Who are you contracting with?

Whether you are an agent or a principal, one of the most basic questions about your agency is also one of the easiest to get wrong: exactly which legal person is the contract with? A trading name is not a legal entity, and an agent who sets up a limited company partway through an agency can quietly change the answer without realising it.

That matters most when the agency ends, because it can determine how many years of your claim survive, and in some cases whether you have a claim at all. The two articles below, from specialist commercial agency solicitors, cover identifying the right party at the outset and what happens when it changes along the way. Each is reproduced in full and attributed to its author.

Who are you contracting with?

The framework: the three ways principals and agents trade, how to identify each properly, and why incorporating mid-agency can cost you years of your claim.

It may seem like an obvious question, but do you know the legal identity of the party that you are contracting with? Whether you are a principal or an agent, this is a key question and one that is not always straightforward to answer. There are three common mechanisms by which principals and agents operate. These are:

• A sole trader: this is where an individual trades by themself and in their own name. In this situation that individual has the benefit of any contracts but also has the sole obligation to perform under those contracts;
• A partnership: this is where a group of individuals trade together to share the benefits and obligations under any contracts.
• A limited company: in this situation it is the company (rather than its directors or shareholders) that enters into the contract and has the obligation to perform under the contract. That liability begins and ends with the company, unless the Directors are in breach of their fiduciary duties.

Each of the above is a separate legal person in the eyes of the law and, when entering into a contract it is very important that you identify the correct legal person. That is not always as straightforward as it seems. For example, if you enter into a contract with “ABC Agencies”, which of the above is the legal person that you are contracting with? It could actually be any of them, as “ABC Agencies” could simply be a trading name. It is important to clearly identify the party so that there is no doubt:

• For a sole trader: at the very least you would need to set out the full name of the individual, any trading name that they are using and their current address (eg John David Smith t/a J S Agencies, 1 Bright Avenue, Birmingham, B1 2PA). You might also want to consider setting out some piece of identifying information which leaves no doubt as to the identity of the individual, particularly if they have a fairly common name (eg NI number or passport number).
• For a partnership: you would need similar information to a sole trader, but you would need to identify at least some of the partners (eg John David Smith and Jane Elizabeth Doe trading as ABC Agencies (a partnership), 1 Bright Avenue, Birmingham, B1 2PA).
• For a limited company: you need to set out the full legal name of the company (along with any trading name), the address of its registered office, its registered company number and the country in which it was incorporated (eg John Smith Agencies Limited t/a John Smith Agencies, a company incorporated and registered in England and Wales with company number 12345678 whose registered office is at 1 Bright Avenue, Birmingham, B1 2PA).

It is very important to get this information right at the start of the agency contract, but it is just as important to ensure that things don’t change during the life of the contract. How can that happen? John Smith may get advice from his accountant that he would be in a better tax position if he operates as a limited company. He sets the company up and from that point on all invoices to the principal are issued by the limited company and all commission payments are made by the principal to the limited company. BUT what John Smith doesn’t appreciate is that by operating the limited company but not amending the agency contract to reflect that the limited company is now the agent he could be seriously affecting any ability to bring a claim for compensation or indemnity if the principal terminates the agency. The most likely scenario is that a new agency contract between the principal and the limited company takes effect from the date on which the limited company starts to operate as agent. If the principal decided to terminate the agency, any claim for compensation or indemnity would be limited to the period of the contract between the principal and the limited company. The limited company would not be able to benefit from the period of time for which John Smith ran the agency as an individual.

In this type of situation the agent should seek a formal novation of the agency contract from the individual to the limited company and should ensure that the novation makes clear that the agent is given credit for the period when they operated as an individual. A novation requires the consent of the principal and there are certain legal formalities which need to be observed.

If you are considering changing from one legal entity to another, it is very important to get legal advice on the implications for your contracts and what you can do to protect yourself. These are issues that we come across with surprising regularity!

© Kevin Manship, Legal Director
Blake Morgan Solicitors LLP, One Central Square, Cardiff, CF10 1FS
E: kevin.manship@blakemorgan.co.uk
T: 029 2068 6126
www.blakemorgan.co.uk

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Commercial Sales Agent: Individual or Company?

