In 2010, Christopher Tayton of Clarkslegal LLP wrote a three-part update on how the courts had been interpreting the Commercial Agents (Council Directive) Regulations 1993. Between them, the three parts cover how compensation is calculated, who counts as a commercial agent, when a principal can avoid paying, how the indemnity works, the one-year notice deadline, and what happens when an agreement is governed by the law of a country outside the EU.
All three parts are brought together here as a single reference and reproduced in full. Start with the key points, then read each part for the detail and the cases.
Please note. This series was published in 2010. The approach to calculating compensation set out in Lonsdale v Howard Hallam remains the leading authority. However, the material predates the UK’s departure from the EU, and the discussion in Part 3 of agreements governed by non-EU law should be read with that in mind. As with all the guidance here, take current legal advice before relying on it.
Key points at a glance
- Calculating compensation. Since Lonsdale v Howard Hallam (2007), compensation is assessed as what a hypothetical buyer would reasonably have paid for the agency at the date of termination, valued on a net basis and assuming it would have continued. Later cases confirmed that the cost of employing someone to do the agent’s work can be deducted.
- Qualifying as a commercial agent. You need continuing authority to negotiate the sale or purchase of goods. Buying and reselling on your own mark-up usually points to distribution, not agency. Activities that are “secondary” to another role can fall outside the Regulations.
- When a principal can withhold compensation. A serious, repudiatory breach by the agent can engage Regulation 18(a).
- The notice deadline. An agent must give notice of a claim within one year of termination (Regulation 17(9)), or the claim is lost. Serve early, because the termination date is not always obvious.
- Non-EU governing law. Choosing the law of a country outside the EU, or non-EU arbitration, does not automatically remove the mandatory Regulation 17 protection, and an English court could still hear the claim. Read this in light of Brexit and take current advice.
The three parts below were written by Christopher Tayton of Clarkslegal LLP and first published on Agentbase in 2010. They are reproduced in full, with only the minor formatting fixes listed in the changelog. The author’s biography and disclaimer appear once, at the end.
Part 1: calculating compensation, and who is a commercial agent
Originally published as “Commercial Agents Update 2010 (Part 1)”, 23 March 2010.
The Commercial Agents Regulations have been in force for over 15 years yet the Courts are still being asked to clarify parts of the Regulations which remain unclear. Few will have missed the House of Lords decision in Lonsdale v Howard Hallam where the Court explained how compensation under the Regulations should be calculated. The purpose of this note is to provide an update on those areas of the Regulations which have been clarified by the Courts over the last three years.
(For a fuller explanation of commercial agency law please refer to our Complete Guide to Commercial Agents, accessible via our website, www.clarkslegal.com).
The following questions have been considered by the Courts over the last three years:
How do you calculate compensation due on termination of a commercial agency agreement?
This was the question put to the House of Lords in Lonsdale v Howard Hallam (2007). Previously the Court’s approach was inconsistent and had varied between either applying the French rule of awarding two years’ gross commission or using the value of the agency business to calculate the award. The Court decided that the latter basis was correct and explained the method of calculating compensation as follows:
The test is what a hypothetical purchaser would reasonably have paid for the agency business at the date of termination, on the assumption that it was assignable and would have continued.
Where appropriate, the valuation will take account of the following:
- The condition of the underlying business of the principal. If the business is in decline or being closed, this will be reflected in a reduced valuation. If the agent is likely to take customers away with him on termination, again this should be reflected in a reduced valuation.
- The agency should be valued on a net basis, so any expenses that the agent has to incur to earn the commission need to be discounted.
- Where claims go to Court, generally the parties will need to provide expert accounting evidence to prove the value of the business.
After Lonsdale, the Court was given a further opportunity to clarify these rules in Nigel Joinery Services v Ian Firth Hardware (2008). The Court held that generally the costs of employing someone to undertake the duties of the agent was an expense which should be deducted when preparing the valuation. In many cases, this will substantially reduce the amount of compensation awarded.
When is an agent a “commercial agent” for the purpose of the Regulations?
One qualification is that the agent must have “continuing authority to negotiate the sale or purchase of goods”. Lawyers have tried to exclude the Regulations by drafting agency agreements which avoid giving the agent the necessary “authority to negotiate”. Two recent decisions have helped clarify this issue.
In Nigel Joinery Services v Ian Firth Hardware (see above), the Court decided that an agent whose role it was to get the customer interested in the product, suggest possible prices for the product (subject to principal’s approval) and encourage the customer to order those products was a “commercial agent” even though the actual sale was negotiated by the principal.
In Raoul Sagal (T/A Bunz UK) v. Atelier Bunz GMBH (2008), an individual bought jewellery from principal at 20% discount and sold onto customers. Court held that where a business buys and sells the goods as principal rather than agent, this will not be a commercial agency. In this case, the individual did not have authority to negotiate on behalf of the principal, and was, in reality, a distributor.
A further requirement is that the agent’s activities as “commercial agent” must not be “secondary” to their main duties as an agent.
In John Harold Crane v Sky-In Home (2007), a sales agent was retained to supply and install satellite equipment packages and also to sell subscriptions to Sky’s satellite television. The Court held that the key issue was whether the sale of the “goods” (in this case the satellite equipment) generated any goodwill (in this context, repeat business) for the principal. The Court decided that it was the sale of the satellite subscriptions (which is a “service” and therefore not covered by the Regulations) which generated the repeat custom and that the sale of the goods (i.e. the satellite equipment) was therefore secondary, meaning the agent was not a commercial agent.
Part 2: avoiding compensation, the indemnity, and notice deadlines
Originally published as “Commercial Agents Update 2010 (Part 2)”, 23 April 2010.
When can a Principal avoid paying compensation following termination of a commercial agency agreement?
