Commercial Agents – The Law

The Law Relating To Commercial Agents

Thank you all for joining me and welcome to the first of two seminars that I’m delivering regarding the law relating to commercial agents.

My name is Andrew and many of you will know me. I’m a company and commercial barrister, and my specialist expertise lies in the resolution of disputes between persons in business together. Those disputes, of course, involve disputes between shareholders and disputes between partners and, most relevant for today’s purposes, disputes between agents and principals.

Essentially, I regard my practice as a commercial divorce practice in many respects. My practice includes the handling of claims by commercial agents under the commercial agent regulations and that, of course, is the subject of the series of seminars that’s beginning today. This is an area that I have practiced in for over 25 years, and over those years I have handled very many commercial agent claims; both for principals and for agents. In particular, I believe that I handled the first ever claim of this nature and I also understand that I handled the largest claim for compensation brought by a commercial agent in this jurisdiction. That was a claim that resolved itself by the principal paying compensation to the commercial agent of over £1,000,000. So you can see that these claims can be of considerable value. This is a fast moving area, but a relatively self contained area. I certainly find it interesting and I hope you will too.

Let me begin with a brief word about the nature of these seminars. They are intended to be an introduction to the subject of commercial agency. Whilst delivering these seminars, I will assume no prior knowledge of the subject and I will of course start from first principles given their introductory nature. However, as I’ve already indicated, it’s a relatively small and self contained area of law and, over the course of these two seminars, I do hope to be able to provide a relatively in-depth look at the subject.

Some of you may know that I publish documents that I call case and statute citators. One relates to my principle area of practice; that being the area of applications for relief from unfairly prejudicial conduct by shareholders under Section 994 of the Companies Act. The other relates to this area; the law relating to commercial agents. That publication really comprises the accompanying notes to this talk and I hope you’ve all received an invitation to download a copy of that document from my Chamber’s website in advance of these seminars. If you’ve not already done so, it’s available for download at the Publications page of the Commercial Chamber’s website the address of which is on the slide in front of you. These seminars will generally follow the structure of that case and statute citator. It provides what I hope is a comprehensive note of the source and references to law in this area. I hope it details all of the issues that tend to arise in this area and lists all the relevant statutory and case law materials.

Given the introductory nature of this seminar series, I’m not going to attempt to deal with every aspect or every issue covered in that case and statute citator. Rather, what I intend to do is to try and confine myself to the more important aspects of this jurisdiction. You will find that the case and statute citator goes considerably further than I’ll be able to go within the context of these introductory seminars. I commend that document for your further reading.

I’ll obviously refer to the principal statutory provisions and, indeed, to some of the leading cases, but I’m not going to attempt to cite an authority for every principle that I refer to. For those who want to refer to those authorities or who want to take their knowledge of this jurisdiction further, I commend that case and statute citator to you. You should also be aware that I publish regular updates to it; so it’s pretty up to date.

I’m very willing and happy to take any questions that anyone wishes to throw at me in relation to this subject. I don’t propose to do so during the course of this first seminar. I’m intending to do so at the end of the second seminar, and if you do have questions, it would be very helpful indeed if you could just drop me an email. Again, you’ve got my address on the slide in front of you and I’ll do my very best to answer all the questions that are put to me at the end of the second seminar.

Let me start then by an examination of the matters that I intend to cover during this seminar and the next. First, I’m going to examine the Regulations themselves and they’re coming into force. Then I’m going to look at a couple of issues surrounding the interpretation of the Regulations. I’m going to look at the territorial application of the Regulations. Then the bulk of this seminar today will be looking at the nature and definition of a commercial agent for the purposes of the Regulations. If time permits at the end of this seminar, I will also turn to look at some of the duties that a commercial agent owes to his principal and vice versa; those that a principal owes to a commercial agent; and, in particular, those that are imposed by the terms of the regulations or at least recognised by the terms of the regulations. It may be that time today does not permit me to get to an examination of those duties. If I fail to do so, then I will cover those duties in the next seminar, which is a week today. Then next week, I also intend to look at the entitlement of the commercial agent to a written statement of the terms of his commercial agency contract; issues surrounding the remuneration of a commercial agent; and the termination of a commercial agency and the knotty and hot topics of the indemnity and compensation payable in circumstances where a commercial agency is terminated by the principal. I’ll have a look, albeit briefly, at issues of valuation of commercial agencies. And then finally I’ll wind up with some comments in relation to the enforceability of restrictive covenants in commercial agency agreements.

