LEADING THE FIELD IN COMMERCIAL AGENCY. by Edward Miller, Tim Foster, Alison Dennis, Nick Elliot Business & Finance, Reed Smith, London

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1 LEADING THE FIELD IN COMMERCIAL AGENCY by Edward Miller, Tim Foster, Alison Dennis, Nick Elliot Business & Finance, Reed Smith, London Larry Coltman and Adam Sturt, International Commercial Litigation Reed Smith, Coventry

2 CONTENTS This booklet is divided into the following Sections:- A. BACKGROUND... 3 B. GENERAL DESCRIPTION OF THE UK REGULATIONS... 4 C. SCOPE OF THE UK REGULATIONS - WHO DO THEY COVER?... 5 D. RIGHTS TO INFORMATION... 7 E. COMMISSION... 8 F. TERMINATION PAYMENTS...11 G. TERRITORIAL EFFECT...22 H. DRAFTING SUGGESTIONS...25 DISCLAIMER: This booklet does not contain legal advice or provide a thorough and complete analysis of the law, and no liability is accepted in connection with it. Some provisions of the law are not covered. The purpose of this booklet is to provide a basic summary of selected main provisions and their effects and to offer some general practical guidance for the setting up, operation and termination of agency relationships. Specific legal advice should be taken in relation to the facts of any given case. 2

3 A. BACKGROUND 1. English law on commercial agency was revolutionised by the adoption of the Commercial Agents (Council Directive) Regulations 1993 together with the equivalent Regulations for Northern Ireland (together "the UK Regulations"). The UK Regulations implement in the UK EC Directive 86/653 ("the Agency Directive"). The Commercial Agents Amendment Regulations 1998 made certain changes to the 1993 Regulations. 2. The Agency Directive was designed to achieve EC-wide harmonisation of laws relating to independent commercial agents. It was inspired by Civil Law traditions from the Continent, in particular German and French law, and by the idea (foreign to the UK) that commercial agents should be subject to considerations of social as well as commercial policy. 3. The UK was given longer to implement the Agency Directive than other Member States, in view of the substantial legal changes it would involve in the UK. The UK Regulations came into force on 1 January They apply to contracts and relationships with agents in existence at that date, not just to contracts created after that date. 4. The implementation of the UK Regulations by the DTI was characterised by delay and inconsistency, culminating in the introduction of substantial and unexpected last minute changes. There is still uncertainty as to the interpretation of certain provisions of the UK Regulations and their exact impact on principals and agents alike. 3

4 B. GENERAL DESCRIPTION OF THE UK REGULATIONS 1. Since 1 January 1994 the UK Regulations have provided a wide range of important rights to commercial agents, most of which will apply irrespective of what the contract with the agent provides. 2. The main areas break down into three main categories, as follows (in ascending order of significance):- (a) (b) (c) obligations for the supply of information to the agent by the principal; rights relating to when and on what transactions commission is due to the agent; and automatic rights of compensation or indemnity for agents on termination. 3. A general feature of much of the UK Regulations is that they are, by English standards, poorly drafted and their meaning is unclear. There remains a great deal of uncertainty as to how some important provisions will be interpreted, and it may take some years yet before the uncertainties are clarified by Court decisions. 4. In September 1994, the DTI issued Guidance Notes to assist with interpretation of the UK Regulations. Reed Smith was involved in commenting on previous drafts of these Guidance Notes. Generally, the final version of the Guidance Notes does not provide, in Reed Smith's view, much helpful guidance to businesses using the UK Regulations. Where they have seen fit to comment, the DTI (with one or two exceptions) offer in the final Guidance Notes balanced and uncontroversial comment and indicate the main residual areas of uncertainty. 5. In July 1996 the European Commission issued its Report on the application of the indemnity and compensation provisions of the Agency Directive. This Report refers member states to French and German law in interpreting national regulations. Whilst the Report has removed some uncertainty in the areas of termination payments, criticism has been levied that the Report failed to give a correct statement of the German law and practice which it purported to cite. It is hoped that the Commission will review its Report to amend inaccuracies and add details that are missing. Until then, agents and principals and their advisers, as well as the courts, are obliged to rely on the Report as it is the only available authority on the calculation of termination payments. 4

