Summary of Commercial Agency Regulations

by Reed Smith
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[author: Sakil A. Suleman]

Introduction

The Commercial Agents (Council Directive) Regulations 1993 (the ‘Regulations’) are the UK’s implementation of a European directive (EC Directive 86/653). They came into force on 1 January 1994 and govern the relationship between a certain type of "commercial agent" and principal. The terms of the Regulations are implied into all relevant commercial agency arrangements, whether written, oral formal or informal. In many respects, the Regulations represent a substantial change to the English law of agency, in the main providing certain protections for the agent.

Some of the protections can be excluded by express contractual provisions and it is important that agency agreements are properly drafted from both the agent’s and the principal’s perspective to take into account the impact of the Regulations.

Who is a "commercial agent"

The Regulations do not apply to all agents. They apply to anyone who is "self-employed" and who has a "continuing" authority to negotiate and/or conclude sales or purchases of goods on behalf of a principal.

Despite reference to the agent being "self employed", the agent does not have to be a natural person - the Regulations also apply to companies and partnerships. However, the Regulations only apply to "goods" and not services. The legislation provides no further guidance on how the distinction between goods and services is to be made. Clearly there will be many grey areas which will be left to the courts to determine.

The Regulations do not apply to employees, individual partners, liquidators or unpaid agents. More importantly, they do not affect those whose activities as commercial agents are considered "secondary" to their main activity. Again there is no clear description of what constitutes secondary activity, but the Regulations include a schedule of indicators which the English courts have found very difficult to interpret.

Remuneration

The amount of remuneration of the Agent can be agreed between the parties, but in the absence of agreement, the agent shall be entitled to "customary" or "reasonable" remuneration.

If agreed remuneration includes commission, then the amount of commission shall be based on the transactions concluded as a result of the agent’s actions, or in the territory where the agent has an exclusive geographic area or group of customers.

Under certain circumstances, the agent is also entitled to commission on transactions concluded after the agency contract has been terminated. This will apply to pipeline orders that are mainly attributable to the agent’s efforts during the term of the agreement and which are entered into within a reasonable period after the contract terminated.

Termination

The Regulations also govern the termination of agency contracts, which has been one of the most controversial aspects of the Regulations.

Where an agency contract is entered into for an indefinite period, it will be possible it to be terminated by either party giving notice to the other, provided that the period of notice is at least one month for the first year of the contract, two months for the second year of the contract and three months for the third and subsequent years. Although a longer notice period can be agreed, a principal may not have a shorter notice period than the agent. Any attempted waiver of this right will be void.

Where any agency contract is for a fixed period but continues to be performed by both parties following the expiry of the fixed period, it will be deemed to be converted into a contract for an indefinite period.

Termination payment – Indemnity or Compensation

On termination or expiry of the agency agreement, the agent is entitled to a termination payment being either an "indemnity" or "compensation" payment. The European directive gave member states the option to choose one of these options, but the UK decided to include both options. The payment under each option is calculated differently. If the parties want the indemnity option to apply, they must state this in the contract, otherwise the default option will be a compensation payment. The termination payment is mandatory and will apply in most scenarios other than limited circumstances, such as where the principal has terminated the agency agreement due to the agent’s repudiatory breach.

Indemnity

The indemnity payment will be calculated based on the business the agent has built up (i.e. if and to the extent that the agent brought the principal new customers or has significantly increased the volume of business with existing customers). The courts will also take into account other equitable factors in deciding upon the payment amount. The indemnity payment is capped at a maximum of one year’s commission, calculated based on the agent’s average annual remuneration over the preceding five years or the period of the agency agreement if less than five years. The indemnity payment is separate from and in addition to any damages the agent may be entitled to.

Compensation

This provides for the agent to be compensated for damage suffered as a result of termination. The purpose is to compensate the agent for the loss it will suffer as a result of the end of its relationship with the principal. The English courts have confirmed that the compensation payment should reflect the value or goodwill of the business at the date of termination. There is no maximum cap within the Regulations for a compensation payment.

Conclusion

It is not possible to completely exclude the application of the Regulations if on its facts the Regulations apply to an arrangement. However, it is possible to exclude certain aspects and minimize the effect of the Regulations (in particular with regard to principals) or to clarify and bolster some of the rights conferred by the Regulations (as far as the agent is concerned).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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