Commercial agent duties and obligations

Every commercial agent owes duties to their principal, and those duties come from more than one place: the Commercial Agents Regulations, the general law of fiduciaries, and whatever the agent has signed up to in the contract. Getting them wrong matters, because a serious breach can let a principal terminate and leave the agent with no claim to compensation or an indemnity.

This guide sets out the duties each side owes under the Regulations, the principal’s own duty of good faith (including where an agent falls outside the Regulations), the agent’s core fiduciary duty of loyalty and the conflicts of interest it rules out, and the practical care needed with contractual obligations. The Regulations place duties on the principal too, so this is not a one-way street.

This is general information, not legal advice. Take advice on your own agreement.

The short answers

The statutory duties: what the Regulations require of each side

Contributed by David Bentley, Bentley and Co. Solicitors, August 2015.

Although it is obvious to state it, one of the most important facets of the relationship between a principal and an agent is as to what are their respective obligations to each other. There are effectively two levels to this, and also fundamentally important potentially different consequences. Level one is what is provided for in the Commercial Agents Regulations – as to this (and as many readers may already well know) Regulation 3 sets out what are the agent’s duties to his principal (i.e.: – to look after the principal’s interests, to act dutifully and in good faith, to make proper efforts to negotiate (and conclude) sales, to communicate all relevant information which is available to him, and otherwise to comply with all reasonable instructions), with Regulation 4 specifying the flip side of the coin, and being the principal’s obligations to the agent – i.e.: – (likewise) to act dutifully and in good faith, to provide the documentation that the agent requires in relation to the goods which he is selling, to obtain and provide whatever information the agent requires and as is necessary to enable him to carry out his agency function properly, to let him know if sales are likely to be less than the agent could (otherwise) reasonably have expected, and to inform the agent (and to do so within a reasonable period of time) of its (the principal’s) refusal, acceptance or nonexecution of any sale which the agent had procured.

These duties are all basic and (in the sense that Regulation 5 (:- “The parties may not derogate from Regulations 3 and 4”) make clear that they are effectively mandatory) essential. The second level as to principals’ and agents’ respective obligations to each other, is as to what is provided for in any written agreement, and/or what otherwise may be established by custom and practice. These rights and obligations are (what I would label as being) supplementary to those set out in Regulations 3 and 4, and it is in respect to these that agents need to be particularly careful – for example, they need to be very aware that an obligation to have to achieve a particular minimum level of sales over a specified period (and, moreover, that any failure so to do may then be deemed as a fundamental breach of contract) is nothing stipulated, or even required, by the Commercial Agents Regulations, but (if agreed to by the agent) nevertheless becomes an obligation on his part, and which is in addition to the obligations which he always and anyway owes to every principal, pursuant to Regulation 3. Not only that, but Regulation 18(a) enables a principal to then avoid what would ordinarily otherwise be its liability to have to pay compensation or an indemnity to an agent, where it [the principal] has terminated the contract because of a default on the part of the agent (such as, as an example, this failure to achieve a minimum level of sales), which would justify immediate termination under the terms of the contract. As I say, and in the case of agents who don’t have written agreements (as well as those who do), there may be other obligations which they have agreed to perform by virtue of those other obligations having become established by dint of custom and practice, over a period of time.

The point therefore about obligations which are agreed to in addition to those automatically taken on under the Regulations, is that those “supplementary” obligations may be very many and may be worded in such a way that the agent might be almost bound to fail to achieve them (and to then lose his or her prospective rights on termination, to compensation or an indemnity), no matter that, in actual fact, he or she might actually be an excellent agent. The point about an agent allowing his or herself to become obligated to the principal to such an additional extent under the terms of a contract may therefore have nothing whatsoever to do with how good they might be as an agent or how well they carry out their functions, but everything instead to do with how deeply they looked into the terms of the contract which were presented to them, and whether they sought appropriately expert legal advice, at the relevant time.

David Bentley is a Partner with Bentley and Co. Solicitors and specialises in agency law.
7 Littlemoor Road, Pudsey, Leeds, LS28 8AF · Tel: 0113 236 0550 · www.bentleyandco-solicitors.com

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Bentley and Co. Solicitors and the writer accept no liability in connection with the general guidance given in this column. Please ensure that you obtain legal advice before acting in reliance upon anything in this article. For example, please be clear that the answers 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.