5 C. SCOPE OF THE UK REGULATIONS - WHAT DO THEY COVER? 1. By way of background, the usual distinction between an agent and a distributor is that:- (a) (b) the agent is an intermediary who does not take title to the goods but obtains orders for goods from the customer which are either accepted by the agent on behalf of the principal or accepted by the principal. The contract is between the principal and the customer, so it is the principal who sells on its own account. The agent makes his money through a commission; and the distributor buys the goods from the principal and sells to the customer on the distributor's own account. The distributor will generally take title to the goods while the agent does not. The distributor makes his money on the profit he makes, being the difference between his selling price to his customer and the price he paid to the supplier. 2. The UK Regulations protect "commercial agents". The UK Regulations define a "commercial agent" as:- 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 The definition has the following implications:- (a) (b) (c) (d) it includes companies as well as self-employed individuals; it covers both buying agents and selling agents, though discussion of the UK Regulations tends to focus on selling agent; it covers agents for the sale or purchase of goods, not services. This may include agents for the "sale" of standard software products, though the position is uncertain; it covers agents who negotiate the sale or purchase, either (in the case of a sales agent) referring the order onto the principal or accepting the order on behalf of the principal. It is not yet entirely clear whether the UK Regulations will cover "canvassing" or "introducing" agents who essentially make only introductions between principals and third parties and arguably do not "negotiate" in the commonly understood sense of the word. However, the Courts are likely to give the word "negotiate" a broad meaning to enable these agents to be protected; This wide approach to the interpretation of the word "negotiate" is reflected in the only case of significance on this point, Tamarind International Limited and Others -v- Eastern Natural Gas (Retail) Limited and Another. In this case the Claimants promoted the Defendants gas and electricity business by telesales. Accordingly the Defendants argued that they merely provided introductions and did not negotiate. However, the court held that the Defendants, having marketed the gas successfully, had generated a substantial measure of future goodwill for the Defendants. The Defendants could derive long term benefits from their efforts in the gas and electricity market. Accordingly, the court held 5

6 that the activities were not secondary under Regulation 2(4) and the agents were entitled to the protection of the Regulations in the event of wrongful termination of their contracts. (e) it requires "continuing" authority. If an agent is appointed for a specific transaction or transactions, or his appointment is very short or lacks continuity (for example because he acts as a broker frequently switching between different principals), he is unlikely to be protected. 3. The Agency Directive left it open to each Member State to exclude from the application of its own regulations agents whose activities it considered secondary. The DTI introduced a last minute Schedule to the final version of the UK Regulations, which attempts to define what qualifies as secondary activities in the UK. The drafting of the Schedule is very obscure and confusing. 4. There are two possible approaches to the definition of secondary activities. (a) The first is to look at the business of the agent as a whole and determine what proportion of his activities can be classified as acting as a commercial agent (for one or more principals) under the UK Regulations. If agency activities are only a small proportion of his turnover (for example, he acts mainly as a distributor), then the agency activities could be regarded as secondary. (b) The second is to look at each contract separately and determine whether the agency activities for the particular principal concerned qualify as secondary under the complex terms of the Schedule. 5. It is clear that, although previous versions of the UK Regulations adopted the first approach, the plain wording of the final version now adopts the second approach. However, the prevailing view of the DTI, which is repeated in their final Guidance Notes, is that the first approach should be applied. Confusion reigns. Because the Schedule is so badly drafted, it is difficult to advise with any certainty on the extent of the exclusions it provides. 6. In view of the uncertainty it may be possible for, a principal to try to exclude the UK Regulations if the agent either (i) carries on other activities different from those of a commercial agent or (ii) the agency arrangement is not a classic commercial agency for the sale of goods, for example if the agent acts partly as a distributor. 7. The territorial scope of the UK Regulations is an important and problematic aspect of the new laws. This is covered in Section H: TERRITORIAL EFFECT below. 8. There are also some specific exclusions from the UK Regulations, including commercial agents who are unpaid, commercial agents operating on commodity exchanges and persons acting as insolvency practitioners. 6

7 D RIGHTS TO INFORMATION 1. The UK Regulations contain several non-excludable rights for commercial agents to obtain information from their principals. Traditionally the information flow in an agency agreement has been one way from the agent to the principal. Where an agency agreement has dealt with information in the past, this has been to require the provision of information by the agent regarding his own activities and the local market. The UK Regulations now give the agent several rights to receive information from his principal. 2. A principal must:- (a) (b) (c) (d) (e) provide his agent with "the necessary documentation relating to the goods" (Regulation 4(2)); obtain for his agent the information necessary for the performance of the contract and in particular notify the agent once the principal knows that business will decrease significantly below that which the agent could normally have expected (for example when the principal plans to reduce his activity in a particular market) (Regulation 4.2)); inform his agent within a reasonable period of the principal's acceptance or refusal of, or any failure to conclude, an order or transaction which the agent has procured (Regulation 4(3)). The practical way to meet this requirement is to have a regular system of reporting on the outcome of orders referred by the agents; supply a commission statement setting out the main components used in calculating the commission (Regulation 12(1)); provide on demand all information "including an extract from his books" (but not the books themselves) where available to the principal, necessary to check commission due (Regulation 12(2)). 3. None of the above rights may be excluded or varied by contract. However, some of them are vague (for example (a) above) and parties may well wish to agree in their contracts what information will be given. Dealing with rights to information in agency agreements is mentioned in Section H: DRAFTING SUGGESTIONS below. 4. Regulation 13 (1) gives a mutual right for the agent and principal to receive from the other, on request, a signed written document setting out the terms of the relationship. This is analogous to the statutory right of an employee to receive a statement of terms of employment. 5. The UK Regulations subject the agent to one information requirement which is to communicate to the principal "all the necessary information available to" the agent. This is so vague that the parties may again wish to agree in advance what this information consists of. 7

