Can an agent act for competing principals?

Commercial agents routinely carry ranges from several manufacturers at once. But can an agent act for principals who directly compete with each other, without breaching the duty to act dutifully and in good faith? The question was settled by a single case, Rossetti Marketing v Diamond Sofa, which the two articles below follow through the courts: first the High Court decision, then the Court of Appeal.

Both are reproduced in full and attributed to their authors. Because they cover the same case, the background facts appear in each; the second article picks the story up on appeal.

Can an agent act for competing principals? (High Court)

The original High Court decision: the Regulations can apply to an agent acting for competing principals, and when an implied term permitting it will arise.

In the case of Rossetti Marketing Ltd v Diamond Sofa Company Ltd and another [2011] EWHC 2482, the High Court implied a term into an agency contract allowing the agent to act for multiple competing principals. Before this decision, there had been no legal authority on the question of whether the duty placed upon an agent to act dutifully and in good faith (imposed by the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”)) would be breached if the agent acted for competing principals.

The key lesson for principals arising from this case is that if they do not want an agent to act for competitors, an express agreement to this effect should be included in the agency contract. If there is no written agency contract, principals should consider codifying the relationship in writing or at the very least, should write to their agents explaining that they are forbidden from working for competing principals.

In addition, this case contains a useful analysis as to the scope and extent of the obligation of the agent to act dutifully and in good faith and suggests that the duty is to be assessed by reference to the contractual relationship between the parties.

FACTS

Rossetti Marketing Ltd (“Rossetti”) acted as agent for the Diamond Sofa Company Ltd (“Diamond”), a Thai furniture manufacturer. The parties did not have a written agreement. Rossetti was also agent for other Asian furniture manufacturers. Diamond was aware of this fact and did not raise concerns about it during the currency of the agency.

In June 2008, Diamond terminated the agency. One of the reasons it gave was that Rossetti represented too many manufacturers.

Following termination of the agency, Rossetti brought a claim for compensation under the Regulations, which Diamond resisted.

At a trial of preliminary issues, the High Court considered a number of matters, including whether:

1. in acting for competing principals, the agent was in breach of the duty imposed by the Regulations to act dutifully and in good faith; and
2. as a result of the fact that Rossetti acted for competing principals, its activities for Diamond were secondary and therefore, it should be excluded from the right to claim under the Regulations.

DECISION

Mr Justice Cranston held that the Regulations could apply to an agent acting for multiple competing principals. In so doing, he referred to the intention underpinning the Regulations, which is to protect commercial agents. In addition, Cranston J observed that the Regulations set out the types of agent to whom the Regulations do not apply and noted that agents acting for multiple principals are not listed. Cranston J held that it could not be the intention of the Regulations to limit the agents to whom they applied to those with one principal per class of goods, regardless of the commercial context.

Cranston J observed that there were clear dangers to a principal where an agent acted for its competitors, including the potential conflict of interests faced by an agent who was negotiating with the same third party on behalf of several competing principals. In these circumstances, the interests of the third party may be preferred over the principals’ interests, as, for example, the price payable to any principal may be driven down by the existence of competition.

However, it does not follow that in acting for multiple competing principals, an agent is in breach of its obligation to act dutifully and in good faith. Cranston J held that an agent’s obligation to act dutifully and in good faith under the Regulations can be defined by the contractual context in which the parties operate. In reaching this conclusion, he referred to the case of Kelly v Cooper [1993] AC 205 (a case concerning estate agents), where it was held that a term allowing an agent to act for numerous principals, where the principal knows that the agent acts for and intends to act for other principals selling property or goods of the same description, can be implied into the contract between the parties.

In Rossetti, there was no express contractual term, or any other express term, from which any inference could be drawn about acting for competing principals. Consequently, where a principal is aware that the agent acts for competing principals and does not object, an implied term may arise allowing the agent to do so. In this case, the Court implied a term authorising Rossetti to act for competing principals. By way of observation, the Court appeared to suggest that despite being able to act for competing principals without breaching its duties (where the contractual context allows), it is possible that an agent may still breach its duties if, unbeknown to the principal, it sold one principal’s products at the expense of the products of another principal. The Court did not investigate whether this had actually occurred in the relationship between Rossetti and Diamond.

Cranston J gave short shrift to Diamond’s argument that as a result of the fact that Rossetti acted for competing principals, its activities for Diamond were secondary and therefore, it should be excluded from the right to claim under the Regulations. The Judge held that the Regulations do not contain anything to indicate that an agent acting for multiple principals is conducting secondary activities and that in this case, it was clear that Rossetti was not undertaking secondary activities.

Cobbetts LLP has specialist teams advising on the impact of the Regulations. We take a pro-active and commercial approach to dispute avoidance and there are a number of options that can be considered in advance of any dispute to limit liability and the prospect of claims. In the event of a dispute, our specialist Commercial Agents Dispute Resolution team is on hand to protect your position.

Article written by Andrew Leach of Cobbetts LLP, a leading law firm with offices in Birmingham, Leeds, London and Manchester.
Head Office: One Colmore Square, Birmingham B4 6AJ
Tel: 0845 404 2564
www.cobbetts.com

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Cobbetts LLP and the writer accept no liability in connection with the general guidance given in this column.

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Can an agent act for competing principals? (Court of Appeal)

The Court of Appeal’s decision on the appeal: clearer guidance on the agent’s duty of fidelity and the need for fully informed consent.

