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Module One: Commercial Agents Overview

Module One: Commercial Agents Overview

Module one covers what a commercial agent is and is not, remuneration, Commercial agents regulation and the impact of Brexit, basic duties, commission, conclusion and termination as covered through regulations 2-16 of the Commercial Agents Regulations 1993.

Law of Commercial Agency

We now move on to looking at the law of commercial agency in more detail and here, the most important piece of legislation to have regard to and which we will work through is the Commercial Agents Regulations 1993.  We’ll refer to these as the Regulations throughout.

Regulation 2(1): What is a Commercial Agent?
“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…”
Regulation 2(1): What is a Commercial Agent?
In accordance with Regulation 2(1) of the Regulations, a commercial agent is defined as a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (known as the “principal”) or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal. I’ll now break that down in more detail:
Regulation 2(1): What is a Commercial Agent?
1. This is a self-employed intermediary and therefore does not include anyone who is employed by the principal (e.g. directors or sales staff) and also does not include insolvency practitioners who may be appointed to sell off certain goods in a distressed situation.
Regulation 2(1): What is a Commercial Agent?
2. Secondly this is someone who has continuing authority and therefore someone who acts an agent in relation to a one off transaction, will not be considered to be a commercial agent for the purposes of the Regulations. practitioners who may be appointed to sell off certain goods in a distressed situation.
Regulation 2(1): What is a Commercial Agent?
3. Note that the agent may be a sales or a purchasing agent so do not fall into the trap of believing that commercial agents are only those who sell goods on your behalf.
Regulation 2(1): What is a Commercial Agent?
4. The Regulations will only apply where the agent is connected with goods and therefore activity connected with the sale or purchase of services falls outside of the remit.
Regulation 2(1): What is a Commercial Agent?
5. Finally, note that as referred to earlier, the sale or purchase of the goods is on behalf of and in the name of the principal and therefore the agent does not make the sale in its own name or right.
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Meaning? Raoul Safal v Atelier Bunz GmbH

So what does this mean?  Let’s take a look at some initial case law which has interpreted Regulation 2(1) and provided us with legal precedent in this area.

The Situation:

In the case of Raoul Sagal (trading as Bunz UK) v Atelier Bunz GmbH:

  1. Mr Sagal, having entered into an oral agreement with Bunz, would take orders from customers and then place the same orders with Bunz. 
  2. Bunz would deliver the goods, in this case jewellery, to Mr Sagal and invoice him. 
  3. Mr Sagal would then deliver the jewellery to the customers and invoice them under the name Bunz UK. 

The Claim:

When the relationship came to an end, Mr Sagal sought compensation as a result of the termination (this will be touched on later in the session), by claiming that he had acted as a commercial agent for Bunz, within the meaning of the Regulations. 

The Argument:

It was Mr Sagal’s case that except for the ‘paper trail’, the substance of the relationship indicated an agency relationship. However, Bunz’s case was that Sagal was buying from Bunz and then selling to customers under a separate contract and therefore the relationship was a distributorship. 

The Result:

The Court looked at how the business was conducted in reality and found it clear that the relationship was one in which Mr Sagal purchased goods from Bunz for resale and Mr Sagal’s trading accounts and tax returns were not consistent with the existence of an agency agreement. 

  • Ultimately, Mr Sagal had no authority to negotiate or contract on behalf of Bunz, which is a requirement of the definition of ‘commercial agent’ under the Regulations, and the paperwork clearly presented the reality of the situation that Mr Sagal was not a commercial agent.
  • It is this transfer of ownership of goods that is of vital importance when distinguishing between distribution and agency.

Remuneration Structure is not Determinative

Another key case is Invicta UK v International Brands Limited where Invicta had been engaged by International Brands to get its wines listed with major retailers and wholesalers. 

 

Claim:

When International Brands terminated the agency contract, Invicta brought a claim under the Regulations for compensation.

Claim

International Brands claimed that Invicta was not a commercial agent, as defined by the Regulations, and Invicta did not have authority to negotiate on its behalf. International Brands asked the Court to assess whether Invicta had authority to negotiate at the time the agency agreement was made.

Ruling:

The Court held that whilst an assessment of whether an agent is a commercial agent within the meaning of the Regulations must focus on the beginning of the relationship, the Court should also look at how the agency operated in practice.

Ruling:

  • The Court concluded that an agent is a commercial agent if transactions were concluded as a result of that agent’s action, including transactions between the principal and the agent’s previously acquired customers and it is not necessary for the agent to negotiate the terms of the transaction.
  • The Court also held that the continuing authority does not have to be exercised; it simply needs to exist and not be withdrawn.

    • Conclusion:

    Invicta UK v International Brands Ltd – wine, retainer commission

    Conclusion:

    In this case, Invicta was engaged to sell goods on behalf of International Brands, and could not do so without authority.

