Sales agency law - Legal context
Overview of key rights and liabilities arising under the Regulations
The Commercial Agents (Council Directive) Regulations 1993 ("the Regulations") introduced entirely new rights into the law of England and Wales.
It is fair to say the Courts have, at times, struggled to fit the European principles of the Regulations (derived from the Civil Law systems of Germany and France) within the common law system that applies in England and Wales.
Application of the Regulations is mandatory if a self-employed agent is buying or selling goods in the EU on behalf of a principal.
- Compensation (or indemnity) when the principal terminates the agent's contract
- Pipeline claims under Regulation 8
- Claims in respect of notice under Regulation 15
- Regulation 7 claims to ordinary commissions
- When commissions become payable
- The right to receive details of commission due
- The right to a signed statement of terms
- Terminating for breach of contract under Regulations 16 & 18
- Restraint of trade clauses
- The duties of the agent according to the Regulations
- The duties of the principal
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 fallback position in UK law 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 Morgan Cole 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.
In both instances, whether you are a principal facing a claim from an agent or an agent starting to make such a claim, you will need expert legal advice.
It is important to remember that there is no way out of 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).
It is also important to remember that 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.
Even after an agency contract has terminated the agent is entitled to commissions on transactions that were "mainly attributable" to his efforts during the agency and which came in within a reasonable period after that contract ended. These claims are usually referred to as "pipeline claims" and in some cases, they can involve very significant sums.
Pipeline claims are, in legal terms, completely distinct from compensation and indemnity claims, though in practice when settlements are negotiated there is often some blurring of the two claims within a global settlement sum.
The Regulations provide for statutory minimum periods of notice that shall apply upon the termination of any commercial agency agreement. Though it is possible to provide within a written contract for longer periods of notice than those below, it is not possible to agree shorter periods of notice (save, of course, in cases where the principal is terminating the contract immediately for fundamental breach of contract). The minimum periods of notice are:
- one month in the first year of the agency
- two months in the second year of the agency
- three months in the third or subsequent years of the agency
Unless otherwise agreed by both parties the period of notice must end with the end of a calendar month.
Regulation 6 provides for the agent's entitlement to remuneration, in the absence of any written contract. However, in practice, of course, even where a detailed agreement is not signed then usually there will at least be an exchange of letters dealing with the nature of the goods to be sold and the rate of commissions.
Regulation 7 provides that the commercial agent is entitled to commissions on transactions concluded during the agency where the transactions are as a result of the agent's actions or with one of the customers he or she acquired or (where the agency has exclusive rights to a geographical territory) is with customers from that agent's territory.
In practice, disputes concerning the normal commissions that are payable under Regulation 7 are many and various, particularly where there is no written contract or where the contract is uncertain.
Disputes that arise regularly in this area include the following:
- when is the principal entitled to make an account 'a house account'?
- does the agent have rights over a territory or can the principal appoint another agent?
- what about orders that come in direct to the principal from customers and not via the agent?
- in what circumstances can commission rates be varied?
It pays to get expert legal advice as soon as possible.
In many cases, the written agency agreement will have provisions setting out when the agent's entitlement to commission arises. Regulation 10 sets out when commissions become payable in default of such agreement and Regulation 10(2), which is mandatory, sets out the latest stages at which commission will become due.
Many agency contracts will provide that an agent is only entitled to be paid once the principal has been paid for the goods supplied. However, in some circumstances the agent may still have the right to be paid if the reason that a transaction has not been completed is purely attributable to the principal (rather than the customer or the agent). Disputes in this area can be tricky – seek legal advice if in doubt.
Regulation 12 entitles the agent to a statement detailing all commissions due and gives the agent the right to inspect the principal's books, which in practice can often be an important right.
Both the commercial agent and the principal are entitled under Regulation 13 to receive a signed written statement setting out the terms of the agency contract, including any terms subsequently agreed. However, Regulation 13 is often misunderstood. It does not entitle either party to demand that the other sign up to a written contract of any particular form. It only entitles both parties to the contract to receive a statement from the other explaining the terms that actually already apply to the contract.
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". This is a fertile area for disputes and taking expert legal advice is essential.
In the UK 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).
These are clauses which seek to prevent one party from competing for business with his or her former principal and, in this context, they are very similar to such clauses which apply to employment contracts. Regulation 20 restricts the scope of such clauses and provides that they will only be valid if the following criteria are satisfied:
- the clause is in writing; and
- the clause relates to the geographical area, or group of customers, and the type of goods that the agent actively dealt with during the agency; and
- the clause is not valid for more than two years after the end of the agency
The Dispute resolution team at Blake Morgan regularly acts for parties involved in legal actions concerning restraint of trade clauses – contact us if you have any specific issues.
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:
- make proper efforts and negotiate and where possible conclude the transactions he is instructed to take proper care of
- communicate to the principal all the necessary information available to him
- comply with reasonable instructions given by his principal.
In practice in the UK, these duties broadly applied anyway 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 in English law 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 advice.
Regulation 4 sets out the duties of the principal towards the agent to "act dutifully and in good faith". In particular, the principal must:
- supply the agent with documents needed in relation to the goods concerned
- 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
- 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.