(This article was originally published in 3 different parts – but for your convenience we’ve put all 3 together on this page)
You may have watched the cult horror film 28 Days Later and its sequel 28 Weeks Later about a post-apocalyptic world in the aftermath of the killer virus Rage.
28 years later, after the coming into force of the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (as amended) (‘the Regulations’) implementing Council Directive 86/653 [1986] OJ L382/17 (‘the Directive’) after Brexit and, we all hope soon, after virus, the Regulations rage on for some, creating their own horror stories.
With many principals looking to vary or terminate sales agencies to save costs in these zombified economic conditions, against a backdrop of Covid, we have seen an increase in claims often caused, or worsened, by a misunderstanding of the Regulations.
In this article, I summarise a selection of rights and obligations under the Regulations, examine some common misconceptions and set out some practical steps that might be taken to mitigate exposure to the Regulations.
Introduction
The Regulations came into force on 1 January 1994 and contain important provisions affecting the relationship between commercial agent and their principal.
Broadly speaking, a ‘commercial agent’ is a self-employed intermediary who negotiates or negotiates and concludes sales or purchases of goods on behalf of and in the name of his principal.
Unlike the English common law – this was really the big change that threw agents, principals and lawyers alike in 1994 (still today)- the Regulations provide an entitlement to ‘compensation’ or, if agreed by the parties in writing, an ‘indemnity’ on termination of the agency agreement by the principal or the agent in certain circumstances.
The Regulations also set out duties owed to each other by commercial agents and their principals.
The Regulations also contain provisions relating to the basis of remuneration of commercial agents, the termination of commercial agencies and the validity of restraint of trade clauses.
In all other respects, relations between commercial sales agents and their principals are governed by the common law, equity and, to a more limited extent, other legislation applicable to agents and their principals.
The underlying purpose of the Directive is to protect sales agents by giving them a share of the goodwill which they have generated for the principal, and from which the principal will benefit after the sales agency agreement has been terminated.
The UK Courts are required to interpret the Regulations (even after Brexit unless the Directive is amended or repealed), so far as possible, in light of the wording and purpose of the Directive in order to achieve the result intended by the Directive.
Incorporation or Exclusion of the Regulations
The commercial agent and principal may agree to incorporate the Regulations into a sales agency contract.
The Regulations impose various terms on the relationship between commercial agent and principal, many of which may not be excluded by contract. All are subject to an overriding duty of good faith.
If there is no mention of the Regulations in the sales agency contract, and the agent is a commercial agent, the Regulations restrict the freedom allowed to a principal and agent under English law to contract as they wish.
To the extent that a sales agency contract tries to exclude the Regulations or limit those provisions in the Regulations that cannot be excluded – for example, the right to compensation or indemnity on termination – the clause seeking to exclude is unenforceable.
In my experience, despite the passage of time since implementation of the Regulations, principals often insist upon such ‘exclusion’ clauses in agency contracts. In recent cases I’m surprised to still see: ‘The Regulations do not apply to this agency contract’, and ‘the parties agree that on termination to the extent the Regulations apply compensation shall not be payable’.
Some principals consider it worthwhile including such an unenforceable clause, because it is possible the agent is persuaded not to make a claim or seek advice, particularly, as if the sales agent does not notify the principal within one year of termination his intention to bring a compensation claim, the right to bring a claim is lost.
How the Sales Agent is Described
There is a general misconception by agents and principals that how the sales agent is described by the principal, either in the contract or on, for example, a website is the only thing that decides whether the agent is a commercial agent under the Regulations.
On recent cases I’ve been involved with principals have described sales agents (presumably to try to avoid the Regulations), as: ‘consultant’, ‘contracts surveyor’, ‘sales engineer’, ‘adviser’ and ‘marketing executive’.
The relevant issue however is what the sales agent does, not how he is described by the principal.
Continuing Authority to ‘negotiate’ or ‘negotiate and conclude sales’
Principals will also attempt to limit the scope of the agent’s negotiating role presumably to try to escape the Regulations. Whilst what the contract says is a relevant factor when determining this issue, again the real issue is what the agent does, rather than how his role is described.
Note authority to ‘negotiate’ or ‘negotiate and conclude’ sales or purchases on behalf of his principal is an alternative test. Fundamentally, the test is interpreted widely, to include ‘deal with, manage or conduct’ or ‘promote’. In my experience, these are common mistakes.
