This article is written by Ritika Sharma, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com.

Introduction

A commission agreement is entered into between two parties, usually a company and an entity or individual (usually referred to as the ‘Introducer’), wherein the company wants to find investors or raise funds for its business, and the Introducer finds such potential investors. 

To understand the concept of commission, think about a transaction between a flat owner (who wants to sell his flat), a broker and a buyer. The owner would engage this broker to find potential buyers for the flat. As a consideration, the broker would engage in a deal with the buyer and the owner for 10% of the total transaction (there could be some other form of pay structure as well). 

Commission based transactions are also seen in a marketing, distribution and sales agreement. However, in these agreements the transactions are repetitive in nature whereas, in a commission agreement, the commissions are either paid only once or it pertains to some specific set of deals. 

Role of an Introducer

An Introducer as seen in the example above is like a broker. The Introducer shall not be liable to get approvals for the company or do any compliance related work. The main objective is to raise funds or investments. Introducers are often underestimated and ghosted once the company is introduced to a potential investor, which is why it is important to document this deal in writing.  

On the success of raising such an amount for the company, will the Introducer be eligible for his commission, which shall be based on the amount bracket specified in the commission agreement. Usually, the Introducer does not interfere in the negotiations between the company and a potential investor. 

The company can have the Introducer perform some activities to attract investors for the company. For example, a fashion line could engage an Introducer, to perform a few activities: 

1. Approaching social media influencers to market the fashion line, in order to increase the popularity of the brand;
2. Arrange for fashion shows, displaying the fashion line, to attract investors;
3. Participating and approaching potential investors at seminars;
4. Conducting pitch-deck reviews, etc. 

Things to keep in mind as an Introducer

• Understand the needs of the investor

It is necessary for the Introducer to understand what the investor is looking for, since eventually the consideration for the Introducer would depend upon the occurrence of a deal. Instead of blindly directing and connecting the investor with the company, ask them a few relevant questions:

1. 1. What kind of return is he expecting? And till when is he expecting such a return?
   2. Does he have the funds available at his disposal or would it take him time to procure funds? 
   3. What is his experience in the industry? 
   4. Does the investor have something more to offer other than money?

• Unfavourable terms in an commission agreement 

Do not let the other party take control of the commission agreement. Protect your interests and get a ‘win-win’ agreement. Look out for exclusivity clauses, which would prevent you from working for other clients or competitors of the company. 

What would happen if the investor decides to end up giving a loan instead of investing? Would you get your fees in this scenario? 

What if the investor introduced by you to the company ends up not investing but a person related to the investor does?

Such situations can be taken care of in the commission agreement. 

What are some of the important clauses in this agreement? 

• Non-Circumvention clause

A non-circumvention or a good faith clause is usually put into use where the deals are very risky in terms of one of the parties (usually the company) employing unethical practices. For example, the company may underreport the amount of investment, so as to reduce the introducer’s commission.  

Here is a sample clause: 

“The company shall not in any manner, directly or indirectly attempt to circumvent the operation of this Agreement so as to otherwise deprive the Introducer of any of the benefits intended under or pursuant to this Agreement;

The Parties acknowledge that this Agreement shall be applicable to all the future funds raised or finance arranged or procured by or on behalf of the Company for any such parties or organisations originally introduced by the Introducer. This provision shall survive termination of this Agreement.” 

• Confidentiality

The introducer would have access to the company’s confidential information and may be even their trade secrets, so that the introducer can pitch to potential investors whereas the company would have access to the introducer’s contacts. The confidentiality clause would basically say that both the parties would not use each other’s confidential information after the termination of the commission agreement. 

• Term and termination

This clause is very important since the duration of this agreement can be milestones based or a set number of years. For example, the term of the agreement would end when the introducer helps the company to raise Rs. 90 lakhs in funds. 

There can be a performance based clause which could say that if the introducer fails to bring any potential investor within the first 3 months from the Effective Date of the agreement, then the agreement would be terminated. 

• Exclusivity clause

Exclusivity clause would be essential to clear out the relationship between the introducer and the company. The company would want to engage many introducers to increase its chances of gaining an investment, but the introducer would want exclusivity here so that the introducer does not lose out on commission.