Regulation 18(a) states that a Principal is not required to pay compensation where he has terminated the agency agreement “because of default attributable to the commercial agent which would justify immediate termination of the agency contract”. This applies where there has been a serious breach of contract by the agent, known as a repudiatory breach, which entitles the principal to terminate the contract with immediate effect. This happened in Nigel Joinery Services v Ian Firth Hardware (see above) where the agent disobeyed the principal’s instructions to provide weekly reports and to work exclusively for the principal (subject to notifying the principal of competing work). Court decided this conduct, which amounted to sustained and persistent breach of contract, was a repudiatory breach of the contract, so Regulation 18(a) applied.
Indemnity clarified by the European Court of Justice (“ECJ”)
In a German case, Turgay Semen v Deutche Tamoil GMBH, referred to the ECJ, the Court made two findings which are relevant for Commercial Agency Agreements which provide for an indemnity to be paid on termination:
When calculating the indemnity, unless otherwise agreed by the parties, benefits accruing to other parties in the principal’s corporate group are not considered to be benefits of the principal, so can be ignored for the purpose of calculating the indemnity.
The Court cannot automatically limit the amount of the indemnity to the amount of commission lost by the agent after termination. In fact, there is no indication that the English Courts were contemplating this approach, but the clarification is helpful nonetheless.
Notice of claim for compensation – when does time start to run?
A crucial part of the Commercial Regulations that all agents need to be aware of is that you lose your right to compensation or an indemnity if you fail to serve notice of your intention to make a claim within one year of termination of your agency agreement (Regulation 17(9)). If you fail to comply with the notice requirements in the Regulations you will lose your claim to an indemnity or compensation however strong your case may have been. Generally, the best approach is to serve notice as soon as possible so that there can be no doubt that you have met the one year deadline. Sometimes, however, the question of when exactly the agency agreement comes to an end is not entirely straightforward and, of course, it is only once termination has happened that the one year for giving notice starts to run under the Regulations.
This was the issue the Court was required to consider in Claramoda v Zoomphase Limited (2010). The case involved an agent who sold a range of women’s clothing and had been told by her principal that the Spring/Summer 2007 season was to be the last season she would act as commercial agent. That season came to an end in October 2006, but further commercial activity, including dealing with customer concerns about orders and discrepancies over paperwork continued until January 2007. The agent served notice in November 2007 (i.e. more than a year after the end of the Spring/Summer fashion season, but less than a year after the other commercial activities came to an end in January 2007).
The principal argued that the agent’s “authority to negotiate sales”, which is a pre-requisite of being a commercial agent under the Regulations, came to an end when the Spring/Fashion 2007 season ended in October 2006, meaning the commercial agency also ended on that date. The Judge disagreed and decided that the commercial activity that took place after the end of the fashion season was indistinguishable from the earlier activity, and therefore the agent remained a commercial agent until January 2007 meaning her notice was within time. Usually the termination date of an agency agreement can be established easily from the terms of the contract, but this case provides a helpful reminder of the potential risks if you delay serving notice of a claim.
Part 3: agreements governed by the law of a country outside the EU
Originally published as “Commercial Agents Update 2010 (Part 3)”, 23 June 2010.
What happens if your agency agreement is subject to the law of a country outside the EU?
Often you will see Agency Agreements providing that the law of a country outside the EU, such as the US or Canada, governs the terms of the agreement. Sometimes, the agreement will provide that disputes should be referred to arbitration, again outside the EU.
Since the Commercial Agents Regulations are the product of EU legislation, it is unlikely that the Courts in a country outside the EU will recognise a claim for compensation or an indemnity under the Regulations. However, provided that you qualify as a commercial agent under the definition in the Regulations, the fact that your agreement is subject to the law of a non-EU country does not mean you lose your legal remedies.
Certain parts of the Regulations, including compensation / indemnity under Regulation 17 cannot be excluded by the parties. Even though your contract may be governed by US Law, you would still be entitled to bring a claim in the English Courts for compensation or an indemnity provided you were recognised as a commercial agent under the Regulations.
This is the point the Court was required to consider in Accentuate Ltd v Asigra 2009. The agency agreement was subject to Canadian law with disputes to be determined by an arbitration held in Canada. When the agent gave notice of their claim for compensation, the principal immediately served notice requiring an arbitration to be convened in Canada and not surprisingly the Canadian arbitrator held there was no valid claim for compensation because Canada does not recognise the Commercial Agents Regulations.
This was despite the principal arguing that the agent did not qualify as a commercial agent. The agent was entitled to have his claim, including the question of whether he was, in fact, a commercial agent determined in the English Courts despite the existence of a Canadian arbitration clause.
The English Court held that the mandatory provisions of the Regulations, in particular Regulation 17, could not be excluded by the parties, and therefore the commercial agent remained entitled to sue the principal in the English Courts.
Chris is a dispute resolution lawyer working out of the firm’s Reading and London offices. Chris has particular expertise in the Commercial Agents Regulations (acting for both principals and agents), advertising law and restrictive covenants in employment contracts. He also advises on IT and software related claim, and is a member of the Society for Computers and Law.
Christopher Tayton, Clarkslegal LLP
Thames Valley Office: One Forbury Square, The Forbury, Reading RG1 3EB
Tel: 0118 9604691 | www.clarkslegal.com
Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Clarkslegal LLP and the writer accept no liability in connection with the general guidance given in this column.
Further Reading
This piece opens with who counts as a commercial agent. For the current statutory test and how the courts read it, see when an agent is a commercial agent.
It also covers the choice between the two payment routes and how to avoid or reduce them. For a full treatment, see compensation versus an indemnity.
Its final part deals with agreements governed by the law of a country outside Europe. For where that stands now, see overseas principals: governing law and jurisdiction.