How closely related can an agent and principal be?

To qualify for protection under the Regulations, an agent has to be a “self-employed intermediary”, which in practice means being genuinely independent of the principal. But agents and principals often work closely together. An agent may use a desk at the principal’s office, or take on duties that go well beyond negotiating sales. Does any of that cost them their status?

The two articles below, from specialist commercial agency solicitors, answer that through the leading case on the point, Zako SPRL v Sanidel SA. Each is reproduced in full and attributed to its author.

A note on the case law: Zako is a decision of the Court of Justice of the European Union. Since the end of 2023, UK courts are no longer bound to follow such decisions, although they may still choose to. Zako continues to be treated as the leading authority on an agent’s independence, and the more recent of the two articles below relies on it without qualification. For the wider position, see how Brexit affects the Regulations.

A question of independence: how closely related can an agent and principal be?

The principle in short: what “self-employed intermediary” requires, and whether shared premises or a group company can still qualify.

By Ben Griffin of DWF Law LLP

It is common knowledge that commercial agents benefit from significant protections under the law. The most significant of these is the right to a payment on termination of the agency contract, which can be substantial.

But in order to qualify for those protections, agents need to meet the legal definition of “commercial agent” within the Commercial Agents (Council Directive) Regulations (the “Regulations“).

That definition has been the subject of scrutiny by the Courts and is well understood. One requirement is that the agent is “a self-employed intermediary“, and it is beyond doubt that individuals, companies, partnerships, LLPs and other corporate vehicles all fall within the meaning of “self-employed intermediary“. In this context, self-employed means, simply, that the agent is a distinct entity from the principal; the agent is, in effect, an independent contractor.

But how independent does the agent need to be? Is an individual or company that shares office space with the principal a “self-employed intermediary“? Can a group company of the principal be a “self-employed intermediary“?

The touchstone when considering these questions is the independence of the agent. In particular, an agent must be able to pursue its activity independently, “whether as regards the organisation of that activity or with respect to the economic risks associated with it.” [1]

Thus, as the Court of Justice of the European Union concluded in Zako SPRL v Sanidel SA, an agent can share premises with its principal, and remain a “self-employed intermediary“, provided that it acts independently and takes the commercial risks of its activities on its own.

If the agent acts autonomously (both in terms of its operations and economically), it is much more likely to fall within the definition of “commercial agent” in the Regulations than if it were connected to and to some extent controlled by the principal.

Whether a group company can be a commercial agent will depend on its operation, ownership and relationship to the principal. However, whilst each case inevitably turns on its own facts, on the face of it, it seems unlikely that a group company would be classified as being a “self-employed intermediary“.

[1] Zako SPRL v Sanidel SA (Case C-452/17) [2019] Bus. L.R. 343

DWF’s Ben Griffin specialises in work in the field of commercial agency. The legal directory Legal 500 noted that “Ben Griffin is noted for his expertise in commercial agency disputes, and he has ‘a deep knowledge and understanding of the case law in this field.” Ben has co-authored a textbook on commercial agency with Oliver Segal QC (‘Commercial Agency, A Practical and Legal Guide’ by Oliver Segal QC & Ben Griffin, Law Brief Publishing).

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Working together: can the place where an agent works affect their status as a commercial agent?

The same case in depth, including the tests the court applies and a warning about the secondary activities exception in the UK Regulations.

Commercial agents have traditionally performed their role in an itinerant manner, away from the principal’s premises (for example, by visiting customers and attending trade shows). Much of a commercial agent’s sales activities can now be performed from any location, provided that the WIFI signal and phone reception are up to scratch. However, this is not always the case. In certain circumstances, it may be convenient for the commercial agent to use office facilities at the principal’s premises.

But how does this affect the commercial agent’s status, bearing in mind that independence is critical in maintaining status as a commercial agent?

Recently the European Court has had cause to consider this question in the case of Zako SPRL v Sanidel SA.

Sanidel (the principal) operates a business selling bathrooms and fitted kitchens. Zako (the agent) was responsible for the fitted kitchen department. Zako’s role was varied. It went beyond the normal role of a commercial agent in negotiating or concluding sales contracts. For example, Zako was responsible for promoting the kitchens and concluding sales on Sanidel’s behalf, and also looked after the planning and fitting of the kitchens and had a number of other managerial and after-sales roles within the kitchens department. Zako also had a permanent work station, telephone and email address at Sanidel’s premises. Zako was paid a monthly lump sum, travel expenses and commission for all of its activities. Indeed there was no distinction made between Zako’s commercial agency role, and Zako’s other activities. Crucially, the parties agreed that Zako performed its tasks completely independently of Sanidel.

Following Sanidel terminating the agreement summarily and refusing to pay damages for failure to give proper notice and an indemnity, Zako eventually claimed under the Belgian law corresponding to the Commercial Agents Regulations.

Unsurprisingly, the parties were in dispute as to whether Zako was a commercial agent. As a subsidiary point, Sanidel also claimed that Zako had brought its claim out of time.

The European Court had to determine whether or not a commercial agency existed. The European Court decided that a person can be a commercial agent even though:

• they perform their business activities from the principal’s premises; or
• they have other ‘non-commercial agency’ roles and responsibilities for that principal; or
• both, provided that the agent’s working practices and other responsibilities do not prevent the agent from performing their commercial agency activities in an independent manner.

In reaching its decision, the European Court pointed out that:

• To be a commercial agent a person must:
  • be a self-employed intermediary, and
  • have continuing authority,
  • [to] either negotiate or negotiate and conclude the sale and purchase of goods on behalf of and in the name of the principal.

  There is no additional requirement that the activities must be performed away from the principal’s premises or in an itinerant manner.

• When considering whether or not an agent’s independence is compromised through their close proximity to the principal, it is necessary to consider whether the agent is subject to the principal’s instructions, whether the agent’s ability to organise its own activities is limited or whether the economic risks of acting independently are affected.
• When considering whether or not an agent’s independence is compromised through the requirement to perform other non-commercial agency activities, it is necessary to address the nature of and the manner in which the tasks are carried out, the proportion of the additional tasks when compared with the commercial agency tasks, the method of calculation of remuneration and the reality of the financial risk incurred.

Take home points

• In considering the case before it, the European Court touched on the issue of whether a commercial agent who does have continuing authority to negotiate the sale or purchase of goods, but also undertakes other kinds of activities for the principal without those other activities being secondary to the first type of activities, precludes that person from being classified as a commercial agent.In essence the European Court was considering the exception to the protection given to commercial agents set out in the European Agents Directive where the commercial agency activities are secondary to such other activities.

  Whilst this was not of assistance to Sanidel as Belgian law does not include this exception, the Commercial Agents Regulations do include this exception!

  Going forwards, it can be expected that (where the facts allow) principals will give greater consideration as to whether or not reliance can be had on the exception in order to avoid a claim by an agent for compensation or indemnity.

• It is also possible that when appointing a new agent, a principal may consider requiring the agent to undertake such activities in order to give rise to the possibility of being able to rely on the secondary activities exception at some point in the future!
• Irrespective of this, commercial agents with roles which go beyond negotiating or concluding sales contracts on behalf of their principal, or who regularly use their principal’s premises or equipment, should scrutinise their written agency agreements and their working practices to satisfy themselves that they are acting independently in relation to their commercial agency activities.
• A failure by a terminated commercial agent to claim compensation or indemnity within the applicable time limits will result in the claim failing.

Stephen Sidkin is a commercial law partner at Fox Williams LLP and leads its agentlaw team (www.agentlaw.co.uk; www.foxwilliams.com).
© 2019 Fox Williams LLP