8 E. COMMISSION 1. Regulations 7, 8, 9 and 10 of the UK Regulations contain major rights to commission which have a significant commercial impact on arrangements. 2. Regulation 7 states that an agent must be paid commission:- - on all sales resulting from his actions; - on all sales to any customer whom the agent has previously acquired for the principal, i.e. "repeat orders"; and - where the agent is exclusive on all sales to the territory or group of customers for which the agent has exclusivity. Regulation 7 could have the following implications for an agency agreement:- (a) (b) the agent may be entitled to commission on orders which have arisen other than through its own direct efforts, for example on repeat orders placed by customers direct, even though the agency agreement may provide to the contrary - a decision of the European Court gives some support to such an interpretation; where an agent is said to be exclusive, but is in fact not fully exclusive because certain customers are excluded as "house accounts", Regulation 7 may entitle the agents to commission on sales to those excluded customers. In future, principals should not call agents exclusive if they are not fully exclusive in the legal sense. (Regulation 9 provides for equitable sharing of commission between old and new agents). 3. Regulation 8 states that commission must be paid:- - for a reasonable period after termination, on all sales which are "mainly attributable" to the agent's efforts during the contract; and - on all sales described in Regulation 7 made after termination, where the order reaches the principal or the agent before termination. In the past, many agency agreements have provided for a "clean break" on termination so far as rights to commission are concerned, or may have provided for a very limited run off period for commissionable sales to work through the system. Regulation 8, however, establishes a statutory right to commission after termination. Please note that a "reasonable period" is not defined and calculation of an appropriate period has caused the courts great difficulty. This area is dealt with in detail in Section F: TERMINATION PAYMENTS below; 4. Major uncertainty surrounds the fundamental question whether the rights in Regulations 7 and 8 are totally mandatory (so they will apply whatever the contract says) or are in fact optional (so that the contract will override if it says something different). Regulations 7 and 8 are examples of certain provisions in the UK Regulations which are neither stated to be capable of being varied by the contract nor stated to be incapable of being varied by contract. 8

9 The DTI has been inconsistent on this point but its Guidance Notes suggest that the UK Regulations can be derogated from where this is not expressly prohibited. While recognising that the position remains uncertain, principals may want to make it clear in their agency agreements if they wish Regulations 7 and 8 to be overridden by specific terms in their agreements and agents should be aware of the consequences of such an exclusion. Existing agents under old contracts may have already automatically accrued the extra commission rights under Regulation 7 and 8. In, Moore -v- Piretta PTA Ltd, it was held that under the new accrued rights, an agent would be entitled to count the whole currency of the agency, not only the duration of the last written contract period, including the period before the Regulations took effect. To be sure of excluding such rights, a principal would need to convert the agent to the new terms containing, in Reed Smith's view, express exclusions of these Regulations (see Section H: DRAFTING SUGGESTIONS below). An agent will on the other hand want to ensure that any accrued rights are not excluded by a principal offering to put an existing agency on new terms. 5. In the absence of the UK Regulations, existing UK practice on the timing of commission has varied between the common "pay when paid" approach and allowing the accrual of commission on order acceptance, despatch or invoice. Regulation 10(1) of the UK Regulations, if taken as worded, could impact significantly on when commission must become due, and could in particular challenge the "pay when paid" approach. Like Regulations 7 and 8, there is major uncertainty as to how "mandatory" the changes are. Regulation 10(1) states that commission will arise on the earliest of certain events, including delivery of the goods. The DTI now suggests that Regulation 10(1) is not mandatory and that it is up to the parties (subject to Regulation 10(2) - see below) to specify precisely when commission will become due. 6. Regulation 10(2) is strictly mandatory. It states that:- commission shall become due at the latest when the third party has executed his part of the transaction or should have done so if the principal had executed his part of the transaction as he should have This is equivalent to a "pay when paid" system except that, if the principal defaults and fails to deliver on time, it seems commission will become due when the customer would have paid had the contract been performed properly (e.g. delivered goods on time or to the required quality). There are uncertainties as to how this should be applied in individual cases but this is essentially what Regulation 10(2) says. 7. Commission must be paid no later than 30 days from the end of the calendar quarter in which the commission accrued to the agent. The parties can specify a more favourable arrangement. Any less favourable arrangement would be invalid. 8. Once commission has become due it cannot be extinguished unless the transaction is not completed (e.g. if the goods are not paid for) for a reason for which the principal cannot be blamed (Regulation 11(1). In this case commission already received by the agent must be refunded. The UK Regulations permit cancellation or reimbursement of commission (including, it is believed, the right to set-off) where Regulation 11(1) circumstances arise. 9