So let me start with the Regulations themselves and their coming into force. The concept of a commercial agent was previously alien to our jurisdiction. Commercial agents were widely recognised in civil law jurisdictions. They were particularly recognised in France and Germany. Indeed, it was somewhat uncertain as to how prevalent persons who might fulfil the definition of a commercial agent actually were within our jurisdiction. But if my experience is anything to go by, though not previously recognised in our jurisdiction, commercial agents do seem to be pretty prevalent and widespread in the U.K. They appear to be seen as a source of a flexible sales workforce, one that does not come with all the ties and responsibilities of employing a sales workforce in-house. As we shall see the engagement of a commercial agent or commercial agents as a sales workforce no longer comes without significant responsibilities and commitments but they do appear somewhat less than the commitments and responsibilities associated with employing such a workforce in house.

The origin of the Regulations is, in fact, the “European Directive on the Coordination of the Laws of Member States relating to Self Employed Commercial Agents”. That directive was issued to bring some degree of harmony and consistency to the treatment of commercial agents throughout the European Union. The Directive required its implementation into domestic law of the Member States by the 1st of January 1994. But the precise method of the implementation of that Directive into domestic law of each of the Member States was left to the Member States themselves. In other words, the Member States were given a degree of latitude as to the implementation of the Directive. They weren’t obliged to implement the Directive in a uniform way or a consistent way throughout the European Union. So, for example, the Directive required Member States to provide an entitlement to either an indemnity on termination or compensation on termination of the commercial agency. Some Member States elected to provide for or implement an entitlement to indemnity. Others elected to provide an entitlement to a commercial agent to compensation on the termination of his commercial agency. As we’ll see our own implementation of the Directive in that respect at least seems to have involved something of a fudge that I’ll return to.

In our jurisdiction the implementation of the directive was by means of the Commercial Agents Council Directive Regulations of 1993. These appear to have been something of a rushed piece of subordinate legislation. They, to a very large extent, simply seem to involve an exercise in the rubber stamping of the European Directive into UK law. There is, for example, wholesale incorporation of the Directive into the statutory instrument with apparently little thought or consideration being given to the terms of implementation or, indeed, the consequences of the implementation of the Directive in this way. You get the impression, rightly or wrongly, that the deadline for the implementation of the Directive was upon the UK Government and, at that stage, rather than consider the drafting of statutory implementation, this piece of subordinate legislation was rather hurriedly prepared and made law in our jurisdiction and, as a result, the Regulations themselves introduce certain somewhat alien concepts to our common law jurisdiction. For example, they introduce a right to compensation or, as I say, a right to indemnity on the termination of the agency by the principal in circumstances where the principal may not have acted in breach of contract in any way whatsoever. Indeed, the principal may have acted entirely in accordance with the commercial agency contract yet still finds himself liable to pay compensation in accordance with the Regulations. So somewhat unusual; a provision somewhat unfamiliar to our common law jurisdiction.

It seems to me that, in some ways, these Regulations can be seen as analogous to the employment protection legislation providing rights to redundancy payments and unfair dismissal payments in the context of an employment relationship. But although there are some parallels, I would caution against taking that analogy too far.

Just note in passing that there are separate regulations that apply to Northern Ireland. They are almost identical terms to the ones that apply in Great Britain.

The Regulations, as I’ll be referring to them, are the Regulations that do apply to Great Britain. That is, they apply to England, Wales and Scotland.

The regulations themselves have been the subject of certain minor amendments. Again, I won’t bore you with the amendment history, but again, when talking about the regulations I will, of course, be referring to them in their amended form.

