Brexit – how might sales agents or their principals be affected?

Posted by Stephen Schneider on
Sales agents and principals are looking over their shoulders as Brexit approaches.

The law that protects the rights of commercial agents in the UK is the Commercial Agents (Council Directive) Regulations 1993 (the 'Regulations'). This implemented an EU directive into UK law, harmonising various rights of sales agents across Europe. Commercial agents are self-employed salespeople, without any contract of employment, who usually work on a commission-only basis to promote the sales of the business they work for (known as the principal).

Might the Regulations be revoked as a result of Brexit? And what effect would that have on commercial agency contracts and agents' rights?

At the time of this article, Theresa May has announced her new Cabinet, but has stated that there will be no early general election, so the Government will run its full term until the 2020 election. She has also said there will not be a further referendum.

Likely effect in the short term – 2-3 years

It is likely that negotiating the UK's exit from the EU will be a long process. Article 50 of the Lisbon Treaty (allowing states to leave the EU) has not formally been exercised, and negotiating the terms of Brexit only starts when that Article is invoked. In the meantime, EU law continues to be binding in the UK, and in many areas it trumps UK law.

EU laws have been incorporated into UK law by two methods:

  1. Acts of Parliament – major pieces of legislation passed by Parliament (or 'primary legislation')
  2. 'Secondary legislation' where Government Ministers have powers, under the European Communities Act of 1972, to sign new EU laws into effect for the UK (using statutory instruments), where Parliament never passes an Act. Statutory instruments are often the practical tools to implement the principles of Acts of Parliament.

The first type of law – primary legislation – needs Parliament to pass another Act to repeal it. But the second type of law will usually automatically be revoked if the Act of Parliament from which it derived is repealed. The Regulations are secondary legislation.  If it wished, Parliament could pass a law to repeal the European Communities Act of 1972 entirely, and then the Regulations (and similar EU-derived laws) would automatically cease to have effect.

This scenario raises key political questions. This Government is, understandably following the Brexit vote, more 'Eurosceptic' in its membership than any Government since 1972. Some Ministers would welcome a 'bonfire of the EU laws' as soon as possible. If their arguments hold sway then a sudden repeal of the 1972 Act becomes more likely, in which the Regulations and many other pieces of EU law would fall away.

But the above scenario would be unsettling and costly for business at a time when stability is crucial. Such a move might well also be defeated in a Parliamentary vote. If calmer voices hold sway, the Government may prefer a gradual approach – keeping all EU legislation applying in the UK in force for long enough for each piece to be scrutinised to decide what to keep and what to lose. Such a process would be likely to take much longer.

In the short term, while Brexit is negotiated, principals and agents need to assume the Regulations are likely to remain in force for at least the next 2 years.  By the end of that time, we should have a better idea of whether we are heading for a 'sudden bonfire' of EU laws or a more gradual process.

If the Government takes the cautious approach the Regulations are likely to be long down the list of EU laws that a Conservative Government tackles, so it would appear unlikely that the Regulations would be revoked before the next election.  If that election results in another Conservative Government then the process of rolling back the influence of EU law in the UK may well gather pace. So laws like the Regulations, which protects agents but which costs many businesses significant sums in compensation, indemnity and pipeline payments, might be revoked or at least changed. But if a Labour or Coalition Government is elected then it may wish to retain some of the principles of the Regulations in UK law as part of an agenda of protecting the rights of working people generally.

Implications for principals and agents

Reviewing agency contracts at some point in the next few years is a good idea. A key issue is to understand what the agency agreement says about termination rights. Many contracts contain a provision such as "to the extent the Commercial Agents (Council Directive) Regulations 1993 apply the following provisions have effect" or similar. Such a clause would mean that if the Regulations are revoked then, depending on what the whole clause says, the agent might no longer be entitled to compensation (or indemnity). But other clauses may not have this effect – it all depends on how termination provisions are worded.

Principals may now want to look at again at having fixed term contracts, which expire after perhaps 1-3 years, with optional renewal.  Agents will want to resist this.  Under current law, the fact a commercial agency ends because the contract term comes up does not exempt the principal from compensation or indemnity under Regulation 17 (if indemnity is not chosen compensation applies).  But if the Regulations are revoked, unless some kind of replacement right is enacted, the rights of agents would revert to what they were before the Regulations. Under usual contract law principles if a contract expires through passage of time there is no automatic right to a payment of any kind.  This would make Regulation 8 'pipeline commission' payments more difficult to claim too, though not impossible and every case will turn on its facts. 

Notice provisions might also be affected – at present Regulation 15 provides for 1 month's notice in the first year, 2 in the second, and 3 in the third and subsequent years. These statutory minimum periods are reflected in many written agency agreements. If the Regulations are revoked there may be scope for principals to impose shorter notice periods in new contracts.

Given these risks, if the agent is negotiating a contract at the outset of an agency and has a good bargaining position, they may want some form of 'termination payment' provisions to apply even if the Regulations were revoked. Principals will probably want to resist that.

Sometimes principals feel trapped in commercial agency contracts because of the cost of exiting them, unless the agent is in material breach of the agreement. If the Regulations are revoked it will probably become significantly less costly for principals to terminate agencies.

Commercial agency law, as with so much else, is facing a period of Brexit uncertainty.  Taking legal advice on your circumstances to stay ahead of the game could be important, particularly if contemplating a new agency contract.

Click here to download our free Brexit guide.

About the Author

Stephen specialises in resolving large-scale commercial and contract disputes, including applications for emergency injunctions, partnership disputes and civil fraud work.

Stephen Schneider
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