Commercial agents: Recent legal developments
The Commercial Agents Regulations 1993 (Regulations) provide certain protection to 'commercial agents' (which is given a broad meaning under the Regulations).
Most notably, agents who fall within the scope of the Regulations are generally entitled to a payment (calculated on either a 'compensation' or an 'indemnity' basis) if the agency agreement under which they are appointed is terminated.
That entitlement is lost in specific circumstances prescribed by the Regulations, for example where the agent assigns its rights under the agency, or where the agent has breached its duties to the extent that the principal is entitled to terminate the arrangement (a 'repudiatory breach').
The courts have recently considered a number of issues relating to commercial agents, which are likely to have practical implications for both agents and the principals who appoint them.
Agent acting for multiple competing principals
It is well established that an agent must act dutifully, loyally and in good faith towards its principal ('fiduciary duties'). An agent must not, therefore, act for principals where its duties to one conflict with its duties to another unless the second principal agrees with full knowledge of the circumstances.
The scope of the agent's fiduciary duties may, however, be governed by a contract. For example, an agency agreement may expressly permit the agent to act for multiple competing principals. In those circumstances, caselaw has determined that the normal fiduciary duties are modified in accordance with the terms of the agreement.
Acting for multiple principals will not, therefore, automatically place the agent in breach of those duties. However, the High Court in Rosetti Marketing Limited v Diamond Sofa Company Limited and another stated that there are clearly dangers where a commercial agent does so. For example, an agent is likely to be in breach of its fiduciary duties if it acts for multiple principals who sell competing products without the necessary consent.
In Rosetti, the High Court also determined that the Regulations could in principle apply to an agent who acts for multiple principals. The judge found that to suggest otherwise would go against the wording of, and intention behind, the Regulations. The High Court decision was appealed but the Court of Appeal gave no further guidance on this specific point.
Breach and termination of a commercial agency arrangement
Ordinarily, where a party terminates an agreement due to the other party's alleged breach, the terminating party may subsequently justify termination by reference to circumstances or actions that were not specifically referred to at the date of termination. Simply, if a party terminates where it was not entitled to do so, that termination may be justified if valid grounds for termination existed, albeit that they were not known at the date of termination.
The Court of Appeal in Rosetti was asked to consider whether a principal may retrospectively justify termination of the commercial agency arrangement in those circumstances. If so, would an agent's right to compensation or an indemnity be lost? The court did not, however, clarify that uncertainty.
Guidance may be sought, however, from the decision of the European Court of Justice (ECJ) in Volvo Car Germany GmbH v Autohof Weidensdorf GmbH. In Volvo, the ECJ held that 'once a principal has given notice to terminate, he cannot withhold an indemnity due to the agent…if [he] subsequently discovers a breach that would have entitled [him] to withhold the indemnity'. The ECJ's decision appears to indicate that it will be difficult for a principal to justify termination of an agency arrangement (and, therefore, withholding payment of compensation or an indemnity) on the basis of a breach of which it was not aware at the date of termination.
What constitutes a repudiatory breach of fiduciary duties?
The predominant view has historically been that a principal may immediately terminate a commercial agency arrangement due to the agent's breach of its fiduciary duties. A recent decision, however, suggests that the breach must be 'sufficiently serious' before the right to terminate arises.
In Craig Anderson and Todd Albrecht (t/a Spectrum Agencies) v Crocs Europe BV, the High Court decided that a derogatory thread about Crocs (the well-known brand of shoe), posted on a website by an employee of Spectrum, was not sufficiently serious to allow Crocs to terminate its agency agreement with Spectrum.
The decision is interesting as the Regulations make no mention of the requirement for a breach to be 'sufficiently serious' before the principal can terminate. The wording of the Regulations say that what is important is whether or not there has been a 'failure of one party to carry out all or part of his obligations under the contract' (of which the fiduciary duties form a part).
The decision was appealed to the Court of Appeal, which upheld the High Court's decision. The Court of Appeal held that not every breach of an agent's fiduciary duties 'necessarily and automatically results in the repudiation of the agency contract. Breaches of fiduciary duty…may have different consequences…depending on…the circumstances'. Those consequences may or may not include a right to treat the agency contract as terminated. In this case, the court found that the breach was 'quite close to the borderline' but was not sufficiently serious to allow Crocs to repudiate the contract.
An agency agreement should specifically state whether or not the agent is permitted to represent other (competing) principals.
- If an agent is not permitted to act as agent for other people, an express provision to that effect should be included in the agency agreement.
- If an agent is permitted to represent other competing principals, the agreement must set out clearly what duties the agent owes when doing so, for example, a requirement on the agent to notify the principal of its intention to act for a competitor.
- If an agency agreement does not address the issue of acting for multiple principals, it should not be assumed that an agent will automatically be in breach of its fiduciary duties by doing so.
In the UK, the Regulations provide that an agent is, by default, entitled to compensation (as opposed to an indemnity). It is, however, possible to provide in the agency agreement for the opposite to apply. Principals should therefore consider whether they will pay their commercial agents an indemnity or compensation on termination. An indemnity is usually preferable for a principal for a number of reasons:
- an indemnity is payable if (and only to the extent) that the agent has brought in new customers or significantly increased the principal's business with existing customers. There is no similar qualification on compensation
- an indemnity is only payable where it is 'equitable', whereas there is no such flexibility in respect of compensation. In assessing whether payment of an indemnity is 'equitable', a principal may take into consideration any breach by the agent
- there is a cap on the maximum indemnity payable on termination, whereas there is no such cap under the compensation alternative.
It appears likely that, in future, there will need to be a 'sufficiently serious' breach of an agent's fiduciary duties before an agency agreement can be terminated. Exactly what is meant by 'sufficiently serious' remains to be seen and is likely to be assessed on a case-by-case basis.