Scope of protection
The Directive was implemented by the Commercial Agents (Counsel Directive) Regulations 1993 and came into force on 1 January 1994. The Regulations have retrospective effect, i.e. they affect contracts made prior to 1 January 1994. The Department of Trade and Industry published guidelines giving a broad interpretation to the Regulations and subsequent case law has confirmed this approach.
Agents who market goods as opposed to services are protected by the law. Goods, however, are not defined. It is not clear what the position is if the supply comprises a mix of goods and services. Principals may consider using two separate contracts to distinguish between goods and services. The services that may be excluded include car hire or car leasing, package holidays, subscriptions to satellite television channels, insurance and other financial services. It is still unclear whether computer software will be regarded as a good or a service. Case law currently indicates that data alone is not considered to be a form of tangible property (i.e. a good). It has been held, however, that when integrated to a disk, it may be capable of constituting a good. These cases are not definitive and may yet be distinguished.
There must be a contract between the principal and agent and/or between the principal and sub-agent for the Regulations to apply.
Member States were given the right to introduce provisions on secondary activities where the agent would not be protected. Under English law, if the agent does only a small amount of agency work, his tasks may be considered “secondary” to his other activities taking him outside of the scope of the protection. A principal should always ask an agent for details of his other activities to determine whether he falls within the scope of the Regulations.
The Regulations apply only to the activities of an agent in the United Kingdom. Parties can agree however that an agency contract will be governed by a law of another Member State.
The Regulations expressly exclude from protection: offices of companies/associations; partners; salaried employees; receivers or liquidators; Crown agents for overseas governments; unpaid agents; and commercial agents who operate on commodity exchanges.
Form of contract
There is no requirement for the contract between an agent and principal to be in writing. However, Regulation 13 gives a mandatory right (which cannot be derogated from) to both the agent and the principal to receive a signed written document incorporating all the terms of the agreement on request. Although the Regulations appear to apply to individuals only, in practice, they are frequently applied to limited companies.
Authority to negotiate
For the Regulations to apply the agent must have continuing authority to negotiate. Even if they are unable to change prices or conditions of business and their job is simply to encourage customers, they may still be protected under English law. Agents who only effect introductions between their principals and third parties and lack the power to bind their principals in the sale or purchase of goods, or to negotiate and conclude transactions are not protected by the Regulations. Furthermore, if an agent is appointed for one transaction only or for a specified number of transactions, then he will not be protected as his authority is not continuing.
Indemnity or compensation on termination
An indemnity or compensation may be available on termination unless the agent has substantially breached the contract. The parties are free to choose either mechanism and incorporate it into their contract. In the event that the contract is silent on this issue the default option reverted to is a compensation payment. Where the parties have not entered into a written contract, they will fall back on the Regulations to determine the appropriate mechanism for making a payment on termination. Where it is just to do so, an indemnity will be payable where the agent has introduced new customers or increased business such that the principal continues to derive substantial benefit. The Regulations limit the indemnity to a maximum of 1 year’s commission. Alternatively, compensation will be available where the agent has been deprived of commission or he is unable to amortise the costs and expenses he has incurred in performing the contract.
The Regulations, however, do not mandate a basis for calculating the level of compensation payable to agents, a situation which has been recently confirmed by the House of Lords in Lonsdale (t/a Lonsdale Agencies) v Howard & Hallam Limited. In Lonsdale the House of Lords held that UK agency agreements were not subject to the French method of calculating compensation and instead compensation should be assessed by an expert by reference to the agent’s loss, that is, the value of the agency at termination. Ordinarily, the courts would expect the parties to appoint an expert to assess the value of the terminated agency. This is likely to add further cost and expense to the process.
Compensation is not payable where the agent substantially breaches the contract or where the agent terminates the contract. If, however, an agent resigns due to the actions of the principal, compensation may still be payable. Principals should be cautious in “encouraging” agents to terminate the agency agreement.
The Regulations do not permit the alteration of the compensation provisions to the detriment of the agent, even if the principal and agent agree to such alteration.
Businesses should consider the following commercial alternatives to an agency agreement to avoid potential difficulties on termination:
consider a fixed term employment contract rather than an agency agreement as employees are not protected by the Regulations;
ensure a tightly written contract exists - an unwritten contract will be interpreted to protect the agent;
do not give the agent power to negotiate or bind the principal (preventing the application of Regulations);
insert an indemnity into the agency contract capping the commission upon termination to one year;
define the agent’s responsibilities especially if the agent is involved in the sale of a service as opposed to goods;
draft a clear contractual clause in the agency agreement requiring the principal’s consent to the agent taking on or giving up an activity which brings him within the scope of the Regulations;
enter into a binding settlement following termination to avoid compensation calculations under the Regulations; and/or
wait for a claim - compensation is only available if the agent makes a claim within one year of termination.
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