Commercial Agency In The UK - Revisited

Friday, December 1, 2006 - 01:00

Agents form an integral part of many businesses' sales and marketing strategies. At relatively low cost, businesses can retain individuals or companies as agents to promote and sell their products, typically in return for commission based on volume of sales, and so avoid the additional costs and regulations associated with taking on extra staff to provide these services.

Historically, employees in the UK have received wide ranging statutory protection covering many aspects of their employment, whereas agents had few, if any, additional rights at law. This all changed in the UK in 1994 with the implementation of the EC Commercial Agents Directive 86/653 ('The Directive'). Similar legislation was enacted by the other EU Member States around the same time.

In the words of Lord Justice Staughton, in his judgment in Page v Combined Shipping and Trading Co Ltd : 'commercial agents are a down-trodden race and need and should be afforded protection against their principals.'

This explains, in a nutshell, the purpose behind the Directive, which was implemented in the UK by the Commercial Agents Regulations 1993 ('the Regulations'). In addition to harmonising the different laws of Member States, a key objective was to improve the treatment of commercial agents, who were recognised as a class in need of protection. Of particular concern was the fact that, in many Member States, commercial agents did not receive any compensation, when their agency agreements were terminated, for the valuable goodwill they had built up for their principals, in the form of new customers.

The Regulations addressed this concern and also provide a legal framework to regulate and clarify the relationship between commercial agents and their principals.

The Legislation

Although the objectives of the Directive were well intentioned, the Regulations were a shoddy piece of legislation. Lord Justice Waller, in one case, urged that parts be redrafted, after he encountered a section containing 'an almost impenetrable piece of drafting.'

The UK parliamentary draftsmen, for the most part, copied the wording of the Directive into the Regulations, rather than adjusting the language to fit with English law. This resulted in legislation that was difficult for both practitioners and the judiciary to interpret and understand, which has contributed to the volume of litigation in this area. It is only in the last year that some of the key provisions in the Regulations have been properly explained by the Courts.

Despite these teething problems, few would doubt the significant impact the Regulations have had on the law of agency in the UK.

Is Your Client's Business Subject To The Regulations?

Any business that retains a company, partnership or individual (other than as an employee) in the UK, on an ongoing basis, to market and sell its products or to buy products on its behalf (subject to a few exceptions) is likely to be subject to the Regulations. Agents retained to sell services rather than products, however, fall outside the scope of the Regulations.

The Courts tend to look at the substance of the agency arrangement in preference to the description used by the parties, to determine the status of the agent. The general rule is that, if a party's role is restricted to finding customers for a business, he is likely to be a commercial agent. If, on the other hand, he buys the products with a view to reselling them, he is likely to be a distributor rather than a commercial agent, and the Regulations will not apply.This test is not definitive and the Courts will look at all aspects of the relationship between the parties to determine whether it constitutes a commercial agency.

The Right To Compensation/Indemnity On Termination Of The Agency Agreement

The most significant development under the Regulations is the commercial agent's mandatory right to receive compensation (or, if expressly agreed, an indemnity) following the termination of their agency agreement. Previously, in the UK, commercial agents received no additional compensation if their agency agreement was terminated in accordance with its terms, for example by the principal giving notice, or where it came to the end of its fixed term.

The Directive gave Member States the choice of whether to give commercial agents an 'indemnity' or 'compensation' on the termination of their agency agreement. Uniquely, the UK opted for both. Most Member States went for the indemnity, France being the notable exception, where compensation is payable.

The Regulations set out relatively clear guidance on calculating the 'indemnity,' which is capped at one year's remuneration, based on the commercial agent's average yearly remuneration over the previous five years. In practice, parties in the UK rarely insert a provision in agency agreements providing for the commercial agent to receive an indemnity. This means that, in most cases, compensation is payable on termination.

The term 'compensation,' which is not explained in the Regulations, is unusual in English contract law and, for a long time, the Courts struggled to interpret it consistently. This part of the Directive was based on French law, which has a rule of thumb that commercial agents are awarded compensation equivalent to two years' gross commission, irrespective of the state of the principal's business or the length of the agency agreement. Some judges attempted to apply this interpretation in the UK.

