Every agency arrangement rests on a contract, and when a dispute arises it usually comes down to what the words of that contract actually mean. This guide covers how the courts read an agency contract, and then works through a real case that turned entirely on the interpretation of a single clause. One practical lesson runs through both: get the wording right at the outset, because a court will hold you to what the contract says, not to what you meant.
This is general information, not legal advice. Take specialist advice on any specific wording or dispute.
The short answers
How does a court interpret an agency contract?
Objectively. It asks what a reasonable person in the parties’ position would understand the words to mean, applying their ordinary and natural meaning in the context at the time the contract was made. What one party privately thought they were agreeing to is irrelevant.
Does the court look at the negotiations or earlier drafts?
No. The court considers the background facts to understand the context, but not the pre-contractual negotiations or earlier drafts. A term left out of the final contract may simply not count, so make sure everything agreed is in the final document, and record any later variations in writing too.
Does a duty of good faith stop a principal terminating?
Not necessarily. In Monk v Largo Foods the court held that the good-faith duty in the Regulations governs the performance of the agency, but did not restrict the principal’s exercise of a right to terminate under the contract’s own wording.
What is the practical takeaway?
Put the agreement in writing, make the wording clear and unambiguous, keep any variations in writing, and take advice on the drafting. Clear wording at the start prevents costly arguments later.
How the courts interpret an agency contract
Contributed by Old Square Chambers, December 2015.
At the heart of every agency arrangement is a contract. Whether it be a written document containing detailed provisions of the parties’ rights and obligations, or a simple oral agreement reached over a handshake; at some point the parties will have agreed to the terms on which they will do business with each other.
At the start of the relationship when there is goodwill on both sides and enthusiasm to get on with the business at hand, it is easy to overlook the importance of what has actually been agreed. Often, it is only further down the line when problems occur or where the relationship sours that attention turns to the contractual terms. It can then become apparent that what one party thought had been agreed is not the same as what the other party understood the agreement to be. An agent may find that they are bound by an unrealistic sales target. A principal might discover that they are required to give their agent a far longer period of notice if they wish to terminate the agreement than anticipated. These sorts of issues can lead to messy arguments and costly litigation. So how can such problems be avoided? Or perhaps more importantly, how can you ensure that the contractual terms mean what you intend them to mean?
To answer these questions it is necessary to consider the Courts’ approach to interpreting contractual terms. Firstly, however, it is important to note that whilst a contract can be oral, it is almost always better to commit the terms of the agreement to writing. This goes a long way to avoiding arguments about what was said when and to whom. It also gives you some hard evidence that you can rely on if there is a dispute about what was agreed. When presented with a contract, the Courts will interpret its terms objectively. This means that it does not matter what one party or other meant or understood the contract to mean, but rather what a reasonable person in the position of the parties would understand the contract to mean. The Court will apply the ordinary and natural meaning of the words used given the factual context at the time the contract was entered into. It is not uncommon for one party to say that he or she did not mean what the words actually say and that they would never have agreed to the particular term if they had known how it would be interpreted. Unfortunately for them, that is irrelevant. They are bound by the contract as it is and it does not matter if they thought they were agreeing to something else. This is so even where the ordinary and natural meaning of the term may have disastrous consequences for them. For example, in a recent case (not involving a commercial agent) that went all the way to the Supreme Court, a tenant was found to be bound by a lease agreement that provided for a 10% year on year increase in the cost of their service charge. This meant that what started out at a reasonable level of £90 a year would by 2072 rise to an annual charge of £550,000! The tenant had argued that the natural meaning of the words should not be followed as it would produce an outcome that could never have been intended. The Court disagreed. The meaning of the contract was clear and the tenant would have to suffer the consequences.
It is also important to bear in mind that when interpreting the contract, the Court will want to consider the background facts to understand the context in which the contract was formed. However, the Court will not consider the precontractual negotiations or earlier drafts of the agreement when determining what the contract means or includes. As such a Court may well find that if a particular term is missing from the final contract then it does not form part of the overall agreement. Parties should take real care to ensure that all of the terms of agreement are therefore included in the final contract. Furthermore, any variations to the contract subsequently agreed should also be put into writing and kept with the contractual documentation. The importance of getting the wording in the contract right cannot be overstated. Having a clear and unambiguous written contract in place from the start of the relationship ensures that all parties understand what they are agreeing to do and what they can expect from the other party. It is often advisable to seek expert legal advice at this stage to ensure that the terms of the contract mean exactly what you intend them to mean. Getting the wording in the contract right at the start, can prevent much distress and expense further down the line.
