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Employment Law Solicitor
Jon Curtis, Partner 0114 272 1903 | email Jon View Jon's profile |
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The Commercial Agency Regulations 1993 are a rather complex and hugely important piece of legislation. Our commercial and employment law solicitors can advise you on the impact of the legislation. |
In an agency relationship (Oversimplifying slightly!) there are three parties: the “principal” who manufactures the products, the “agents” who sell the products, and the customer who buys.
If the principal retains an agent, and, in good faith, that agent spends time and money selling the principal’s products successfully, what rights should the agent have in the event that the principal terminates the agreement with the agent? Traditionally the agent had no rights other than what it had negotiated by way of contract. However, this often resulted in unfairness, as the principals took advantage of unequal bargaining rights to ensure up front that such agreements could be terminated cheaply.
The Commercial Agency Regulations 1993 (the “Regulations”) were introduced by the UK government to implement a European Council Directive (the “Directive”) and were designed to deal with this situation. In short, the Regulations give sales agents similar (but rather different) rights to those an employee might have.
Our commercial and employment solicitors would be happy to advise you on any specific questions you might have in relation to the Regulations. This short article is designed to provide a brief overview.
The Commercial Agents Regulations 1993
The Regulations have had a huge effect on how agency agreements are managed. Consideration of the Regulations may well affect your decision whether or not to use (or continue to use) an agent, or an employed sales force.
The Regulations apply to both written and verbal agency agreements.
What is a Commercial Agent?
The definition of a commercial agent is set out at regulation 2(1) of the Regulations and states that:
“a commercial agent means a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal”.
Unfortunately, this definition cannot be relied upon in exclusion as there is a lot of complex case law on the various elements of the definition. In fact, the definition can be broken down into several parts:
- Self-employed intermediary
The Regulations apply to any commercial agent, whether it is an individual, a partnership or a company. This was confirmed by AMB Imballaggi Plastici SRL v Pacflex Ltd [1999] 2 All ER (Comm) 249. This definition also covers the self-employed salesmen of a company, therefore providing protection partly comparable to, though with very significant differences from, the employment law rules on unfair dismissal.
- Continuing authority to negotiate
An agent who is only authorised by the principal to conclude a single transaction on his behalf, is not generally thought to have "continuing authority" for the purposes of regulation 2(1).
The fact that the agent is authorised to, and does conclude, "a number of transactions" for the principal is "normally an indicator of continuing authority", but it is not the only defining factor.
- Sale or Purchase
The Regulations apply to both sales agents and purchasing agents.
- Goods
The Regulations apply to goods but not services (the definition of goods is beyond the scope of this article).
- Negotiate or negotiate and conclude
In Sagal v Atelier Bunz GmbH [2009] EWCA Civ 700 the court held that an agent with authority to contract (as opposed to an agent who only has authority to negotiate) is only a commercial agent if he has authority to contract in the name of the principal as well as on his behalf.
What are the relevant exclusions?
The key exception to agency agreements are distribution agreements which are different because the distributor actually buys goods from a manufacturer or other supplier and then sells them on for his own account, rather than merely selling them on behalf of the principal.
There are additional significant exclusions where the Regulations do not apply such as:
- Certain classes of people are specifically excluded from the definition of “Commercial Agent” such as officers of companies, crown agents, partners or insolvency practitioners acting as such.
- Where the agency is for the supply of services, and so do not come within the definition of goods.
- Where no activity is to be performed by the agent within any EEA country i.e. the Agent is acting outside of the jurisdiction of the Regulations.
- A further exclusion applies to agents “whose activities as commercial agents are considered to be secondary”. The definition of secondary activities is complicated and there are a number of circumstances where this can arise but some examples include:
- Where the goods are such that sales are not normally individually negotiated and concluded on a commercial basis;
- The agent is doing deals which are not likely to lead to repeat business in those goods with this customer;
- The agent does not devote effort, skill and expenditure from his own resources to developing the market in those goods; and
- Examples such as an agent not being substantially a full time agent will also be indicative of a secondary activity.
Some key provisions of the Regulations
Agents’ duties
The Regulations impose a duty upon agents to act dutifully and in good faith towards their principal. They must make proper efforts to negotiate, and if appropriate, conclude any transactions they are responsible for. They must also provide to the principal all information available and comply with the principal’s reasonable instructions.
The agent must also comply with any duties as set out in any express agreement with the principal, and is subject to any common law duties.
Principals’ duties
The Regulations also impose upon the principal a duty to act dutifully and in good faith towards the agent.