10 Principals should consider setting out the mechanics for cancellation, reimbursement or set-off of commission in their agency agreements. Regulation 11(1) does raise some practical difficulties, including how long a principal would have to wait for payment before concluding that the customer will not pay. Principals could ensure that their contracts state a time period for default beyond the due date, after which the price can be taken as unpaid for the purpose of Regulation 11(1). 10

11 F TERMINATION PAYMENTS 1. The right to automatic compensation or indemnity on termination is the most dramatic effect of the UK Regulations. Following termination of the agency, the agent is entitled to receive an automatic termination payment, either for "compensation for damage" suffered (Reg 17(6)) or, if the parties have so elected, by way of an "indemnity" in respect of business brought to the principal (Regulation 17(3)). The Agency Directive allowed member states to include in their laws a right to either "Compensation for damage" or an "Indemnity". Most member states opted for the latter. The UK Government has opted for a mixture of the two: the parties may opt in their Agreement for an "Indemnity" but in the absence of such an election the agent will be entitled to Compensation as explained in more detail below. Para F.3 below explains how "automatic" the right to a termination payment is under Regulation 17. The key thing to note is that the right will arise irrespective of whether there has been a breach of contract by the principal in terminating the contract. The new right will arise when the contract is terminated by the giving of proper notice or on expiry of a fixed term. In the past, under English law, an agent has only had the possibility of compensation on termination in the form of a claim for breach of contract, where the principal has given insufficient notice or terminated early before expiry of a fixed term. 2. What the rights are (including the decisions parties will need to make between them) are set out in basic terms below:- The rights to "Indemnity" and "Compensation for damage" can be summarised as follows:- a. Indemnity (Regulations 17(3) and (4)) The Commission Report refers directly to the German system of Indemnity payments under which an agent is entitled to a payment which reflects the new customers which he has introduced to his principal and the significantly increased volume of business generated with existing customers. It is a prerequisite for payment of any Indemnity that the principal should also continue to derive substantial benefits from that increased business after termination. The German legal system provides a structured series of steps for calculation of the indemnity as follows: - A figure is calculated for the increase in goodwill generated by the agent. This is twelve months' commission on the new customers and increased business from existing customers. - This figure is multiplied by the number of years which the Court believes that the benefits would have continued to accrue to the Principal, which the Report puts at 2 to 3 years. 11

12 - Then the rate at which customers are likely to migrate is taken into account to decrease the figure and it is further decreased to take account of accelerated receipt of the commission. - The figure is further decreased by a certain percentage amount (8% in Moore -v- Piretta PTA Ltd, see below) to take account of the fact that the agent is receiving the money as a lump sum. - The figure arrived at is looked at in the context of all of the circumstances of the agency and the termination. It cannot be higher than the amount which is perceived to be fair in all of the circumstances. - Finally a comparison is made to the average annual commission of the agent (averaged over the last five years or the agency if shorter), which is the maximum that any Indemnity can be. In February 1998, in the case Moore -v- Piretta PTA Ltd. the High Court set out some clear reasoning behind the calculation of an indemnity payment. b. Compensation for damage (Regulations 17(6) and (7)) The Commission's Report refers to the French legal system for its description of the way in which Compensation is calculated. - Compensation looks forward from termination to loss suffered by the agent as a result of termination of the relationship but calculates that loss by looking backwards. - The right under the UK Regulations is extremely vague. Like Indemnity, it is intended to apply even where the principal has not broken the contract. - The main reason why the Courts have found it difficult to calculate the amount of Compensation is that, where there was no breach of contract, the Court had no traditional parameters by reference to which it can assess the loss suffered by the agent. Decisions of the French Courts have fixed the level of Commission at twice the average annual commission over the last three years of the agency, or the commission earned in the last two years of the agency, although it is within the courts' discretion to vary this amount. - Considerable assistance in calculating compensation has come from the Scottish Court of Session Case of Douglas King -v- T Tunnock Ltd March 1999 which followed French law in allowing the agent two years gross commission by way of compensation with no deduction for mitigation. However, as is discussed at F.5 below, the English courts have not always felt bound by this case and have developed various additional issues to be considered when calculating compensation. See in particular the Court of Appeal decision in Lonsdale v Howard and Hallam Limited [2006] EWCA Ci 63 which applies a significantly different set of factors to calculate compensation. However, at the time of preparation of this booklet that case is subject to an appeal to the House of Lords. - The right to Compensation can also include loss representing the 12

