Sub-agents legal guide

A commercial agent can often appoint sub-agents to help carry out the agency, unless the agreement forbids it. But the Commercial Agents Regulations say nothing about sub-agents, which leaves a hard question when an agency ends: if the main agent can claim compensation or an indemnity, can the sub-agent claim anything, and if so, from whom?

This guide brings together two contributions on where sub-agents stand. The first sets out the general position under English law, including the leading Court of Appeal case. The second looks at a more recent European Court ruling that reached a different answer on a sub-agent’s share of an indemnity, and what the resulting UK and EU divergence means after Brexit.

This is general information, not legal advice, and the answer can turn heavily on which country’s law governs the agreement, so take advice on any specific situation.

The short answers

The general position: can a sub-agent claim on termination?

Contributed by Paul Samuel, Director, Ashby Cohen Solicitors, March 2014.

An agent who is a commercial agent within the meaning of The Agents (Council Directive) Regulations 1993 (“the Regulations”) has an independence which an employee does not have. Unless his agency contract expressly prohibits this, the agent can delegate his duties to sub-agents.

Many principals do prohibit the agent from appointing sub-agents as the sub-agent is one removed from the principal with the result that the principal is one removed from the customer. However, there are numerous agency agreements which do not contain any such prohibition.

What happens when the main agent retires or just wants to give up the main agency or the principal terminates the main agency because of some default on the part of the main agent which justifies the principal bringing it to an end? Where does that leave the sub-agent? Depending on the circumstances in which the main agency ends, the main agent may be able to bring a claim for compensation / indemnity against the principal, but can the sub-agent?

The Regulations do not make any mention at all of sub-agents and the argument goes that if the Regulations had intended to cover the position of sub-agents, they would have expressly mentioned them.

The Government’s guidance notes issued when the Regulations were introduced stated, in reply to the question “are sub-agency agreements covered by the Regulations?”, that:

“Whilst the position is not clear, the Regulations are, in principle, capable of covering sub-agency agreements”

Nevertheless, a case called Light and Others v Ty Europe Ltd decided in 2003 in the Court of Appeal is authority that the sub-agents would be unable to bring a claim against the principal.

Briefly, the Court of Appeal case involved a principal who manufactured cuddly toys, a main agent who was paid a commission of 15% and sub-agents of the main agent who were paid a commission of 10%. The main agency was for a fixed period and came to an end. The main agent ceased trading and had no assets and dropped out of the picture. The sub-agents brought claims for compensation under the Regulations against the principal. The High Court agreed that the sub-agents could bring a compensation claim against the principal. However, the principal appealed and the Court of Appeal reversed that decision.

The Court of Appeal held that the sub-agents were commercial agents of the principal within the meaning of the Regulations, but went on to rule that that was not enough. A further question had to be asked. This was whether there had to be a contract between the sub-agent and the principal for the Regulations to apply. The principal in that case said that the wording of the Regulations made it clear that a contract was required whereas the case for the sub-agents was that no such contract was required. The Court of Appeal held that a sub-agent of the principal who has no contract with that principal has no right to claim under the Regulations against that principal when the sub-agency ends. The Court of Appeal declined to refer the question to the European Court of Justice, commenting that the Regulations are clear and that there was no need to make a referral.

Thus a sub-agent would have to challenge a unanimous Court of Appeal decision if he wanted to bring a claim against the principal

The next question is whether the sub-agents could bring a claim against the main agent.

The Court of Appeal case which decided that there had to be a contract between the sub-agent and the principal for the Regulations to apply also, in passing, touched upon the question of whether the sub-agents could bring a claim against the main agent. The Court of Appeal commented “the claimants were probably not [the main agent’s] commercial agents because they were not selling on its behalf, but I can see no reason why as [the main agent’s] agents they should not have been able to establish a stake in [the main agent’s] compensation claim.

Whether they could have compelled [the main agent] to make such a claim is more problematical, but a combination of commercial pressure and resourceful lawyers might have done the trick”.

This was only a passing comment in the case by the Court of Appeal, which was not asked to decide if the sub-agents could bring a claim under the Regulations as against the main agent (presumably because in that case the main agent had ceased trading and had no assets). The argument against the sub-agents being able to bring a claim under the Regulations against the main agent is picked up in the above quoted passing comment from the Court of Appeal that ” the claimants were probably not the main agent’s commercial agents because they were not selling on its behalf”.

In other words, as between the main agent and the sub-agents, the main agent does not own the goods which are of course owned by the principal and the sub-agents negotiated the sale of the goods on behalf of the principal and not on behalf of the main agent. If this argument were upheld, it would mean that a sub-agent would be left without a claim against either the principal or the sub-agent.

As indicated by the comment which the Court of Appeal made, the courts are likely to try to construe the Regulations so as to give the sub-agents “a stake” in the sum which the principal pays over to the main agent. This pre-supposes that the principal makes a payment to the main agent and even if he does, the sub-agent in practice will have to have strong nerves and deep pockets to try to establish his “stake”.

Article written by Paul Samuel of Ashby Cohen LLP, a leading law firm operating in all areas of employment law, partnership law and in matters arising out of the Commercial Agents (Council Directive) Regulations 1993.