    What About Software?

    Software Incubator Ltd v Computer Associates Ltd – depends on form

    In Software Incubator Ltd v Computer Associates Ltd, the Court of Appeal Overturned the decision that software could be classified as a ‘good’.
    • The decision was made reluctantly, and has subsequently been subject to widespread criticism.
    • The judge ruled that wider authorities on the definition of ‘free movement of goods’ have ruled that software in a non-physical form is not a good.
    • So where software on a CD or other device could be viewed as a good, downloadable content could not. Sadly, the law is not even as straightforward as saying that intangible things are not capable of being goods, because gas and electricity have been held as goods.
    • The judge acknowledged that this is already an outdated approach but did not consider that the court had authority to change it. Reform would have to come from Parliament.
    Software

    Brexit

    We now briefly touch upon the implications of Brexit given that the Regulations are EU law and given that at the time of writing, we still find ourselves within the transition period and no clear details as to the type of Brexit that the United Kingdom is set to experience.  

    DWAD BREXIT

    Brexit:
    Do be aware that it appears unlikely that anything will change in the immediate future given in part that the common law elements of agency were developed by the English courts.
    DWAD EU CONTRACT

    Brexit:
    Following 31 December 2020, we would recommend that you take specialist advice on how the Brexit deal or no deal will affect your international dealings as a whole (and not just those relating to agents and distributors). I am actively advising clients that they ensure that their contracts are robust and provide them with flexibility and safeguards no matter what the Brexit scenario may be and consequences which may follow.
    DWAD Birmingham COURTS

    Commercial Agents (Council Directive) Regulations 1993:
    Common law elements of agency were developed by English courts and will not be affected by Brexit, however… Current law of agency mostly derived from the Regulations The UK left the European Union on 31 January 2020; however, during the transition period, the UK will continue to be treated for most purposes as though it is still a member state
    DWAD ENGLISH COURTS

    Commercial Agents (Council Directive) Regulations 1993:
    The transition period is currently due to end on 31 December 2020. The UK and EU are currently engaged in negotiations as to the future trading relationship, although no agreement has yet been reached. The default position is that the Regulations will remain in force indefinitely until the government decides to repeal or amend them.
    DWAD BREXIT

    Brexit:
    Do be aware that it appears unlikely that anything will change in the immediate future given in part that the common law elements of agency were developed by the English courts.
    DWAD EU CONTRACT

    Brexit:
    Following 31 December 2020, we would recommend that you take specialist advice on how the Brexit deal or no deal will affect your international dealings as a whole (and not just those relating to agents and distributors). I am actively advising clients that they ensure that their contracts are robust and provide them with flexibility and safeguards no matter what the Brexit scenario may be and consequences which may follow.
    DWAD Birmingham COURTS

    Commercial Agents (Council Directive) Regulations 1993:
    Common law elements of agency were developed by English courts and will not be affected by Brexit, however… Current law of agency mostly derived from the Regulations The UK left the European Union on 31 January 2020; however, during the transition period, the UK will continue to be treated for most purposes as though it is still a member state
    DWAD ENGLISH COURTS

    Commercial Agents (Council Directive) Regulations 1993:
    The transition period is currently due to end on 31 December 2020. The UK and EU are currently engaged in negotiations as to the future trading relationship, although no agreement has yet been reached. The default position is that the Regulations will remain in force indefinitely until the government decides to repeal or amend them.

    What a Commercial Agent is Not

    We now refer back to the Regulations and having established what a commercial agent is, we will now look in more detail at what or who is not a commercial agent.  As mentioned briefly, this does not include a Partner in a Partnership, director or office in the case of a company or LLP or insolvency practitioner in the case of any business.

    Regulation 2(1) continued:

    • Officer of a company or association
    • Partner
    • Insolvency Practitioner

    Regulation 2(2):

    • Unpaid agents:

    Regulation 2(2) of the Regulations also goes further to state that where someone who would otherwise appear to meet the requirements of a commercial agent, they will not be so where they are unpaid for their activities.  This does not however, cover where that non-payment is in breach of contract of course.

    Regulation 2(3) and (4):
    Regulations 2(3) and 2(4) then provide some further examples.  That which appears most pertinent here is those who are classified as secondary agents, being those who sell goods as a secondary consequence of the primary purpose of their services.