As we all know, the UK has now left the European Union. So the question arises what has become of these regulations? Well, they simply haven’t disappeared. Rather, like other pieces of European derived legislation, they’ve been the subject of the EU Withdrawal Agreement Act of 2020. Pursuant to that act, the regulations are said to comprise retained EU law and in my view, that is likely to be the case for some considerable time. It seems to me that it’s unlikely that the UK Parliament is going to find sufficient time for further consideration of the commercial agency legislation. It seems to me that it has other, much more pressing requirements and so the concept of a commercial agent is likely, in my view, to be with us for some time. Indeed, I go one stage further and say that it seems to me that the concept now of a commercial agent is so entrenched in our commercial world as a result of the implementation of the directive and the Regulations themselves, that commercial agents may now be considered permanent features of our jurisdiction.

At the outset, I think I ought to also draw attention to everyone’s attention the fact that the commercial agency arrangements are retrospective in the sense that they apply to commercial agency arrangements whenever they were created. Although the regulations came into effect on the 1st of January 1994. They apply to commercial agency arrangements that came into effect both prior to and after that date.

Now, I want to say just a word about the interpretation of the regulations. Prior to Brexit, we were required to abide by decisions of the European Court of Justice, of course, regarding the proper implementation of Directives from the EU as well as other EU legislation and the implementation of that legislation within our own jurisdiction. Prior to Brexit, there was still some, albeit inconsistent, willingness on the part of the UK courts to look to the experience in other member states of the EU for guidance on the correct interpretation of the Regulations. However, I think it’s fair to say that more recently the courts have tended to treat the Regulations as stand alone UK legislation to be interpreted according to the principles recognised by our jurisdiction rather than looking to the experience in Europe. In my view, following departure from the European Union, the courts in this jurisdiction, I think, can be expected to look less and less to the European experience when implementing the Regulations and construing the same and more and more to our own domestic interpretation of the legislation for so long as it’s remains on the statute book.

Let me turn to the territorial application of the Regulations themselves. Unusually, the regulations apply throughout Great Britain. That is, they apply to England, Wales and Scotland, but not to Northern Ireland. As I’ve indicated, there is a separate but very similar set of Regulations that apply to Northern Ireland. The Regulations apply to regulate the activities of commercial agents insofar as they carry on their activities of commercial agency within Great Britain. In other words, they apply to commercial agency activities in Great Britain of both British persons and non British based persons. Conversely, they do not apply to govern the activities of British individuals and companies to the extent that they carry on commercial agency activities outside of Britain. And of course the same goes for non British entities.

It is true that the Regulations do throw up some more complicated issues as regards their jurisdictional application, for example. The courts have had occasion to consider whether the Regulations apply to commercial agents operating in England if the written, contract provides that the governing law is to be that of another member state in the EU or even a country outside of the EU. In practice, such questions rarely arise and so I’m not going to devote much time to addressing those issues. But, generally speaking, a commercial agent operating in the UK will be afforded protections and entitlements as good as those that would be provided if the UK Regulations themselves applied.

So with those introductory observations, let’s move on to the nature and definition of a commercial agent. A commercial agent is defined by section 2(1) of the Regulations as a self employed intermediary with continuing authority to negotiate or negotiate and conclude contracts for the sale or purchase of goods on behalf of and in the name of his principal.

A number of issues arise from that definition that I now need to consider. I think, first and foremost, I need to emphasise the fact that when trying to determine whether a person is a commercial agent, as is almost always the case, the labels actually afforded by the parties to the relationship will not be determinative of their status. The courts, rather, will consider the substance of the arrangement between those parties.

The next observation that derives from the words of section 2(1) is that the person needs to be self employed. These regulations do not apply to employees of the principal. They do not apply to officers of companies. They don’t apply to partners in partnerships. They don’t apply to members of limited liability partnerships. The regulations only apply to those who are self employed agents.

It’s clear that self employed agents can take the form of an individual and it can also take the form of a company. So both individuals and companies may, in certain appropriate circumstances, be commercial agents for the purposes of the Regulations.