• Scope of work 

This clause would summarize what kind of work the introducer is authorized to do and his range of activities that he will be required to perform. The clause may state the Introducer shall not produce any marketing material for the company’s services or use the trademarks, logos or name without the consent of the company. He may be allowed to conduct pitch-decks and conduct workshops on behalf of the company to attract potential investors.

• Commission structure

What is a standard introducer’s fee? Well, the answer is that there is no such thing as a standard fee. The fee depends on various factors:

• The type of industry;
• The size of the company;
• The cost of goods sold;
• The length of service for which the introducer is engaged; and
• Payment schedule: is it a recurring payment or a one off payment.

There are many variables that have to be considered to calculate the fees. As stated above, it is not necessary that the commission is percentage-based. A flat fee structure of payment is also a viable option, which works the best when the margins are thin for the introducer. In the draft below a percentage based fee schedule has been given. 

• Non-compete clause

This is a very standard clause used in many agreements. This clause would basically state that the introducer shall not work for the competitors of the company or any other entity which is closely related to the business of the company, during the course of the agreement. 

Sample commission agreement

Here is a sample commission agreement that will briefly cover the essence of a new Commission Agreement:

This Commission Agreement (Agreement) is entered into on this 3rd day of May, 2020 (hereinafter referred to as Effective Date) at Mumbai.

BY AND AMONG:

Toptailor Fashion Private Limited, a private company incorporated under the Companies Act, 2013, with CIN number 78990999, having its registered office at B-12, Kamala Mills, Mumbai-400021, Maharashtra, India, herein referred to as “Company”;

AND

Jairam Shetty, aged 43 years, an individual s/o Shriram Shetty with Aadhar Number 800008000 and permanent address at Building no. 3, Viraj Nagar, Koramangalam, Mumbai, Maharashtra- 40001202, hereinafter referred to as “Introducer”.

The Company and the Introducer are herein individually referred to as a Party and collectively as the Parties.

Check the above agreement to understand the format.

WHEREAS: 

1. The Company is engaged in the business of fashion and apparel bootstrap and wishes the Introducer’s assistance in relation to the introduction of investors, clients, and organisations for procuring finances, or seeking to secure investments or raise funds in connection with a transaction or any of the various projects including as set out in this Agreement;
2. The Introducer has agreed to provide the Company such assistance and services from time to time during the term of this Agreement on the terms and conditions mutually agreed upon;

Now, therefore in consideration of the promises and the mutual covenants set forth herein, the Parties hereto, intending to be legally bound, hereby agree as follows:

• Introducer’s scope of services

1. The Introducer hereby agrees and acknowledges that he shall introduce the Company to the investors and raise funds for the purpose of this Agreement; 
2. The Introducer shall conduct seminars, pitch deck and all and other activities as it deems fit to raise the capital of Company by introducing investors willing to invest in the Company;
3. The Introducer does not warrant to the Company that any third party will enter into any agreement or grant any permit nor that any third party is financially viable and able to meets its debts or perform its obligations under any agreement or arrangement; 
4. The Introducer shall introduce such investors who are willing to invest a minimum amount of INR Five Lakhs (INR 5,00,000) in the Company.

• Obligations

1. The Company shall be responsible for obtaining all licences, permits and approvals which are necessary in connection with the funding and investment.
2. The Company shall comply with all applicable laws and regulations and shall provide all such support as may be reasonably requested by the Introducer from time to time. 
3. If at any time control (as defined in SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011) of the company is acquired by any person or group connected persons not having control of the Company at the date of this Agreement, the company shall forthwith give written notice the Introducer identifying that person or group connected persons and the Introducer shall be entitled, by giving notice forthwith to terminate this Agreement.
4. The Introducer shall exclusively work for the Company for the duration of this Agreement.
5. The Introducer shall not delegate his responsibilities to another person or entity without the written consent of the Company. 