The consequences in more detail: how to tell who the agent really is after an informal incorporation, and the retirement protection that a company cannot claim.

Both individuals, partnerships and companies may be commercial agents pursuant to the Commercial Agents (Council Directive) Regulations 1993 (the Regulations) as affirmed in the cases of:

• AMB Imballaggi Plastici Srl v Pacflex Ltd [1999] 2 All ER (Comm) 249
• Bell Electric Ltd v Aweco Appliances Systems GmbH [2002] EWHC 872

It is very common for individual agents to incorporate limited companies through which to run their agencies.

Who is the agent, the individual or the company?

The person who is appointed by the principal to sell its goods is the agent. If there is a written sales agency agreement governing the terms of the agency this should set out who the parties to the contract are, and it will therefore be possible to determine from the contract who the agent is.

If there is no written agreement, communications which took place at the start of the sales agency may assist in determining who (individual or company) was appointed as the sales agent. Sometimes the position is not altogether clear, and that leaves room for debate as to who the identity of the agent is.

Incorporation after the agency has commenced

Where a sales agent incorporates a limited company after the sales agency has commenced, the incorporation of the company does not in itself mean the agency is automatically assigned to the company. For the limited company to become the sales agent, it must have a contractual relationship with the principal and the parties must have intended that the company become the agent.

It is common to see sales agents set up a limited company after the sales agency has commenced, for the purposes of using it as a vehicle to receive commission payments from the principal. This is often done for tax reasons. Typically, the only thing which changes about the agency is where commissions are paid. Everything else remains the same. The individual will often assume he or she continues to be the agent, but the position may be unclear. In these circumstances it is often the case that the individual remains the agent and the company is nothing more than a vehicle through which commissions are paid, however, it is necessary to consider what was said and agreed between the parties at the time the company was incorporated to be able to determine the position.

Why does it matter who the agent is?

The identity of the sales agency matters because the Regulations entitle commercial sales agents to claim a termination payment under Regulation 17 when the agency terminates. That entitlement is usually lost where a sales agent terminates the agency himself save for where termination is justified:

(i) by circumstances attributable to the principal, or

(ii) on grounds of the age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities.

It is point (ii) which illustrates the practical impact of the Regulations on sales agents who have set up a limited company and the company has become the agent. A company cannot get ill or old and thus this exception only applies to individual sales agents.

The problem here is obvious. If an individual agent subsequently incorporates a company which becomes the agent, they will not be entitled to compensation or an indemnity under Regulation 17 if the individual becomes too old or ill to continue the agency. This is often something which is not considered by individual sales agents upon incorporating a limited company through which to operate their sales agency business.

Practical steps?

Individuals should think very carefully about whether to incorporate their agency business, since incorporation may remove their right to protection under Regulation 17 upon retirement.

Whilst incorporation may not be fatal to claiming a Regulation 17 termination payment upon retirement, it is something sales agents should be mindful of, and should seek legal advice as to its likely effect.

They should consider how they go about the incorporation, what to say to the principal, and what is to be recorded in writing about the effect of the incorporation. The less discussed between the parties and recorded in writing is likely to mean the identity of the sales agent is less clear.

If it is obvious the parties intended for the company to become the sales agent, it will be very difficult, if not impossible, for the individual to recover compensation or an indemnity under Regulation 17 upon retirement. However if the identity of the agent is less clear, the individual may wish to assert an entitlement to a termination payment under Regulation 17 upon retirement in the hope that the principal will negotiate a compromise.

It is always advisable for a sales agent to seek legal advice if the agent is considering retirement so that the appropriate steps can be taken which protect the agent’s position.

Suzanne Carr, Senior Associate, Dispute Resolution & Commercial Litigation, Myerson Solicitors
T: 0161 941 4000
E: Suzanne.Carr@myerson.co.uk
www.myerson.co.uk
Grosvenor House, 20 Barrington Road, Altrincham, WA14 1HB