After several confusing and contradictory judgments, the Court of Appeal has now ruled that 'compensation' under the Regulations means the value of the goodwill in the commercial agent's business as at the date of termination ( Graham Lonsdale v Howard & Hallam Ltd 2006). Importantly, this means that issues like the commercial agent's failure to mitigate its loss by looking for alternative work following termination are not relevant, whereas factors that have a direct impact on the value of the goodwill in the commercial agent's business, such as the imminent decline of the principal's business, are taken into account.

It is important to remember that compensation is not always payable on the termination of a commercial agency. The general rule is that the right to compensation is lost if the commercial agent terminates the agreement or assigns the agency business to a third party. There are exceptions to this rule, where a commercial agent retires or terminates on grounds of ill health, or following a serious breach of contract by the principal. In these cases, and where the principal terminates the agency agreement (save where this is justified by a serious breach of contract by the commercial agent), compensation is payable to the commercial agent.

Commercial Agent's Right To Payment (During And After The Agency Agreement)

In most cases, commercial agents are remunerated by way of commission on the sales they arrange, although it is perfectly acceptable for the parties to come to another arrangement, such as the payment of a monthly retainer. (Where the parties fail to agree on any payment terms, the Regulations provide that a commercial agent shall receive the level of commission customarily paid in the place where he operates, or, in the absence of this, a reasonable remuneration taking into account all aspects of the transaction).

In addition to receiving commission on sales they arrange, commercial agents have a right, under the Regulations, to commission on all sales to customers they have acquired for the business, whether or not they arrange the actual sales. Where their agency agreement grants them an exclusive territory, commercial agents are entitled, under the Regulations, to commission on all sales in that geographical area.Notably, there is nothing in the Regulations preventing parties from contracting out of these provisions.

Commercial agents are also entitled to commission on sales concluded within a reasonable period after the termination of their agency agreement, where the sales are attributable mainly to their efforts.It is unclear how this right fits in with the right to compensation under the Regulation, but recent case law suggests that the Courts will not make awards which compensate commercial agents twice for the same loss.

Other Important Rights And Duties Under The Regulations

It goes beyond the scope of this article to cover all the additional rights and duties of principals and commercial agents created by the Regulations. Instead, we have focused on those we consider have the most practical significance.

Principals and commercial agents now owe each other duties of good faith under the Regulations. This type of duty is not generally implied into commercial contracts under English law, and its precise scope has yet to be clarified by the Courts. However, the Regulations explain that, for the commercial agent, this duty includes making proper efforts to negotiate and, where appropriate, conclude the transactions he is instructed to take care of, to communicate all necessary information to the principal and comply with the principal's reasonable instructions. In return, principals are obliged to provide their commercial agents with all relevant information and documentation necessary for them to carry out their sales and marketing services.

Principals are also required to provide their commercial agents with regular statements of their commission. Agents have a right to demand all available information to check the commission calculations. This can be very useful for any commercial agent contemplating suing their principal or terminating their agency agreement on the grounds of their principal's serious breach of contract.

Finally, where an agency is for an unlimited period (or continues beyond its fixed terms), the Regulations provide for mandatory notice periods for termination: one month's notice during the first year of the agency agreement, increasing in subsequent years, up to a maximum of three months' notice. Parties are not entitled to contract out of the rights and duties described above.

Conclusion

Have the Regulations been a success? From a legal perspective, most difficulties have resulted from commercial agents and principals (and lawyers) not understanding the rights and obligations under the Regulations. To a large degree these uncertainties have been resolved by the Courts over the past decade.

An EU investigation into the application of the Regulations, shortly after they came into force, found that, for the most part, there had not been a significant change in the business practices of commercial agents and principals in the EU, although there was evidence in some Member States of an increase in the use of distributorships, which are not subject to the Regulations. In the UK, it was found that some principals had terminated their agency agreements before the Regulations were implemented and either replaced them with new agreements or took the agents on as employees instead. Not surprisingly, the survey concludes that, on the whole, agents were happy with the new rules, principals less so.

The key message for businesses is that they need to be mindful, when deciding whether to take on individuals as agents or employees, that they may have to pay compensation for the value of the goodwill brought to their business, if they opt for a commercial agency.

Chris Tayton , an Associate with Clarkslegal LLP, deals with a wide range of commercial dispute resolution cases with particular emphasis on IT and software related claims. He may be reached at 0044 118 960 4691.

Please email the author at ctayton@clarkslegal.com with questions about this article.