• Terms of Payment

• Company shall pay the Introducer a lump sum amount of Rs. 2,00,000/- (Rupees Two Lakhs only) within 15 (fifteen) days from the date of execution of this Agreement.
• The sum payable to Introducer shall be a percent based commission on the following model: 

• All such payments shall be payable by Company to Introducer within 7 days from the day of the Company receiving the entire amount of investment from the investors brought by Introducer.

• Obligations of the Parties

The Introducer shall be responsible for the following:

1. The Introducer shall not provide similar or same Services to any other competitor of the Company or any entity which is into the fashion and apparel business line till the termination of this Agreement. 
2. The Introducer shall introduce at least one investor within 6 (six) months from the date of execution of this Agreement. 
3. The Introducer shall not disclose any information received by it in the course of delivering Services to the Company to anyone during the course of this Agreement.
4. The Introducer shall not represent himself in any way as the Company’s representative or employee, he shall only represent himself as a contractor of the Company. 
5. The Introducer shall not take part in any negotiations between the company and investor or third party. 

The Company shall be responsible for the following: 

1. Company shall be responsible for acquiring all licenses, permits and all requisite approvals in connection with the Services.
2. Company shall make timely payments to the Introducer as per Clause 2 of this Agreement. 
3. Company shall at its own expense comply with all legislations, statutes, and all other requirements for the performance of this Agreement. 
4. Company shall ensure to maintain the quality and standards of its apparels and services during the duration of this Agreement, so that the Introducer does not misrepresent about the Company to its investors.

• Non-Circumvention

1. 1. The Company shall not in any manner, directly or indirectly attempt to circumvent the operation of this Agreement so as to otherwise deprive the Introducer of any of the benefits intended under or pursuant to this Agreement; 
   2. The Parties acknowledge that this Agreement shall be applicable to all the future funds raised or finance arranged or procured by or on behalf of the Company for any such parties or organisations originally introduced by the Introducer. This provision shall survive termination of this Agreement. 
   3. The Introducer acknowledge that he shall perform his duty in good faith and shall not use any information provided by the Company for any illegal means for any other purpose expect as mentioned under this Agreement; 
   4. The Introducer shall during the notice period as mentioned under the Agreement, perform his obligations as mentioned under clause 4.1 of the Agreement and shall return or destroy every such document provided by the Company for the purpose of this agreement at his own cost. The Company shall pay the Introducer for the future funds raised or finance arranged or procured by introducing such investor only after receiving such funds in the future date; 

It is hereby acknowledged, agreed and declared that the Company and Introducer shall perform their obligations in good faith.

• Duration and Termination

• This Agreement shall come into force on the first day of May, Two Thousand Twenty, and shall continue up to 30th of December, 2022. 
• This Agreement shall terminate in the following circumstances: 

1. As soon as the Company files for bankruptcy or there is a slight hint about insolvency to the Introducer, the Introducer would terminate this Agreement. 
2. If the Company defaults in paying the amount payable to the Introducer, the Parties agree that the Company shall be given a cure period of 6 (six) months, which would not attract any interest. In case the Company still defaults at the end of this cure period, this Agreement shall terminate.
3.  If the Introducer attempts to or circumvents this Agreement through direct or indirect means. 
4. In case of circumvention by the Introducer, the parties agree and acknowledge that the Company shall be entitled to withhold a sum of 0.5% of all sums due or payable to the Introducer, including legal expenses, if involved.

• As soon as this Agreement terminates, the Parties shall: 

1. Return all confidential information and documents procured for the purpose of this Agreement to each other.
2. The Introducer shall not share any information related to the investors to any client acquired after the termination of this Agreement for a period up to 6 months. 
3. The Introducer shall immediately cease to represent himself as the agent of the company. 

In witness whereof this Agreement is hereby signed below by the authorized signatories of the above-named Parties on the date as mentioned above in the recital. 

Conclusion

It is important for any commission agreement to have the abovementioned clauses in place so as to avoid any subsequent disputes. However, confidentiality is paramount, to not have any chance of foul play. 

To quote Mrs Hillary Clinton here seems appropriate, “In almost every profession- whether it is law or journalism, finance or medicine or academia or running a small business- people rely on confidential communications to do their jobs. We count on the space of trust that confidentiality provides, When someone breaches that trust, we are all worse off of it.”

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