13 extent to which the agent has been unable to amortise costs and expenses incurred during the contract on the advice of the principal. This is drawn from the French concept of inability to reduce or depreciate expenses of a capital nature such as premises. The meaning as it appears in the UK Regulations is unclear. As a practical matter:- i. principals should make clear in their agency contracts that no costs and expenses can be treated as on their advice unless incurred pursuant to a separate signed written agreement; and ii. agents should keep a good record of any costs and expenses, capital or otherwise which have been incurred with the awareness of the principal with a view to supporting the agent's activities for the principal under the contract. c. The parties (in practice the initiative is with the principal) must decide between the right to an Indemnity and the right to Compensation for damage. It is now less difficult to assess the benefits of choosing Indemnity or Compensation as the right to Compensation has been clarified. It is recommended principals should try to limit their exposure by including an indemnity clause in any contract. Agents will prefer to avoid such a clause as compensation can provide a much higher award. However, it will be worth looking at each agency on its merits in case there are clear grounds for choosing one form of payment rather than the other. For example:- i. if the agent is being appointed to service an existing body of customers where he is unlikely to generate any increased business from those customers due to his own efforts, he would be unlikely to qualify for an Indemnity; and ii. iii. if the agent is being appointed on a trial basis to develop a new market, a Compensation payment might be smaller than an indemnity payment; and if an agent is likely to qualify for an Indemnity by virtue of creating new business and the agency is likely to continue for some years, because an Indemnity is capped at one year's commission whereas, at least under French law, Compensation is often two year's commission, the Indemnity will therefore be smaller than the amount of any Compensation payable in the same circumstances. Note that an agent in place at 1 January 1994 will have already automatically accrued a right to Compensation for damage under the new laws, in the absence of an election for the Indemnity. To change the rights to the Indemnity the parties will need to convert the agent to new terms containing an express choice for the Indemnity which can be limited to a maximum of 12 months commission. d. An Indemnity is conditional on the agent itself bringing new customers or significantly increasing volume of business with existing customers. A principal may therefore want to identify at the start of the contract who the existing customers are and have a record of the current volume of sales to those existing customers. 13

14 3. Please note the following with regard to when the right to a termination payment will arise: a. The right to a termination payment under Regulation 17 will apply in the following circumstances:- i. when a contract for a fixed term, e.g. for a fixed trial period, expires; ii. iii. iv. when either party terminates on ordinary notice; where the agent, if an individual, dies, or retires due to age, infirmity or illness; where the agent terminates because of reasons attributable to the principal; or v. where the principal terminates the contract where any breach of the agent is not so serious as to justify immediate termination. Principals are increasingly asking agents who are individuals to take out life, accident, and permanent health insurance (at the agent's cost but written in trust for the principal) in an amount judged to cover possible compensation (e.g. a year's commission). Policies are becoming available for this specific purpose. The Standard Terms do not address this. If you are a principal and this is an idea you would like to consider, or you are an agent whose principal has proposed this, you should take legal advice. To avoid the protections in the UK Regulations specific to individuals (retirement, death), principals could insist that agents are incorporated entities. b. There are only very limited cases where the right to Indemnity or Compensation will be excluded, including:- i. where the principal terminates because of serious breach justifying termination. In general, a contract may be terminated for very serious breaches and for breaches of "conditions" of the contract; Principals might seek to expand the potential for termination under the common law by naming various provisions as conditions of their contract. It is possible this approach may be found to be void under the Regulations. See Section H: DRAFTING SUGGESTIONS below. ii. where the agent himself terminates (except on the grounds mentioned above); Where the agent decides to terminate, it will therefore be in the interest of the principal to have it clear in writing from the agent that the agent is resigning, to avoid a claim for Indemnity or Compensation. 4. The UK Regulations also provide for minimum levels of notice, analogous to minimum notice provisions protecting employees. The statutory minimum periods are one month up to the end of the first year, two months up to the end of the second year and three months from the commencement of the third year and for subsequent years. Agreed longer notice periods are not affected. 5. There has now been a reasonable amount of case law concerning an agent s right to 14