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The principal’s duty of good faith (including non-commercial agents)

Contributed by Emma Roake, Legal Director at Fox Williams LLP, December 2020.

For years, the duties owed by a principal to his sales agent under English law were few and far between. Whilst this changed for commercial agents with the coming into force of the Commercial Agents Regulations, non-commercial sales agents remained without rights at common law. However, this too has changed in recent years as several cases in the English courts have established that a duty of good faith is implied into what have been termed “relational contracts”.

So, what is a relational contract? The English High Court has identified a list of factors which may indicate that a contract is a relational contract:

• the contract is long-term, or it is intended by both parties that there will be a long-term relationship;
• the parties intend their respective roles to be performed with integrity;
• the parties are committed to collaborating with one another in the performance of the contract;
• it is intended that there is a relationship of mutual trust and confidence;
• the contract involves a high degree of communication and co-operation between the parties;
• there may be a degree of significant investment by one party (or both) in the relationship; and
• the relationship may be exclusive.

Given the above list, it is possible that some freelance agents who have been long-term agents for their principals will, even if their sales agency agreement is not covered by the Regulations, be owed a duty of good faith by their principals.

The English High Court considered in June 2020 the precise nature of such a duty of good faith, and concluded that conduct will be a breach of the duty of good faith if it would be regarded as “commercially unacceptable” by reasonable and honest people. Whilst this duty does not go as far as the commercial agent’s fiduciary duties to the principal, it provides useful ammunition for a sales agent whose principal’s conduct is on the sharp side.

At the same time for those sales agents who are commercial agents the Regulations require principals to act in good faith in their relations with their commercial agents. Finally relational contracts may also include long-term distributorship agreements, supply and franchise agreements meaning that a duty of good faith may be implied into the agreements entered into by suppliers and distributors and franchisors and franchisees.

Take home points

• The bedrock of the duties owed by a commercial sales agent to his principal under English law is the duty of single-minded loyalty. A facet of this duty is the duty on the sales agent to act in good faith.
• Commercial agents can hold their principals to account as the Regulations require principals to act in good faith.
• Non-commercial agents may now look to an implied duty of good faith to hold their principals to account.

Emma Roake is a Legal Director at Fox Williams LLP
www.agentlaw.co.uk · www.foxwilliams.com
© 2020 Fox Williams LLP

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The agent’s fiduciary duty of loyalty

Contributed by Thom Vaughan, E.A.D. Solicitors LLP, October 2009.

Commercial agents, quite understandably, often tend to focus on the question, “what’s in it for me?” However, any responsible agent will realise that they must also keep in mind the strict obligations owed to their principals.

The obligations owed in this context are known as fiduciary duties and are helpfully outlined in the Court of Appeal case of Mothew (t/a Stapley & Co) v. Bristol and West Building Society [1996], where the judge pointed out,

“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”

An agent must therefore ask himself at each turn whether the decisions he takes in conducting his agency are in the best interests of his principal in order to satisfy his fiduciary duties. If not, he may well be placing himself in breach of the agreement between the parties and be vulnerable to termination with no claim to compensation where the circumstances of breach are serious.

This issue arises most often when an agent decides to take on another agency to complement an existing one. This can obviously be greatly disturbing to a principal, particularly where the agent is receiving substantial commission on a monthly basis, but is it contrary to the agent’s duty of single minded loyalty? The answer is that if the new agency competes with the existing agency or takes up so much time that the original agency suffers then it probably is a breach and the principal may ask the agent to reconsider.

A classic argument between agent and principal in this regard is whether the new agency truly competes and where there is no clear evidence of this it will come down to a question of fact. For instance, can an agent carry two furniture ranges for different principals? The obvious answer is no but the less obvious (and potentially correct) answer is yes, if the furniture is composed of different materials, styles, price points and will therefore appeal to mutually exclusive customers.