Regular readers will recall that Issue 196, published in April 2012, dealt with this very question; however, the “Rossetti case” was subsequently appealed and the Court of Appeal have now provided further clarity on this important question.

This article therefore looks closely at the recent appeal court decision referred to as Rossetti Marketing Ltd & Anor v Diamond Sofa Company Ltd [2012] EWCA Civ 1021 (17 July 2012).

Preliminary

Bearing in mind that the Commercial Agents (Council Directive) Regulations 1993 have been in force just shy of 20 years it is perhaps surprising that this is the first time that exhaustive judicial consideration has been given to this very important practical question.

We all know that commercial agents often prosper by attending a call with a raft of products to be considered by the same shop owner. They may pull a number of products out of their “bag”. For instance, an agent might sell shower heads, shower units and shower cubicles, all produced by distinct manufacturers, possibly all from different countries. In this case, the agent is able to faithfully sell for all of his principals whilst attending on one call. There is no conflict whatsoever in his mind and the shop owner will likely appreciate the opportunity of considering a range of distinct products that he may choose to stock.

This situation can be contrasted with an agent calling on the same shop owner, albeit this time presenting three different types of shower head from a Swedish, German and British manufacturer respectively. In this case, the agent will often face a dilemma as to which brand to prioritise. One agent may deny that any conflict exists because, of course, the brands all occupy different price points and we all know that the Swedish and German designs differ markedly from what the Brits produce. However, these really are fine arguments that may run the risk of appearing self serving, particularly when put before a robust judge seeking to apply common sense principles.

The “Rossetti case” on appeal

In the Rossetti case we learn that the agent was appointed on an exclusive basis in connection with the sale of leather upholstery in the UK and Irish markets. The principal, Diamond, was based in Thailand, where it manufactured leather upholstery. The idea was to utilise the agents’ strong connections and experience in order to sell through huge quantities of furniture produced at a competitive price. While the arrangement was being negotiated, the agent informed the principal that it was already acting for two other manufacturers of upholstery known as Linkwise and ArtPeak but that the furniture range of each of those two companies did not ‘clash’ with Diamond’s range.

The agency arrangement was initially on a one year trial basis, but the parties thereafter continued it, partly because the agents were ‘remarkably successful on Diamond’s behalf’. UK turnover increased from just over $1m in 2004 to well over £15m in 2007. Its worth pausing for a moment and admiring such a contribution from the agents; this type of performance is precisely why good agents will always flourish.

After such success, there was perhaps a certain inevitability that the agents’ agreement would soon be terminated, and so it came to pass. The genesis of the breakdown appears to lie in adverse currency fluctuations, together with the agents’ attempts to try and advise the principal how to run its business. After termination the agents pursued a claim to compensation and other damages. The principal contended that, although it was unaware of its right (or the relevant facts giving rise to the right) at the time it terminated the agency arrangement, it had in fact had the right to put an end to the arrangement on the ground of the agents’ breach of duty. The alleged breach was that the agents had acted for two direct competitors of the principal, namely a company known as Cassaredo and a company known as Creative.

The court’s clear guidance

After recounting the facts of the case, the Judge then provided very clear guidance on an agent’s duty of fidelity. I set out the words themselves as they convey the rules in a pleasingly concise fashion:

“An agent can act for two principals with conflicting interests in two types of case. The first is, as already indicated, where both principals agree. In such a case, it is for the agent to show that the principal not merely consented, but that the consent was given on a fully informed basis, i.e. that the agent had made full disclosure to the principal…

The second type of case where an agent can act for competing principals is where… the principal must have appreciated that the nature of the agent’s business (in that case a residential estate agent) is ‘to act for numerous principals’. As Lord Browne-Wilkinson explained, ‘despite the conflict of interest’, residential estate agents ‘must be free to act for several competing principals; otherwise they will be unable to perform their function’ …”

Therefore, what we learn from this case is that even when a principal discovers a serious contractual breach after having terminated he may still seek to rely on it as a causative factor. Further, an agent’s obligations are stark, he must obtain his principal’s fully informed consent. Clearly, as ever, there will be cases where an agent might argue that the principal had full knowledge of a competing range because, for instance, he expressly referred to the agent acting for another principal, or saw him manning the competitor’s stand at an exhibition. However, even these cases may fall short of the requirement outlined above. It seems that the Judge anticipates an agent making full disclosure to his principal of the fact that he intends carrying a competing brand and seeking the principal’s consent prior to taking on a new range. This may be by exchange of email, or perhaps more informally by discussion.

This judgment has provided clarity on an important issue and has removed shades of grey. In terms of whether the agents in this case will succeed, it is noted that the hearing was of a preliminary issue; its not clear whether a determination was actually made whether Cassaredo and Creative did compete with the main agency.

We may see the case appealed again to the House of Lords or alternatively the parties may now put down their weapons and fashion a compromise. In any event, agents should now be clear as to their obligations in terms of seeking fully informed consent in respect of competing agencies.

Thom Vaughan, Solicitor, EAD Solicitors LLP
thom.vaughan@eadsolicitors.co.uk
Head Office: Prospect House, Columbus Quay, Liverpool L3 4DB
Tel: 0151 735 1000
www.eadsolicitors.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, E.A.D. Solicitors, Prime Forensic Accountants and the writes accept no liability in connection with the general guidance given in this column.