For example, my firm conducted a claim for compensation by an agent of a wine manufacturer principal which the principal defended on the grounds that the agent did not have authority to negotiate and conclude. The case could have settled for £60,000 at the beginning before issue of Court proceedings but proceeded to trial. The principal paid more than £600,000 in compensation and legal costs.
In essence, there needs to be some element of sale or purchase in its widest sense. There is no need for the agent to negotiate terms or haggle about price, merely to acquire or develop or promote business for the principal. In the above case the agent had a set price at which to sell and often did not conclude orders. This brings me back to the purpose underpinning the Directive. If the agent has generated goodwill through his efforts, then a Court when interpreting the agent’s role is likely to apply the Regulations.
The authority of the agent as above must continue throughout the agency, although there are exceptions.
‘On Behalf of and in the name of that principal’
The agent must negotiate on behalf of and in the name of the principal. Agents are unlikely to be afforded protection by the Regulations where they act for an undisclosed principal or where they act for a disclosed but unnamed principal.
What are ‘Goods’
The interpretation of goods for the purposes of the Regulations is also wider that what might ordinarily be considered goods. Goods must be tangible.
‘Goods’ may include gas and electricity, may extend to computer software if it is supplied in a physical form for example on a disk, hard drive or fire stick, but not if it is supplied by way of an electronic download on the internet.
‘Secondary activities’ are excluded from protection from the Regulations
If the agent’s primary purpose for the principal is other than as set out in the Schedule to the Regulations, the agent’s role will be secondary and excluded from protection. In another case in which I was recently involved, my client an agent sold substantial quantities of crisps on behalf of a crisp manufacturer into the UK multiple retail sectors – shops like Tesco and Sainsburys. In order to sell to a retailer like this, it is necessary to be a listed supplier which the manufacturer principal was not. The principal argued that the agent’s sales role (which it denied) was secondary to his account management role which fell outside of the Regulations. The agent’s role introducing and listing the principal as a supplier of the retailer and notwithstanding the management role (which was probably not a commercial agency and which took up a substantial proportion of time following listing)was not secondary and was within the Regulations.
Taken as a whole, the Schedule is directed at distinguishing between a relationship where the agent develops goodwill in the market for the particular goods which pass to the principal and circumstances where that may not be the case.
The Schedule contains a number of indicators, the existence or absence of which may be evidence that the role is one of a commercial agency or not.
The indicators in the Schedule are merely indicators. Differing weight may be attached to each of them in different cases. Moreover, the indicators may only assist a principal trying to avoid the Regulations if the agent has not through his activities developed goodwill – as in the above case, in the market for the particular goods in which he is engaged to sell.
Too often, I see principals offer up paper weight defences based on the Schedule to genuine claims for compensation under the Regulations.
Termination of a Commercial Agency
In broad terms a commercial agency for an indefinite period may be terminated by the minimum notice period prescribed by the Regulations, namely one month in the first year, two months in the second year and three months in the third and later years. The parties may not agree a shorter period of notice (but may agree a longer notice period) and the notice period must expire at the end of a calendar month. A commercial agency for a fixed period, which both parties continue to perform after the expiry of that fixed period, converts into a contract for an indefinite period and requires the same notice period as described above. Further, a commercial agency agreement for a fixed period which finishes at the end of the period gives rise to a claim for compensation.
On a recent case, with which I brought, involving a chocolate manufacturer, a two-year fixed term commercial agency ran from 1st January 2018 to 31st December 2019, but the parties continued to perform with the principal accepting orders placed by the sales agent. On 10th January 2020, the principal tried to terminate the sales agency with effect at the end of January 2020, arguing that the sales agency had come to an end at the end of December 2019, that only reasonable notice was required to the end of January with no compensation payable. I claimed notice to the end of April 2020 with compensation. Had the principal allowed the fixed term agency to terminate 10 days earlier, the claim would have been limited to compensation. Principals often try to settle compensation claims with the agent, after giving notice of termination before the sales agency contract ends. However, such a strategy can be risky, because the Regulations prevent the parties from doing anything detrimental to the sales agent’s right to compensation before the end of the agency contract.
On another recent case in which I was involved, in September 2020 a national supplier principal of garden furniture gave 3 months-notice to
terminate, a sales agency that commenced in January 2010, with effect at the end of December 2020. The sales agency had always been successful. On any reasonable analysis the sales agent’s compensation claim was conservatively valued at in excess of £300,000. On 25 November 2020, the sales agent and principal agreed that the principal would pay £25,000 in full and final settlement of all claims inclusive of the remaining notice – valued at about £15,000 and compensation to be valued. This was paid on 31 December 2020. The sales agent then sought my advice. I challenged the validity of the agreement reached prior to termination and recovered substantial compensation. The principal was very unhappy, but in my mind had sought to pull the wool over the sales agent’s eyes to circumvent the Regulations.