In this case an agent can sustain an argument that there is no detriment to the principal and he can act for both ranges whilst fulfilling his fiduciary duties. However, he may still fall foul of the provisions clarified above if he has failed to obtain valid consent from his principal, which, for obvious reasons may well be withheld.

Further, if the time commitment of the new agency would impact adversely on the first agency, and this can be proven, then he is arguably in breach once more.

A practical answer to this problem for an agent is to steer well clear of any new agencies if there is a hint that a new agency may compete as to move forward will leave him open to future problems; for instance, a principal may choose to quietly tolerate the situation in the good times and then seize on it as evidence of breach in the bad times.

A principal may also argue that it is entitled to recover an agent’s “secret profits”, i.e. those profits made for another competing agency without its knowledge. In this regard an agent is at risk of having to account to the first principal for profits made with the second later agency.

The upshot of all of this is that an agent must give careful thought to taking on new agencies and closely analyse whether it will in any way interrupt his existing operations.

Thom Vaughan is a solicitor with E.A.D Solicitors LLP and specialises in commercial agency matters.
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 and the writer accept no liability in connection with the general guidance given in this column.

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Conflict of interest: a cautionary case

Contributed by Thom Vaughan, E.A.D. Solicitors LLP, January 2012.

An Agent must not allow a conflict of interest to arise between his agency and competing interests or there may be expensive consequences.

The recent Scottish Court of Session decision in Samsung Semiconductor Europe Ltd v Docherty (FE) & Anor [2011] ScotCS CSOH_32 (17 February 2011) served as a timely reminder that agents or employees owing fiduciary duties to their employer / principal should never forget the requirement not to make a secret profit from their elevated position.

In this case, Docherty was employed by Samsung and advised and influenced it to continue procuring services from DKV, a technology testing company, to deal with quality assurance issues raised by Dell, one of Samsung’s most important customers. Over the period of time that Samsung contracted with DKV, one of its managers queried with Docherty whether this company was truly giving the best value and whether alternative contractors should be considered.

Docherty consistently reassured Samsung, sometimes via email, that DKV represented the best alternative; sometimes this was done by rubbishing the performance or charging rates of other potential providers, such as Axiom and Flextronics.

In reality, part of the reason Docherty favoured DKV was that he had a business interest in it as a shareholder. He had not disclosed this fact to his employer Samsung in clear breach of an express provision of his contract of employment. The Court held that Docherty owed a fiduciary duty to Samsung. He occupied a position of great responsibility and had “authority to represent SSEL in front of Dell in regard to all QA related issues”. Among other things, he obtained prices from suppliers and potential suppliers and carried out negotiations with DKV on behalf of Samsung in relation to a number of matters. In short, he undertook the great bulk of the contact between SSEL and DKV.

The judge found that there was potentially a conflict between, on the one hand, Docherty’s duties as a QA Manager and Senior QA Manager for Samsung to act in the best interests of his employer and, on the other, his interest as, in effect, a 50% shareholder in DKV. As QA Manager, he was in a position to influence decisions about the work to be given to DKV and the payment for that work; and as a 50% shareholder in DKV he stood to gain if decisions made by Samsung resulted in DKV’s services being retained, or in DKV being given more work, or in DKV being paid more generously for its work than it might otherwise have been.

Doherty actually accepted in cross examination that his undisclosed financial interest in DKV put him in a position where he had a potentially conflicting interest.

As the judge found that Docherty was in breach of his fiduciary duty to Samsung by his involvement in DKV he was obliged to account for the profits derived from that interest. He was therefore ordered to pay Samsung a total of €340,808.92, plus interest at a rate of 8% p.a. until payment.

This is a cautionary tale for any employee or agent owing fiduciary duties and underlines the requirement to avoid any conflict of interest situations arising and the strong line taken by the courts in relation to breach of this duty. It will be prudent for agents carrying a range of product lines or having an involvement in other commercial interests to take stock by analysing whether any conflict has already arisen or is likely to arise.

Article written by Thom Vaughan of EAD Solicitors LLP, specialists in agency and distribution law.
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, RSM Tenon and the writer accept no liability in connection with the general guidance given in this column.

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Contractual obligations: making sure you can meet them

Contributed by David Bentley, Bentley Agency Law, January 2023.