Ashby Cohen Solicitors Ltd
18 Hanover Street, London W1S 1YN
Tel: 0207 408 1338 · Email: info@ashbycohen.co.uk · www.ashbycohen.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, Ashby Cohen 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.

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The recent development: the European Court on a sub-agent’s share of an indemnity

Contributed by Stephen Sidkin and Jessica Howard, Fox Williams LLP, 2023.

Introduction

Recently the European Court of Justice considered whether a sub-agent is entitled to a share of the goodwill indemnity which has been paid by the principal to the main agent on termination of the main agent’s agency agreement with its principal.

The ruling effectively puts clear water between the UK and EU laws in relation to the entitlements of sub-agents.

Facts

A German company, Poensgen (Principal) concluded a commercial agency agreement with Herios (Main Agent).

Under the agreement the Main Agent had the exclusive right to sell the Principal’s products in Belgium, France, and Luxembourg. The Main Agent subsequently appointed NY as its sub-agent (Sub-Agent) to promote and sell the Principal’s products in these countries.

The commercial agency agreement between the Principal and the Main Agent was terminated by the Principal and shortly after the Main Agent terminated its contract with the Sub-Agent. Subsequently the Sub-Agent became the commercial agent of the Principal.

The Principal paid the Main Agent a goodwill indemnity under the EU Agents Directive.

The Sub-Agent claimed against the Main Agent, arguing that it was entitled to a proportion of the indemnity payment as, under the Directive, the indemnity paid to the Main Agent was a “substantial benefit” derived from the customers that the Sub-Agent had brought.

Judgment

The European Court decided that an indemnity paid on termination to the Main Agent by Principal was a “substantial benefit” and therefore the Sub-Agent was entitled to a share of that indemnity from the Main Agent (that is, the Sub-Agent’s own principal) on termination of their sub-agency agreement.

However, in this case, given that the Sub-Agent continued its commercial agency business in relation to the same clients and for the same products – effectively replacing the Main Agent – the Sub-Agent’s entitlement to the indemnity was not fair – a key issue under the Directive.

In its judgment, the European Court, accepted that, in a situation where there is a principal, main agent, and sub-agent, there are two principal-agent relationships:

• between the principal and main agent; and
• between the main agent and sub-agent (where the main agent stands as the principal of the sub-agent).

Consequently, the European Court applied the entitlement to indemnity given by the EU Agents Directive to the sub-agent, as if it stood in the same position as the agent against the principal.

But in reaching its judgment the European Court simply ignored the starting point under the Directive for considering whether an indemnity payment was due from the Main Agent to the Sub-Agent in terms of whether the Main Agent would continue to derive substantial benefit from business undertaken with customers introduced by the Sub-Agent.

How does this compare with English law?

Some years ago the English Court of Appeal rejected the same argument. In that case the Court of Appeal considered the status of sub-agents and decided that a sub-agent does not have a right to compensation against the principal as there is no contractual relationship between the principal and sub-agent (read our article here for more information).

What does the difference in approaches between English law and EU law mean for principals, agents, and sub-agents?

Following Brexit, the European Court’s judgment is no longer binding on the UK Courts. However, principals, agents, and sub-agents may be affected by this judgment depending on where they are based.

For example, if the principal is based in the UK and the agent and sub-agent are based in the EU, the principles established by the European Court’s judgment could well be relevant.

In this situation it will also be necessary to consider the governing law of the agency and sub-agency agreements particularly where the agreements are governed by the law of an EU member state.

For example, if, in the above scenario, the agreement between the principal and the main agent is governed by English law but the agreement between the main agent and sub-agent is governed by the law of an EU member state – we anticipate that the principal would seek to rely on the English Court of Appeal’s earlier judgment, while the agent and sub-agent would seek to take advantage of the European Court’s recent judgment.

In such a situation it is possible that the agent would find itself as being the meat in the sandwich – particularly if the amount received from the principal under its agreement was proportionately smaller than the amount which it had to pay to the sub-agent under the sub-agency agreement.

Therefore, we expect to see more EU agents with sub-agents pursuing litigation against their UK and EU principals following the termination of their agency agreement given that their sub-agents may now have an entitlement to a proportion of any indemnity payment the agent receives.

Can this be applied to compensation payments?

The European Court’s judgment concerned the entitlement of an agent to an indemnity payment for the purposes of the EU Agents Directive.

However, it raises the question of how compensation payments on termination of the main agent’s agreement with its principal will be treated in similar circumstances. In some EU member states where compensation payments apply instead of indemnity payments, how will local courts treat the compensation payment? Will they follow the European Court’s judgment or, given that compensation is calculated in an entirely different way to an indemnity, will local courts adopt an approach similar to that of the English Court of Appeal?

Take home point

For principals, agents, and sub-agents it is critical to carefully consider the governing law which is stated in or otherwise applies to the agency agreement or sub-agency agreement in question as well as which country’s courts may decide disputes. A failure to do so may result in greater exposure for principals and agents or greater entitlements for agents and sub-agents respectively.

Stephen Sidkin is a partner and Jessica Howard is an associate at Fox Williams LLP (www.agentlaw.co.uk; www.foxwilliams.com)
© 2022 Fox Williams LLP

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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. The law on sub-agents differs between the UK and the EU, and every arrangement turns on its own facts and governing law. 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.