15 Indemnity or Compensation under Regulation 17, and it is worth noting the following cases of interest:- (a) Douglas King -v- T Tunnock Limited, a Scottish Court of Session case in which an agent asked the court for compensation on termination of his contract. The court applied the French approach and awarded two years gross commission by way of compensation. The Court also decided mitigation was irrelevant to such awards as they are based on past, not future earnings. (b) Barrett MacKenzie Company Limited -v- Escarda UK Limited was heard in the English High Court and judgment given on 1 February In this case the Judge rejected the two year gross commission tariff adopted in Douglas King -v- T Tunnock Limited in Scotland. The Judge went on to say that compensation should be determined by factors such as the duration of the agency, its terms, the actual nature of the relationship between the parties and whether the client base was a recurring client base or simply one off transactions. This not only demonstrates that a regular client base can equal more compensation than an unstable one but it also introduced factors more normally associated with calculating indemnity to the compensation culture. (c) Cybermedia Incorporated -v- Roderick Manhattan Group Limited is a case where a distributor became an agent for two years before termination of its relationship with the principal. Importantly, the court confirmed that a limited company can claim compensation notwithstanding it was not a "self employed intermediary under Regulation 2(1)". The court awarded compensation of eighteen months when the agency had only lasted two years. This was based upon customers introduced by the agent. The court also decided the discrete issue of whether the agent had properly notified the principal of its claim within twelve months of termination pursuant to Regulation 17(9). The court held that the agent had even though there had only been a vague request for a "payment" of "loss of gross profit". Accordingly, the court will apply a wide definition to this notice requirement. (d) In Frape -v- Emreco International Limited the court had to interpret the nature of "termination". In this case the parties had a relationship from 1968 the terms of which were finally incorporated into a written agreement in That provided that the agency would end either when the agent was 65 or on 31 May It was agreed that the agency had ended through effluxion of time. The court decided that it was required to interpret termination in a purposive way to protect commercial agents and accordingly termination does occur when contracts expire through the effluxion of time. (e) Hardie Polymers Limited -v- Polymermand Limited, a case of the Scottish Court of Session, held in 2001 that despite the Sales Representative Agreement containing a clause headed "Compensation After Termination" the actual wording of that clause was sufficient to satisfy the court that a written election for an indemnity had in fact been made notwithstanding the titular reference to compensation. (f) Bell Electric Limited -v- Aweco Applied Systems GMBH UK was decided in the High Court of England & Wales on 8 May In this case the Claimant company did almost all of its business through its managing director and the Defendant was a large German manufacturing company which produced components for dishwashers, refrigerators and similar products. The Claimant acted as agent continuously from 1988 through a number of written agreements between the parties the latest of which was dated 10 August The 15

16 Agreement provided for a period of validity until 31 December 2002, automatic renewal unless either party gave six months notice of cancellation and upon cancellation by either party the Defendant was to pay the Claimant 12 months compensation to the value of the previous five years average total earnings. The agreement was complied with until the end of However, thereafter with no reason given to the Claimant the Defendant stopped paying the commission payments and merely paid a contractual fixed cost contribution. In July 2000 the Defendants proposed to change the procedure for making payments and the basis of payment. The Claimant assessed that such a change would have reduced its commission overall by some 46%. The Claimant objected to the proposed change. Discussions took place between the parties and in October 2000 the Claimant issued its Particulars of Claim for unpaid commission and damages for breach of the agreement stating that it was entitled to, and did accept, repudiation of the agreement by the issue of the claim form. However, thereafter the Claimant did continue to act in some way in accordance with the agreement. One question was whether it had reaffirmed the agreement, the court held that it had not. The key area arose as to whether expenses and mitigation would apply to any award. The court held that there was clear evidence that expenses are incurred in a front loading fashion when a commission contract has been secured and the purpose of the fixed price element in this case was to amortise the expense during the lifetime of the agency contract. It would be unjust for the court to treat expenses as accruing evenly throughout the duration of the agency contract. There will be some expenses which the Claimant would have incurred had the contract not been terminated and credit must be given for those. In this case the Claimant would have been able to take on additional work even if the contract with the Defendant had continued and accordingly credit did not need to be given for mitigation. Finally, the court had to rule on whether a corporate body could be a self employed intermediary to gain the benefit of the regulations. The court held that they would apply to a corporate body. The court went on to say that an agent may have a claim under both common law and the regulations. (g) Ingmar GB Limited -v- Eaton Leonard Inc is a case that has significant impact on jurisdictional arguments dealt with in Section G: TERRITORIAL EFFECT below. However, the European Court having ordered that the UK Regulations applied referred the case back to the High Court in England for a decision on quantum. That judgment was given on 31 July 2001 and again the court departed from the imposition of a two year tariff as held in Douglas King - v- T Tunnock Limited. The court held that a two year tariff would be excessive and result in a considerable degree of windfall. The court stated that a non exhaustive list of factors should be taken into account and specified the length of time of the agency, the inevitable lack of profitability in the first years, the high degree of engineering and sales expertise required in that particularly case, the nurturing and developing of the customer base, the degree of profitability of the agency at the time of its rupture and many other factors as being relevant to that particular case. Having considered all of those facts the court made its award by aggregating the claimant's remuneration and pension with a management charge ultimately resulting in commission reflecting around twenty one months commission. However, the method of calculation applied is very different to the French approach. 16