Old Square Chambers
10-11 Bedford Row, London, WC1R 4BU
020 7269 0300 · www.oldsquare.co.uk
Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Old Square Chambers LLP 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.
A worked example: the Monk v Largo Foods case
Contributed by Paul Samuel, Consultant and Co-founder of Ashby Cohen, March 2017.
When a couple get married there is a warm glow of optimism but sometimes the warm glow wears off and the couple end up in a bitter divorce. It is something similar with an agency relationship. In both cases those involved end up wishing they had thought more carefully before they made the commitment. This was probably the sentiment of the parties to a case which was heard in the High Court in June 2016. The case involved a Mr Monk and an Irish food company called Largo Foods Limited. Mr Monk was engaged to provide input into how best to market Largo’s snack food “Velvet Crunch”. After a couple of years, in January 2011, the parties entered into a written agreement. When the agreement ended, Largo disputed that Mr Monk was an agent at the start of their relationship, but conceded that he was in the period after the written agreement was entered into. This concession was made notwithstanding that the written agreement described the arrangement as one of consultancy. If Mr Monk was an agent, then because the agency involved goods, he was a commercial agent under the Commercial Agents (Council Regulations) 1993 (“the Regulations”). The clause in the January 2011 written agreement dealing with how long the agreement was to last read: “The consultancy arrangement will operate for a three year period subject to the completion of a successful review in January 2012. Assuming both parties are satisfied with the arrangement following this review, both parties will commit to a further two year consultancy period.”
Although a clause in an agency agreement dealing with how long the agency is to last is a fundamental one, it would seem safe to assume that when they entered into the agreement neither Mr Monk nor Largo gave much thought to the clause which is deceptively straightforward. In January 2012 Largo terminated the agreement mainly because it did not think that it would get value for money in continuing it. The termination caused Mr Monk and Largo to look more closely at the agreement and query what the clause meant. Mr Monk argued that the clause meant that the agency would only come to an end if there had been a review which allowed him a fair opportunity to put his case and that Largo had to conclude in good faith that Mr Monk’s performance had on an objective basis been unsatisfactory when compared to the sales projections which the parties had discussed around the time when the agreement had been entered into. Largo contended that the clause gave both themselves and Mr Monk the unfettered right not to continue with the agreement after one year. If Mr Monk’s interpretation was correct, it opened up the possibility of his claiming damages for what he would have earned during the remaining 2 years of the agreement. In the event the Court decided that Largo’s interpretation was the correct one meaning that their termination of the agreement was lawful. In the course of putting forward his case on what the clause meant, Mr Monk argued that Largo could only terminate the agency agreement if it did so in good faith. First of all he argued that the obligation of good faith was implied at common law. The Court rejected this. He had another string to his bow and this was that the Regulations provide that “in his relations with his commercial agent a principal must act dutifully and in good faith.” This meant that there was no need to argue that a duty of good faith was implied at common law as the Regulations expressly stated that it applied. However, the Court thought that there was a big difference between a principal’s dealings with an agent for the purposes of performing an ongoing agency agreement and a clause which dealt with the termination of the agency relationship. This led the Court to conclude that the duty of good faith expressly mentioned in the Regulations did not apply to the exercise of the right to terminate an agency. Mr Monk was left with a claim for pipeline commission under Regulation 8 and for compensation under Regulation 17 of the Regulations. At the end of the trial, Mr Monk put forward a compensation claim under Regulation 15 which was just short of £1.8 million. The Court awarded him £275,000. In addition it awarded him just over £74,000 for his Regulation 8 pipeline commission claim. The Judge had cause to comment that unrealistic awards of compensation would not serve the longer term interests of commercial agents as a group, but simply deter principals from retaining them. The lesson for commercial agents is firstly to look very carefully at the wording of any agreement which they are asked to sign at the start of the relationship and secondly to put forward realistic claims for compensation at the end of the relationship.
Paul Samuel is a Consultant, Co-founder of Ashby Cohen
Ashby Cohen Solicitors Ltd, 18 Hanover Street, London W1S 1YN
Tel: 020 7408 1338 · Fax: 020 7491 0414 · Email: paul@ashbycohen.co.uk · www.ashbycohen.co.uk
Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen 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 the 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.
The contributions on this page are general guidance, not legal advice, and reflect the position at the time each was written. Every contract turns on its own wording and facts. 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.
Further Reading
The best protection against a dispute over wording is getting the clauses right in the first place. For the ones that matter most, see what should be included in an agency contract.
A court will hold you to the final wording, and to a variation only if it was made properly. For how changes must be recorded, see making changes to a sales agency contract.
A written contract is what gives the certainty this article is about. For whether you need one and what it should say, see agency agreement: written or unwritten?