The self employed person must act as an intermediary. In other words, he must be a genuine agent. The concept of a commercial agent does not include those people who buy goods from one person only to resell them on their own behalf to customers. Such people are not agents, of course, in any sense; they are distributors. So it is important for the purposes of the definition to recognise that we are talking about true agents acting as intermediaries rather than distributors.

The manner of remuneration of a person whose status is being considered is not conclusive. Commercial agents can of course be paid by commissions. In fact, that is indeed generally the most commonplace form of remuneration for commercial agents. But they can also be paid by fixed or variable retainers. They can even be paid by reference to a markup on the price of goods that are sold. Though often the remuneration in the form of a markup of goods can be a telltale of the existence of distributorship rather than agency. But as I say, there is no pre conceived idea of the mode of remuneration afforded to a commercial agent covered by the terms of the Regulations.

To qualify as a commercial agent, a person must have, and I take you to the words on your screen here, they must have “continuing authority”, I’ll come back to the phrase “continuing authority” in one second, but “to negotiate or to negotiate and conclude contracts for the sale or purchase of goods on behalf of and in the name of his principal.

It’s wholly unclear to me whether the words “negotiate and conclude” actually add anything to the definition of a commercial agent. It seems to me, as a matter of logic that all a person needs to have in order to satisfy the requirements of acting in the capacity of a commercial agent, is a continuing authority to negotiate contracts on behalf of his principal.

The concept of “negotiation” or being empowered with “continuing authority to negotiate” seems, in this context, to have a pretty wide meaning. It certainly doesn’t require the commercial agent to have authority to negotiate the price or indeed other terms of the contract of sale. Rather, it seems simply to require that the commercial agent must have authority to promote the principal’s goods or to deal with, manage or conduct relations with those buying the principal’s goods or selling goods to the principal. In other words, commercial agents appear to include persons who might be described as “introduction only” agents and indeed, in a number of cases, that has been found to be the case. So someone who merely introduces potential new customers to a principal may well fulfil the requirements of acting in the capacity of a commercial agent.

As I’ve already said, that authority has to be continuing. In other words, the relationship between a commercial agent and its principal must be an ongoing relationship. A commercial agent is not someone who is authorised to negotiate a single one-off deal, for example. That being said, there is clear authority to the effect that a person engaged on a trial basis or for a probationary period, for example, may still comprise a commercial agent whilst on that trial or probationary period.

It’s also worth noting from the concluding words of section 2(1) that a commercial agent must act on behalf of and in the name of his principal. This seems to exclude from the concept of commercial agency situations where an agent acts on behalf of an undisclosed or unnamed principal. It appears a commercial agent needs to be clearly acting on a disclosed basis for a named principal.

The regulations again, on their face, apply to both selling agents and purchasing agents. In my experience, purchasing agents seem to be very rare. Indeed, over the past 25 years or so, I’ve yet to come across a commercial agency case involving a purchasing agent. In practice, they all appear to be cases that involve selling agents. But it seems to me that there may well be purchasing commercial agents out there. I’m thinking, for example, of situations where, for example, clothing retailers use independent consultants to negotiate for the purchase of their stock on behalf of the clothing retailer for the coming season or the future seasons. That sort of operation would seem to me to involve an element of commercial agency.

The Regulations only apply, however, to persons selling or buying “goods” on behalf of their principal. Generally, the concept of “goods” in this jurisdiction is confined to tangible, moveable property. See, for example, the sale of goods legislation. But the concept of “goods” in this context might perhaps have a slightly extended meaning. So for example, “goods” for the purposes of the Regulations seem to include both gas and electricity and also even possibly advertising space which would seem difficult to qualify as “goods” for the purposes of sale of goods legislation in this jurisdiction. It’s certainly worth noting that a leading case in this area has determined that computer software, unless perhaps it’s sold in a tangible form, such as on a disk, does not comprise “goods” for the purposes of these Regulations. It’s also worth noting that the Regulations themselves specifically provide that financial products or insurance products are not to be considered “goods” for the purposes of the Regulations.