17 (h) Tigana Limited -v- Decoro Limited is a judgment of the High Court of England and Wales given on 3 February It involved an agent and principal involved in leather furniture products. The agent was extremely well known in the market place whereas the Defendant had no foothold there at all. Services were provided by the agent from around October 1998 until termination on 1 January The court was persuaded by, in particular, Frape -v- Emreco International Limited that Regulation 17 compensation will apply on the expiry of the Sales Agreement by effluxion of time. When assessing the compensation the court confirmed that a separate damages claim cannot succeed alongside Regulation 17 as "damages" that would otherwise be payable are to be subsumed into, and taken into account as part of, the assessment of Regulation 17 compensation. The court went on to say that the common law principles of mitigation and avoidable loss had no part to play in the assessment and that the focus is on the position at the time of termination. Accordingly, in assessing compensation the court must look backward at the circumstances of the agency and not forward to what has happened, or will happen, after termination. The court again went on to give a non-exhaustive list of facts (paragraph 89 of the Judgment) to be taken into account in assessing the level of compensation which included the period of the agency as provided in the contract, the actual period of the agency, the terms and conditions attached to the agency contained in any agreement, the nature and history of the agency and of the particular market, the nature of the client base and the kind of contract anticipated, (for example one-off or repeat) whether the agent was exclusive or non-exclusive, the extent to which the principal retains after termination benefit from the activity of the agent, whether the agent is free after termination to have dealings with customers with whom he dealt with during the agency, the manner in which the agency contract has ended and the extent to which the principal and agent respectfully have financially contributed to the goodwill generated during the agency period. In outlining these principles the court said that it was not bound to assess French law nor was it bound to impose a two year tariff. Whilst an agents right of indemnity to compensation is spelt out in the Directive the remedy itself is to a significant degree left to each member state. The Judge felt that he did not feel bound to consider French law and that the court has to make its assessment of the compensation to be paid under Regulation 17 having regard to all the relevant circumstances of each individual case. In this particular case there were points of considerable weight to be taken into account by the court in that the agency had not been exclusive and the agent had been free to carry out (and had carried out) its valuable agency contracts with other furniture manufacturers. The Claimant had not been subject to a restraint of trade provision and had been free after termination to solicit business from the customers he introduced to Decoro. It was also noted that any award would involve accelerated payment. In considering gross and net remuneration it was found that there was no reason why gross remuneration should not be applied but went on to say that the court is not required to take gross remuneration as the starting point nor to treat it as the norm. Accordingly he assessed the Claimant's compensation based on net remuneration during the period of the agency. He considered that expenses should be deducted and assessed, on the individual circumstances, that these should be 20% of the principal compensation sum. He awarded compensation amounting to around fifteen to eighteen months under Regulation 17 and around nine months in relation to 17

18 Regulation 8. These are significant sums bearing in mind the relatively short length of time of the agency. (i) Lonsdale v- Howard and Hallam Limited was a judgment of the Court of Appeal given on 8 February The claimant had been a Commercial Agent for the defendant shoe manufacturing company from 1990 until The claimant s agency was terminated after a period of notice as a result of the serious downturn in the defendant s business due to rising costs and falling sales in the footwear market. The parties accepted that the Commercial Agents (Council Directive) Regulations 1993 applied and that the agent was entitled to compensation. However, agreement could not be reached on the amount to which the agent was entitled. The defendant paid the agent 7,500 and, seeking a higher amount, the agent issued proceedings. The claimant s case was that the agency had continued over a reasonable period of time, the agent had performed his functions competently and as a general rule it should receive an amount equal to two years gross commission. The Judge concluded that the Regulations themselves gave no explicit guidance as to the amount of compensation which an agent was entitled to receive. The parties had agreed at the trial that the damage suffered in respect of which the claimant was entitled to received compensation was the loss of goodwill attaching to his agency. The Judge in first instance relied on the fact that the defendant s business had been in serious decline and assessed compensation at 5,000. That decision was appealed on the basis that the Judge had been in error in failing to apply the two years commission guideline and failing to give sufficient weight to both the duration of the agency and the fact that the claimant had performed satisfactorily. The Court of Appeal dismissed the appeal. The Court stated that the Regulations gave a right to receive compensation for any damage actually suffered not provision for an agent to receive payment of an amount reasonable having regard to all the circumstances. They considered that whilst the purpose of the Regulations was to provide compensation for the loss of goodwill, for which a claim would not otherwise arise, that was not the only damage in respect of which an agent might be entitled to receive compensation. For example, the agent would be entitled to recover whatever loss he could show he had suffered, which might include in all or in part the unamortized expenses. They concluded that there was no basis for construing the Regulations in a way that would entitle the Court to award an amount of compensation unrelated to the actual damage suffered. They considered the two years compensation rule, as applied in Scotland in Douglas King v T Tunnock Limited, could not be supported even as a broad guideline. The Court of Appeal considered in detail all of the relevant case law including the cases highlighted in this booklet. It concluded that the correct interpretation in Regulation 17 (6) is that the compensation should reflect the value of the business at the date of termination. It follows from that analysis that the duration of the agency and the competency of the agent are not necessarily significant factors. However, the deterioration in the principals business ( which would effect the value of the agency on the open market) must be taken into account. The Court of Appeal specifically distinguished Tigana v Decoro on the basis that the factors identified at paragraph 89 of the Tigana Judgment would play an important part in the assessment of compensation if the Courts task were to award a sum which is fair and equitable having regards to all the circumstances 18

