Commercial Agency Law – a guide for advisors outside the UK – Beware the differences in the UK

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Introduction

This is a summary for legal advisors outside the UK of commercial agency law in the UK. The effect of the Commercial Agents (Council Directive) Regulations 1993 ("the Regulations") in the UK can be quite different from other jurisdictions which have implemented the EU Directive (eg the ability of the parties to elect between compensation and indemnity) and so it is important to get specialist advice when advising Principals or Agents who operate in the UK. Please note that the Regulations do not apply to Northern Ireland.

If your client requires advice on commercial agency law in the UK, Blake Morgan can assist. We have a proven track record of advising on all aspects of commercial agency law in the UK and the claims that arise in this area. Blake Morgan has acted in leading cases in this field:

  • Lonsdale v Howard & Hallam – this case decided the law on how agents’ claims for compensation in following termination of an agency should be determined. We took the case to the House of Lords and established how a compensation claim should be quantified by looking at the value of the agency business which has been lost, considering what a potential third-party purchase would pay to take over that agency business. We now work with specialist accountants to advise on valuation of compensation claims of commercial agents.
  • Crocs Europe BV v Anderson & Albrecht - we successfully acted for the claimant in this key Court of Appeal case which turned on whether and when an agent’s allegedly poor conduct was serious enough to justify a principal immediately terminating the agency. This was critical because if termination was justified then the Principal would have avoided liability for compensation under Regulation 17.

The Regulations introduced entirely new rights into the law and it is fair to say the Courts have, at times, struggled to fit the European principles of the Regulations within the common law system that applies here.
As an example of how the Regulations affect Principals with Agents in Great Britain, we have set out below some of the key Regulations to consider and how they have been implemented.

Compensation (or indemnity) when the principal terminates the agent's contract

Probably the most important right, and in practice the one that has led to most litigation, is the agent's right under Regulation 17 to compensation (or indemnity) when the principal terminates the agency contract (except when the agent has committed a fundamental breach of contract).

The position in Great Britain is different from that of other countries, in that the agency agreement can opt for either indemnity or compensation on termination. The default position is that the agent is entitled to compensation, but the parties to an agency contract can opt for an indemnity provision instead, which needs to be specifically stated in the written agency contract for this to apply.

In practice, compensation claims can range from the very modest to significant sums, dependent largely on the level of income the agent has previously generated from sales. These days, after the groundbreaking case of Lonsdale v Howard & Hallam (in which Blake Morgan, acted for one of the parties) compensation claims are calculated by valuing the agent's income stream.

Claims to indemnity payments under Regulation 17 follow a staged process which assesses the ongoing benefit to the principal of the sales that the agent has generated, taking numerous other factors into account. In contrast to compensation payments, indemnity claims are capped at one year's gross average earnings calculated over the previous five years of the agency, or a shorter period if the agency was shorter than this. However, an indemnity claim does not prevent the agent from also suing the principal for damages.
There is no way of avoiding liability under Regulation 17 to pay compensation or indemnity unless the principal can prove that the agent has fundamentally breached the contract (and can thereby rely on Regulation 18).

If the agent does not notify the principal that the agent intends to pursue their rights to compensation or indemnity under the Regulations within one year of the agency contract terminating then this right will be completely lost.

Terminating for breach of contract under Regulations 16 & 18

Regulation 16 provides that the Regulations do not alter the rules of law which provide for the immediate termination of an agency contract "(a) because of the failure of one party to carry out all or part of his obligations under that contract; or (b) where exceptional circumstances arise".

The concept of termination under Regulation 16 & 18 is usually conflated with the idea of "fundamental breach of contract" (which is a much more familiar term in the law of England and Wales), though some commentators have argued that Regulation 16 goes somewhat further than that.

Regulation 18 provides that if the principal has terminated the agency contract under Regulation 16 for default which is attributable to the agent then no compensation (or indemnity if the contract provides for that) shall be payable.

Regulation 18 also confirms that if it is the agent who terminates the contract then compensation or indemnity shall also not be payable, unless the agent has terminated the contract for a justifiable cause attributable to the principal (which we suggest applies to cases where the principal has committed a fundamental breach of contract) or on the grounds of age, infirmity or illness of the commercial agent which is such that the agent cannot reasonably be expected to continue their activities.

Similarly, no compensation or indemnity will be payable when the agent assigns the agency to someone else with the principal's consent. It is important to note that compensation or indemnity will still be payable if the agent "dies in service" during the agency (under Regulation 17[8]).

The duties of the agent according to the Regulations

Regulation 3 sets out the duties of a commercial agent to look after the interests of the principal and to act dutifully and in good faith. An agent must also:

  1. make proper efforts and negotiate and where possible conclude the transactions he is instructed to take proper care of
  2. communicate to the principal all the necessary information available to him
  3. comply with reasonable instructions given by his principal.

In practice, these duties broadly applied before the Regulations came into force, because of the duties at common law which apply to agents. In many cases, an agent will be considered to have a series of special obligations to their principal known as "fiduciary duties". The interplay of the fiduciary duties of agents and the law relating to the rights and obligations of commercial agents is a complex and developing area, and a trap for the unwary. The duties applicable may vary considerably depending on the scope of responsibilities and the nature of the agency contract. It pays to seek expert local advice.

The duties of the principal

Regulation 4 sets out the duties of the principal towards the agent to "act dutifully and in good faith". In particular, the principal must:

  1. supply the agent with documents needed in relation to the goods concerned
  2. obtain for the agent the information necessary for the performance of the agency contract, and notify the agent if the likely sales volumes will be significantly lower than expected
  3. inform the agent of the refusal or non-execution of any transaction that the agent has procured from customers.

Again, the duties that the principal has towards the agent will, in practice, often go considerably further than this, not only because of any terms which may be set out in a written contract but because of various duties which apply under common law.

Where the effect of the Regulations in Great Britain can be quite different from other jurisdictions it is important that the local effect of the Regulations is considered. If you have any clients (either principals or agents) who require such assistance then please do not hesitate to contact a member of the Commercial Agents team. Our key contacts are Kevin Manship and Stephen Schneider .