There is some uncertainty as to whether the Regulations apply to people placing contracts or seeking to place contracts on behalf of their principals where those contracts comprise contracts for work and materials. Some commentators have sought to suggest that the Regulations might apply, at least in part, to that sort of scenario; it being contemplated that the Regulations might govern that part of the sale that relates to the materials because they comprise a sale of “goods”. For my part, I’m not sure that it is appropriate to try to establish distinctions as to a person’s capacity in respect of the supply, on the one hand, of their services in a contract for the sale of work and materials and, on the other hand, to their supply of the materials themselves. It seems to me artificial and indeed difficult to apply such distinctions in practice. For example, how much of any commissions earned are to be referable to the order from the customer for the services of the principal and how much to be referable to the order for the materials provided by the principal when one comes to calculating any entitlement to compensation, for example. That seems to me to be a potentially insuperable problem raised by any such analysis. So I’ll say nothing more about it. But I have my doubts as to whether contracts for work and materials could be the subject matter of a commercial agency.

The Regulations quite clearly do not apply to persons who act as volunteers. In other words, the commercial agent must be being paid for his services. If he’s acting as a volunteer, he won’t comprise a commercial agent for the purposes of the Regulations.

There is, I think it’s worth noting, authority to the effect that the regulations do not cover sub-agents appointed by a commercial agent to assist in providing agency services to the principal. A true sub agent will not be considered a commercial agent of the principal for the purposes of the Regulations.

It’s also worth mentioning that the Regulations themselves expressly state that they do not apply to persons who operate on commodity exchanges or in commodity markets. But certain case law authority also suggests that the concepts of commodity exchanges and commodity markets might be quite narrowly defined.

Finally, it’s important to recognise that the Regulations do not apply to persons whose activities as a commercial agent are to be considered secondary to their other activities. A schedule to the regulations seeks to assist in identifying circumstances when a person’s activities as a commercial agent are to be considered secondary activities and so that person is not to be considered a commercial agent for the purposes of the Regulations. This schedule, and what’s on your screen at the moment is not a quote – is not the whole of the schedule, but certain extracts from it, is, I think, pretty unhelpfully and rather confusingly drafted. But the essence of it is this: the business person is likely to be considered a commercial agent if the business of the principal is the sale, or, as the case may be, the purchase of goods of a particular kind and the goods concerned are such that transactions are normally negotiated and concluded on a commercial basis and procuring a transaction on one occasion is likely to lead to further transactions in those goods with that customer on future occasions or to transactions in those goods with other customers in the same geographical area or amongst the same group of customers and, accordingly, it is in the commercial interests of the principal, in developing the market in those goods, to appoint a representative to such customers with a view to that representative devoting effort, skill or expenditure from his own resources to that end. That is more likely to be seen as the case if (1) the principal is the manufacturer, importer or distributor of goods; (2) the goods are specifically identified with the principal in the market in  question rather than or to a greater extent than with any other person; (3) the agent devotes substantially the whole of his time to representative activities whether for one principal or for a number of principals whose interests are not conflicting; (4) the goods are not normally available in the market in question other than by means of the agent; and (5) the arrangement is described as one of commercial agency. It is less likely that a person’s activities as a commercial agent will be considered primary and therefore will be considered secondary if (1) promotional material is supplied direct to potential customers (i.e. by the principal concerned); (2)  persons are granted agencies without reference to existing agents in a particular area or in relation to a particular group of customers; and (3) in circumstances where customers normally select the goods themselves and merely place their orders through the agent.

That concludes my examination of the nature of a commercial agent. I did say that, if I had time, I would go on to look at certain duties of commercial agents. I am, however, conscious that we have used up 40 minutes already and I did indicate that these seminars would only last some 30 to 40 minutes. So I think it’s actually probably appropriate that I stop this seminar now.

I will, of course, return to the question of the duties owed between commercial agents and their principals in the context of the second of the seminars that will take place on the 9th of March and, as I say, will cover both remuneration and termination of a commercial agent, as well as issues concerning the indemnity and compensation payable on termination amongst other things.

I hope you found today’s talk interesting. I hope you’ll join me for the next one. Until then, thank you very much for being a part of these seminars and I look forward to speaking to you next week. In the meantime, I wish you all well. Many thanks indeed.