    • Secondary Agents
      • W Nagel (A Firm) v Pluczenik Diamond Co NB [2017] EWHC 2104 (Comm) – a commercial agent operating on commodity exchanges or in commodity markets is not a commercial agent. Commodity market = e.g. wholesale trading such as purchase of coffee beans by description in bulk.
    • Schedule to the Regulations
    • E.g. paragraph 2(b) – nature of the goods

    Crane v Sky In-Home Service Ltd – secondary in nature A good example of "secondary in nature" was set out in the case of Crane v Sky-In Home Service Limited.
    • In this case Crane was a Sky technician, who sold Sky TV boxes and carried out installations of the necessary hardware.
    • Upon termination of the relationship Crane raised a claim that he should be classified as an agent (and therefore receive the benefits which come with that and which I shall come into in due course).
    • Crane made this claim on the basis that he was selling goods in the form of satellite dishes, Sky boxes and the like.
    • However, Sky successfully argued that these goods were sold as a secondary consequence of the sale of subscription packages, which were themselves the primary activity under the contract.
    • Ultimately, without a Sky subscription package, the goods sold by Crane would have been worthless.
    • This case makes clear that the Regulations will not protect agents who sell goods where each sale is not likely to lead to further sales.

    Basic Duties:

    Regulations 3, 4 and 5 of the Regulations, deal with the duties of the agent, the principal and the fact that these duties cannot be derogated from respectively.

    Regulations 3-5:
    • Duties of the Agent The duties are common sense in nature, requiring amongst other things, the parties to act in good faith to one another and provide each other with the information that is reasonably required to perform their duties. However, their generic nature means that we would recommend supplementing these duties with contractual terms, making it easier to take action against the agent should he breach those contractual terms for example.
    • Duties of the Principal
    Basic Duties
    • No Derogation
    • Breach of Duties: Breach of the duties is not necessarily a repudiatory breach (Crocs Europe BV v Anderson & another – croc of s### message).
    Crocs Europe BV v Anderson & others
    The importance of this is highlighted when you consider what happened in the case of Crocs Europe BV v Anderson & others. Here, Anderson (the agent) was fed up with some of the poor service levels and supply times of Crocs and posted a derogatory statement on an online message-board amongst other Crocs agents:
    • Crocs became aware of this and claimed that the comments constituted a repudiation of the agency agreement. Crocs therefore disposed of the services of Anderson as an agent.
    Crocs Europe BV v Anderson & others
    • However, Anderson successfully argued that the post was made on a private message-board, amongst only other agents who were of the same view and that there was therefore no damage to the goodwill or reputation of Crocs, such that no duties were breached.
    • Ultimately, the Court held that it was a one off-incident that had not involved bad faith. Given the language used in the message and its derogatory nature, this can be seen as quite harsh on the part of Crocs as it would not be expected that it would want someone holding the views of Anderson to be representing its brand.
    Basic Duties
    • Vital contract terms
    • Barnett Fashion Agency ltd v Nigel Hall Menswear Ltd: Selling rival products: In contrast, the case of Barnett Fashion Agency v Nigel Hall Menswear was an example of the successful removal of an agent for a breach of duty. Here the agent was dismissed for selling rival brand products in its store and a claim for illegitimate termination of the agent’s appointment was dismissed on these grounds. This is just one of three bases on which the agent failed with its claim in this case and we’ll revisit for the other two later on in the session.
    Parties cannot contract out of their duties:
    Whilst we recommend that businesses implement bespoke contracts to bolster the duties and obligations on the agent, thus enabling them to remove them from post more easily, these contracts cannot be used to contract out of the duties set forth by the Regulations.
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    Commission

    Regulation 6
    Moving on to Regulation 6 of the Regulations, we see the basis on which commission is paid to agents for their activities.  This states what the form and amount of the commission should be in the absence of there being a formal agreement entered into by the parties.  Regulations 6 states as follows: the remuneration that commercial agents appointed for the goods forming the subject of his agency contract are customarily allowed in the place where he carried on his activities.  Furthermore, it states that the agent will be due reasonable remuneration taking into account all the aspects of the transaction.
    • Form and amount of remuneration in absence of agreement
    • “the remuneration that commercial agents appointed for the goods forming the subject of his agency contract are customarily allowed in the place where he carries on his activities”
    • “reasonable remuneration taking into account all the aspects of the transaction”
    Where your goods are obscure and/or the territory in which the agent is carrying out their activities is remote, it highlights the importance of having agreed contractual and commercial terms.  Without them in this case, should there be a dispute between the parties as to what is reasonable and customarily allowed, the experts who will be called upon to determine the position are likely to be those agents carrying out that activity in that territory.  Do not therefore leave anything to change.
    Regulation 7

    Regulation 7 then goes on state that the agent is due to receive commission in relation to those transactions which are concluded during the term of the agency contract.  This seems relatively easy to understand and particularly where the agent has had some part in making an introduction; however, please be aware that should an agent be appointed under an exclusive territory or customer group and a sale be made within that territory or customer group then even though the agent may have had no part in that sale, they would still be entitled to commission.  If therefore, you wish to reserve the right to make direct sales in addition to the agent, then it is important that the agent is only given sole (rather than exclusive) rights.