The parties to a principal/agent relationship are not obligated to have to enter into a written agreement (but subject always to Regulation 13 of the Commercial Agents (Council Directive) Regulations 1993 (‘CAR’), which regulation entitles either party to require the other to provide a signed written document setting out the terms agreed, including any terms subsequently agreed). However, recording in writing the terms of any commercial relationship (including a commercial agency relationship) is always best practice, as that can avoid unnecessary future points of dispute.

In entering into a written agency agreement, great care must be taken by both parties to ensure that they can actually comply with what they are agreeing to be their respective obligations. Moreover, in the case of the agent, compliance with such obligations can potentially make the difference between it subsequently being entitled to any form of compensatory payment on termination, or not. This is because Regulation 16 of the CAR entitles either party, in circumstances of a breach of their contractual obligations by the other party, to terminate the agency relationship ‘immediately’ and, by Regulation 18(a), where a principal has justifiably terminated the agency immediately, the agent would not then have any rights to bring a claim for (as appropriate:-) compensation or an indemnity.

It follows therefore that agents need to ensure that they can comply with all contractual obligations, such as (and just as a few of many potential examples) in agreeing to:-

• Sales targets – to avoid being in breach of contract (with the potentially adverse consequences, as explained above) agents should ensure that, for example, any expressed sales targets are actually achievable; are expressed in such terms whereby they cannot be unilaterally set by the principal; and are also worded so that the agent is not deemed to be in breach if prohibiting circumstances beyond its control materialise (such as a significant customer going out of business or failing to place anticipated volumes because of circumstances attributable either to the principal or to other factors). This all explained, the most by way of a ‘sales target’ obligation that an agent should ever really agree to is to use its ‘best endeavours’ to maximise sales, as opposed to having to achieve a particular level of sales.
• Provide feedback – agents are frequently required to report to their principals as regards customers’ feedback regarding products and service and/or otherwise as to market conditions, and this can be on a fairly regular basis (i.e.:- weekly, monthly, or quarterly). However, and again, agents need to ensure that they do not agree to do something which they cannot actually comply with (and so as to avoid being in breach of contract, with the potential consequences as explained above).
• Make a minimum number of customer visits – agents may be required to make a minimum number of visits in a particular period, but, again, the agent must ensure that what is being required of it is practical.

By Regulation 3(2)(c), agents must otherwise ‘comply with reasonable instructions given by the principal’ with, moreover, Regulation 3(1) requiring the agent to ‘look after the interests of his principal and to act dutifully and in good faith’. Failure so to do and in circumstances where the principal may consequently be entitled to terminate the relationship forthwith, may likewise lead to circumstances where the agent may potentially lose its entitlement to any form of compensatory payment.

In summary, agreements in writing are always advisable, but agents should particularly take care to consider what it is that they are being asked to agree to do (as well as taking advice as regards all other aspects of the draft agreement). This is because obligations need basically to be achievable and otherwise worded protectively of their position, and so as to avoid subsequent breaches.

© David Bentley
Contact David Bentley of Bentley Agency Law. E db@bentleyandco-solicitors.com · T 0113 236 0550 · M 07590 267475.

BentleyandCo is the trading name of Bentley Agency Law Limited (SRA No. 554403). Bentley Agency Law Limited is a company registered in England and Wales (Companies House registration No. 07445437), with its registered and trading office address situated at 7 Littlemoor Road, Pudsey, Leeds LS28 8AF. Bentley Agency Law Limited is recognised, authorised and regulated by the Solicitors Regulation Authority. The ONLY law which we practice is the law as it relates to commercial agents. Please ensure that you obtain legal advice specific to whatever are your own circumstances before acting in reliance upon anything in this article, since, for example, the particular circumstances of each individual may necessitate a different approach, and on account of the fact also that the law may at any time change. Furthermore, be aware that information given in this article may not cover or take into account all possible points or aspects of the law.

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The contributions on this page are general guidance, not legal advice, and reflect the position at the time each was written. Every agency turns on its own facts and wording. Agentbase and the contributing firms accept no liability for any reliance placed on them. Please obtain legal advice before acting on anything set out here.