The principal must, for example, provide the agent with the necessary information necessary for the agent to perform his duties (e.g. information relating to the goods the agent is to sell), and must also give advance notice of any expected fall in demand for products in the territory where practicable.
The principal must comply with any obligations as set out in any express agreement with the agent, and is also subject to any common law duties towards the agent.
Remuneration and Commission
The amount of commission payable is usually a percentage of the net invoice price of the products sold through the agent or of the cash ultimately received by the principal from those sales.
There are detailed provisions in the Regulations relating to how commission should be calculated and when it should be paid - some of which are mandatory and some are not. The provisions do not apply if the agent is not remunerated (wholly or in part) by way of "commission".
Regulation 7 of the Regulations specifies circumstances in which commission should be paid to an agent. The current prevailing view is that this regulation is not mandatory and that the parties are free to specifically exclude it in their contract. The circumstances for paying commission include where a transaction has been concluded between a third party and the principal:
- As a result of his action; or
- Where the agent has previously acquired custom from a third party, on transactions “of the same kind”; or
- Where the agent has an exclusive right under the agency agreement to a specific geographical area or group of customers, on transactions with customers belonging to that area or group – even if the agent has never heard of the specific customer!
There is no definition of “exclusive” in the Regulations. As such, it is unclear whether only agents, with what we generally understand to be “exclusive” rights, are entitled to commission under point 3, or whether those with “sole” rights are also covered under this provision (the difference between the two being beyond the scope of this article).
The Regulations provide that the agent may also be entitled to receive commissions on transactions which are concluded after the termination of the agency agreement. This might occur if the transaction was mainly attributable to the agent’s efforts and the transaction is concluded within a reasonable time after termination or the third party order reached the agent or principal prior to termination but the order was accepted only after termination.
Termination: Compensation or Indemnity Payments
The Regulations provide that minimum notice periods apply to an agency contract which runs for an indefinite period.
Prior to the Regulations, any payments between the parties on termination of an agency agreement were purely a matter of contract. Where the Regulations do not apply, this is still the case. Where the Regulations do apply the position is very different.
Regulations 17 and 18 provide that, upon termination of a commercial agent’s agreement, the agent will have a right to either “compensation” or “indemnity”. If the Regulations say that compensation or indemnity is payable, then it is payable, even if the agent has no right to damages at common law in respect of the termination.
It is important to remember that the expiry of a commercial agency contract by effluxion of time in the normal course of events will amount to a termination giving rise to the right to a compensation or indemnity payment for the commercial agent, even if there was no expectation that the agreement would ever be extended or renewed. i.e. if an agency agreement is drawn up for a term of 1 year compensation would still be payable when the year is up.
The right recognises that the agent has played a part in the continuing development of the goodwill of the principal, and the intention is to compensate the agent for that by making the principal effectively buy out the agent’s goodwill.
The agent has a period of one year after the date of termination of the agreement to bring a claim.
In the UK, the basic position is that compensation will be payable to an agent upon termination of their agreement unless it is stated in the agreement that the indemnity alternative will apply.
Under the indemnity alternative, the Regulations provide that a maximum amount of indemnity is one years’ commission, taken as an average of the last five years’ prior to termination of the agreement.
By contrast with the indemnity alternative, no maximum amount is specified for the compensation alternative. Under the compensation alternative, the proper basis for calculating the compensation is by reference to the loss of the value of the agency. The value of the agency is the amount that a hypothetical purchaser would be willing to pay for it as at the date of termination.
No right to indemnity or compensation will arise:
- Where the principal terminates in response to a fundamental breach by the agent. It is important to note that the principal should not delay in terminating, or else he will risk accepting the breach;
- Where the agent terminates for a reason unrelated to the principal, serious illness or age (i.e. retirement); and
- Where the agent assigns the agreement to another agent with the consent of the principal.
- Where the agent does not request compensation within one year of the termination.
It is important to note that the parties to an agency agreement cannot agree to exclude or reduce the agent’s rights in respect of regulations 17 and 18 before the agreement is terminated, and therefore any settlement in respect of indemnity or compensation can only be concluded after the expiry of the agreement.
As you can see from the above brief introduction to the Commercial Agents Regulations 1993, the decision to enter into a commercial agency agreement should not be made lightly.
It is vital that sound legal advice is sought prior to entering into a commercial agency agreement whether you are dealing as principal or as agent so as to protect your position whilst still creating a workable commercial relationship.
For more information on the above please contact Jon Curtis, employment law solicitor on 0114 272 1903 or email Jon on jon.curtis@ironmongercurtis.com
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