    • Commission on transactions concluded during agency contract
    • Reg 7(1)(a)&(b) – agent’s action or introduced customer
    • Reg 7 (2) – customer in an exclusive territory or group
    Regulation 8: Pipeline Commission

    Whilst the circumstances of Regulation 7 are a bit more straightforward, Regulation 8 provides for additional circumstances in which the agent would be entitled to commission.  This provides that he may receive commission where the transaction is concluded after the conclusion of the agency contract.  In the case of Warren t/a On-line Cartons and Print v Drukkerij for example, commercial agent Mr Warren decided in September 2009 to retire and provided three months’ notice to terminate his agency. The agency ended in December 2009 on good terms. In the six months following this termination, around £230,000 worth of orders were placed with the principal by two key customers Mr Warren had previously been maintaining. When Mr Warren discovered that he had missed out on a large amount of commission, he brought claims under the Regulations. In his claim for “pipeline commission”, he was awarded £5,771 under Regulation 8. 

    • Transaction concluded after agency contract 
    •     (Warren t/a On-line Cartons and Print v Drukkerij – there was none)
    • “mainly attributable” 
    • “reasonable period”
    Regulation 8: Software Incubator v Computer Associates Ltd

    Software Incubator Ltd v Computer Associates Ltd – specify what this is:

    • This right would apply where the activities of the agent were ‘mainly attributable’ to the transaction being concluded and within a ‘reasonable period’.  What was is a reasonable period was explored in the case of Software Incubator Ltd v Computer Associated Ltd.  In this case, certain post-termination transactions were attributable to the agent’s efforts, however the agency agreement excluded a claim under regulation 8 for commission on post-termination sales. In spite of this exclusion, it was found that the agreement preserved contractual claims to post-termination commission and so the agent was awarded commission. On the issue of a “reasonable period”, the court considered what this would have been if regulation 8 did apply and where the parties exclude regulation 8 (which they are entitled to do), the agency agreement should state what a reasonable period is considered to be.
    • Software Incubator Ltd v Computer Associates Ltd – (2016 case: citation in previous slide notes) – Although certain post-termination transactions were attributable to the agent’s efforts, the agency agreement excluded a claim under regulation 8 for commission on post-termination sales. Found however that the agreement preserved contractual claims to post-termination commission and so awarded commission. On the issue of a “reasonable period”, court considered what this would have been if regulation 8 did apply. Notes that, where the parties exclude regulation 8 (which they are entitled to do), the agency agreement should state what a reasonable is considered to be.
    Regulation 9

    It is possible to contract out of the agent’s right to commission under Regulation 8 as the parties did in the Software Incubator case.  The danger of not doing is that where an outgoing agent is replaced, there is a situation where both he and the incoming agent are entitled to commission.  In addition to being able to contract out of this right to commission with the outgoing agent, Regulation 9 states that it is possible to apportion commission on a particular sale between an outgoing and an incoming agent, thereby avoid the principal paying this twice.

    • Apportionment between new and previous agents

     

    Regulation 10

    Commission will become due in accordance with Regulation 10, which provides that commission shall become due as soon as either, the principal has executed the transaction; the principal should, according to the agreement with the third party, have executed the transaction; or the third party has executed the transaction. In terms of payment, the commission is to be paid by the last day of the month following the quarter in which it became due, and, unless otherwise agreed between the parties, the first quarter period runs from the date the agency contract takes effect, and subsequent periods shall run from that date in the third month thereafter or the beginning of the fourth month, whichever is sooner. 

    • When commission is due and date for payment
    Regulation 11

    However, the right to commission can be extinguished in accordance with Regulation 11, if it is established that the contract between the third party and the principal will not be executed because of a reason for which the principal is not to blame. Any commission which the commercial agent has already received shall be refunded if the right to it is extinguished. 

    • Extinction of right to commission
    • “not to blame”

    (ERGO Poist’ovna a.s.v Alzbeta Barlikova – don’t just look at legal but factual/circumstantial)

    In the case of ERGO Poist’ovna a.s.v Alzbeta Barlikova it was established than when determining whether the right to commission has extinguished, it is necessary to look at the factual and circumstantial facts of a matter and not just the legal position.

    ERGO – (Case C 48/16) 17 May 2017: ECJ guidance = the concept of a reason for which the principal is to blame in article 11(1) does not relate only to the legal reasons which led directly to the termination of the contract, but covers all of the legal and factual circumstances for which the principal is to blame, which are the cause of the non-execution of that contract.

    Conclusion & Termination

    We now move on to looking at the circumstances surrounding termination of the agency relationship and Regulations 13 – 16.

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