Another strategy my firm sees adopted by principals, is to give notice of termination then reduce the scope of the sales agent’s product range, customer list or territory so as to reduce the amount of commission the sales agent may earn and the amount of compensation payable upon
termination. This however does not in my experience work. Frist because any variation must be with bilateral agreement and if the principal
seeks to impose the change unilaterally it may permit the sales agent to terminate and preserve his compensation claim. Second because the Court will calculate compensation payable for the loss of commission that the commercial sales agent would have earned if the sales agency agreement had continued in its normal manner not based upon what the commercial agent did earn as a result of the principal reducing scope. Thus, on a recent case I conducted, involving a long-established cutlery supplier principal, the principal unilaterally removed half the sales agent’s territorial customer base and product range, the agent terminated with immediate effect and claimed compensation by reference to the contract pre-variation. The principal paid notice and compensation assessed by reference to the contract pre-variation.
The sales agent’s right to compensation does not exist if: (1) the principal terminates because the agent has done something seriously wrong. The conduct is said to have to go to the root of the contract. Thus, a commercial agent has a duty to look after the interests of his principal and act dutifully and in good faith. This is arguably the only basis upon which a sales agency may be justifiably terminated by principal without payment of compensation. An example is a sales agent acting for multiple principals who compete with one another. Unless each principal was fully informed of the sales agent’s activities for the other principals and all principals had consented to the agent acting in this manner, any of the principals may terminate the sales agent’s agreement summarily and avoid the payment of compensation. By contrast an agent failing to hit agreed key performance indicator in a contract, may entitle a principal to terminate summarily but would not entitle a principal to avoid the payment of compensation.
This is a complex field which has given rise to a significant amount of litigation. For example, a claim in which my firm was instructed involving the sale of furniture, the issues of competing principals and informed consent, which ran for several years to the High Court and Court of Appeal. (2) the sales agent has terminated himself and the termination is not justified by the principal’s serious default or the sales agent’s age or infirmity, or (3) the agent has with the principal’s consent assigned his rights and duties to another person.
Practical Steps that Might be Taken
Like them or loathe them, the Regulations are, in my view, likely to be here to stay. Where they apply, the Regulations restrict the freedom allowed to a principal and a sales agent under English law to contract as they wish. Certain provisions, as indicated, can’t be avoided; all dealings between sales agent and principal are subject to an overriding duty of good faith. The parties, particularly principals, should therefore ensure that written agreements mirror the Regulations where they must; provisions overriding the Regulations, where that is allowed, should do so taking into account the need for good faith. At a basic level the parties to a sales agency relationship should ensure that the agreement clearly sets out the following:
a. what rate of commission is payable, when, and subject to what conditions?
b. on what basis commission on sales will be split between former and current sales agents and over what period?
c. events of termination, particularly what will justify the principal in terminating immediately?
d. sales agents will want a statement that they are commercial agents; principals will prefer a statement either (if such is obviously true) that they are not,
e. Principals will normally prefer, if the Regulations are applicable, any entitlement on termination is to indemnity and not to compensation (the difference between the two entitlements is not covered in this article but an indemnity is generally more favourable):
Principals should understand before entering a commercial sales agency agreement that in most cases an agent on termination will be likely to compensation and in broad terms how much. If faced with a compensation claim, principals are encouraged to ask themselves the following questions: Did the sales agent sell things for me ? Have I and will I continue to benefit from those sale? If the answer is yes, then the principal should think hard about disputing the existence of the commercial sales agency and instead look to engage in early settlement negotiations during which costs are better spent seeking to reduce the amount of compensation payable.
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Giles Bright is a Head of Dispute Resolution at Bankside Commercial Solicitors
Hamilton House
1 Temple Avenue
London EC4Y 0HA
Tel: 020 7654 0200
www.banksidecommercial.com
Disclaimer: This article does not contain legal advice and is for general guidance only. AgentBase, the firm of solicitors and the writer accept no liability in connection with the general guidance given. Please ensure that you obtain legal advice before acting in reliance upon anything in the article. For example please be clear that the information and views given in this column may not cover all possible angles, aspects, relevant considerations and/or points of law and so that all or any information which is given above needs in every instance to be referred for legal advice for clarification and amplification, before being relied upon.