Commercial Agents Regulations – some reminders

Background

The Commercial Agents (Council Directive) Regulations 1993 (Regulations) were introduced to supplement the existing common law protection given to commercial agents.

Under the Regulations a commercial agent is an intermediary with authority to negotiate (or negotiate and also conclude) contracts for the sale of goods on behalf of a third party (the principal). The agent can be an individual or a limited company.

The agent doesn’t enter into contracts on its behalf, so it doesn’t act as a distributor or reseller – it just helps to facilitate sales by the principal.

The Regulations are based on an EU Directive which has been implemented by the different EU members states by national legislation (despite the end of the Transition Period, the Regulations remain in effect in the UK and are unlikely to be changed considerably or repealed in the immediate future). This means there can be some variations in the rules applying in different member states but many of the broad principles are the same – meaning that a company planning to appoint a commercial agent within the EU needs to think about the Regulations or the comparable legislation in the relevant member state.

The key areas covered by the Regulations are:

• The agent may request a written statement of the terms of its appointment.
• Restraint of trade provisions must be in writing to be enforceable.
• The respective duties of the agent and the principal.
• How commission should be calculated and when it should be paid.
• Minimum notice periods to terminate an agency.
• Payment on termination of an agency.

Payment on termination can be one of the most problematic issues, both when entering into an agency agreement and/or when it comes to an end. The original EU Directive set out two alternative types of payment (compensation and indemnity), with a view to each member state opting for one or the other when passing national law to implement the Directive. However the UK Regulations give the parties the option to elect which type of payment should apply (if they fail to do so, the compensation alternative applies by default).

Green Deal Marketing Southern Ltd v Economy Energy Trading Limited & Others

This case came before the High Court in March 2019 and the various issues which the judge had to consider included some questions relating to the Regulations:

1. What are “goods” for the purposes of the Regulations?

The Regulations apply only to goods, not services. In this case Green Deal was appointed by the defendants to try to persuade consumers to switch from their existing gas and electricity suppliers to the defendants. A case in 2000 had already decided that gas was caught by the definition of “goods” and in the Green Deal case the judge decided that electricity also constituted “goods” for the purposes of the Regulations.

Takeaway: this is a useful reminder that the Regulations might still bite where the agency relates to what you might ordinarily expect to be classed as services. Another example of where this distinction can catch out parties is in relation to software (currently, software sold bundled within hardware or supplied on discs is considered as goods but downloaded software is not).

1. What does “negotiate” mean?

The judge in the Green Deal case, looking back to a 2005 decision, found that an agent who finds customers but does not play a part in the subsequent sale of goods could still be viewed as having authority to “negotiate”.

Takeaway: For the purposes of the Regulations “negotiate” has a wide meaning and can mean dealing with, or managing a pre-contract relationship, even if it falls short of playing a formal part in negotiations.

3. No right to payment on termination where the agent defaults?

Under the Regulations the agent loses the right to a payment on termination if the principal terminates the agreement for the agent’s default and the default justifies immediate termination.

Although there were multiple defaults by the agent in the Green Deal case, the only one which the principal was aware of was one which didn’t justify immediate termination.

Takeaway: Although the court didn’t have to make a decision of this issue in the Green Deal case it should be remembered that a principal can only argue that the agent’s default negates the right to a payment on compensation if the default which the principal is aware of is one which allows it to terminate the agreement immediately.

1. Calculation of compensation on termination

The House of Lords’ 2007 decision in the case of Lonsdale v Howard & Hallam Limited sets out a number of guidelines for calculating compensation. In that case the court’s view was that the fact that the term of the agency agreement might be limited, or could be terminated by the principal, should not affect the value of the agency for the purpose of calculating the compensation payment.

In Green Deal the judge indicated that there are no firm rules and the fact that an agency might have an uncertain future could in some instances be relevant to the calculation of compensation.

Takeaway: Calculation of termination payments under the Regulations have always been a difficult topic, partly because when it comes to figures there are almost always multiple ways of analysing them. The disputes which can arise where parties contest a termination payment at the end of an agency are a sobering reminder of the fact that while agency arrangements can be attractive from a commercial perspective (e.g.  because they can help a principal to expand into new markets), they can have unfortunate legal consequences and seeking professional advice at the outset is always a sensible precaution.