commission agreement should set out clearly who the parties are, what the introducer is being asked to do, and how and when commission will be paid. The key clauses typically include:

• Definitions covering the key terms used throughout the agreement
• Appointment of the introducer and the scope of their role
• How introductions should be made and what counts as a qualifying introduction
• Obligations of both parties once an introduction has been made
• Commission rates and payment terms including when commission becomes due
• Relationship of the parties confirming the introducer is not an employee or agent
• Non-competition and non-circumvention clauses to protect the business
• Confidentiality obligations on both sides
• Termination provisions covering how and when the agreement can be ended
• Governing law and jurisdiction

The agreement should also include a commission schedule setting out the rates that apply, and a product or service schedule describing what the business offers.

What a Commission Agreement Cannot Be Used For

This type of agreement is not suitable for introductions in financial services, including insurance products, investment advice, or any regulated financial activity. Those introductions are governed by the Financial Services and Markets Act 2000 and are subject to oversight by the Financial Conduct Authority (FCA). A standard commission agreement does not reflect or comply with those requirements.

If you are operating in a regulated sector, you should seek legal advice before putting any introducer arrangement in place.

FAQs

What is the difference between a commission agreement and a referral fee agreement?

A commission agreement pays the introducer on all transactions between the business and the introduced customer within a set period. A referral fee agreement pays a one-off fee for the first transaction only. Which one you use depends on whether you want to reward an ongoing commercial relationship or just the initial introduction.

Does the introducer have any responsibility after making the introduction?

No. Under a commission agreement, the introducer's role ends once the introduction is made. All selling, negotiation, and supply is handled by the business. The introducer plays no further part in the relationship between the business and the customer.

Can a commission agreement be used for financial services introductions?

No. Financial services introductions, including insurance and investment products, are regulated under the Financial Services and Markets Act 2000 and overseen by the FCA. A standard commission agreement is not designed to comply with those rules and should not be used in this context. Take legal advice if you operate in a regulated sector.

What happens if the introducer doesn't bring in any new business?

They earn nothing. A commission agreement is a performance-based arrangement. If no qualifying introduction is made, no commission becomes due. There is no guaranteed fee for the introducer simply being appointed.

This article is for general information only and does not constitute legal advice. Commission agreements can vary significantly depending on the parties involved and the nature of the arrangement. Always seek advice from a qualified solicitor before putting any commercial agreement in place.