19 of the case. However, it was the Court of Appeal s analysis that the task was to assess the value of the business to the agent at the date of termination. To this end the Court believed there must be a degree of looking forward to assess the compensation. However, the Court also stated that this would not preclude the agent from bringing additional heads of claim for other damage (including unamortized expenses), which he could prove he had suffered. This case is subject to a further appeal to the House of Lords and so it is clear the assessment of compensation remains a grey area. (j) (k) Graham Page -v- Combined Shipping and Trading Company Limited was heard in the Court of Appeal and looked beyond English common law to the spirit of the European Directive and determined that the agent had a potential claim for compensation. Paul Jeremy Duffen -v- FRA.BO SpA was heard in the Court of Appeal (April 1998). This case is of great interest as it addressed the issue of the relationship between liquidated damages clauses and compensation claims under the UK Regulations. In a liquidated damages clause the parties to a contract agree in advance an amount of money which will be paid in the event of breach of contract or termination, rather than leaving the calculation of loss or damage to be made later on at the time of breach or termination. Regulation 19 of the UK Regulations prevents the parties from derogating the agent s right to compensation or indemnity. It was suggested in this case that an agent does not necessarily suffer from agreeing to fix an amount of claim in advance and that therefore such arrangements will not automatically be set aside by the courts. The impact of Regulation 19 would appear not to invalidate any advance agreed calculation for compensation, even if the agreed figure turned out to be less than the agent would otherwise be entitled to. The effect of Regulation 19 would seem to top up any agreed figure to what the agent is entitled by virtue of compensation under the UK Regulations. The case also examined the relationship between compensation under the UK Regulations and common law damages. From the UK Regulations it is unclear whether compensation for loss under Regulation 17(6) is simply added to common law damages for breach of contract if the termination was in fact in breach of contract. The Court of Appeal confirmed that it should not be the intention of the UK Regulations to allow an additional recovery but that Regulation 17 would top up any common law claim for damages for breach of contract. It should be noted that under common law no damages would be payable where a contract was terminated on full contractual notice or at the end of a fixed term contract. Regulation 17 would augment any (or no) common law entitlement with an award under the UK Regulations. It is worth noting that, unless otherwise agreed by the parties, the end of the period of notice must coincide with the end of a calendar month. 6. The following practical steps may be available for principals to avoid or reduce their costs:- (a) consider carefully whether to choose the Indemnity or Compensation rights depending on the circumstances; 19

20 (b) if you elect for the Indemnity:- (i) (ii) establish at the start of the contract who the principal's existing customers are and what the existing levels of business with them are (and include them in the contract) and during the contract keep a record of where new and increased business has not been generated - this is with a view to clarifying the position at the end of the contract when the agent will seek to base his claim on the amount he has increased business for the principal; (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) where the agent is an individual, consider requiring the agent to take out life, accident or permanent health assurance for your benefit (see above) or specifying an age limit at which the agent must retire. Establishing a mutually agreed time limit for the relationship should help reduce the potential ongoing costs or loss of commission which an agent could claim under the Indemnity or Compensation heads; plan terminations carefully in case there are arguments available and steps which could be taken to avoid or reduce a claim; control, by agreement and in practice, costs and expenses which the agent might incur and claim under the Compensation head (see above); consider a variety of drafting devices available which may control or provide some means of arguing for reduced exposure on termination (see Section H: DRAFTING SUGGESTIONS below) for example specifying significant provisions as conditions of the contract, the breach of which may enable termination without exposure under Regulation 17; do not forget that there might be an argument available that the agent's activities are "secondary" and potentially outside the UK Regulations; be extremely careful when appointing trial agents; they may well be protected under the UK Regulations so that you could be faced with dealing with a claim under Regulation 17 if you terminate an undesirable trial agent even after a short-term appointment. There may, of course, be very limited grounds for a payment. If, however, the trial agent has committed resources to his role with the knowledge of the principal and/or has had success in picking up (perhaps only the easy) customers in the market place for which the agent feels he should be rewarded, he may well have a claim; in view of the requirement for notice to end at the end of a calendar month (see F.4 above) either: provide in the agency contract that notice need not end at the end of a calendar month or; in the absence of this, make sure notice does comply with this requirement to avoid a notice being found to be invalid; do not give the agent a right to remedy a breach - this may assist exercise of the right to terminate the contract immediately where such a right might arise at common law (see Para F.2 above); include binding minimum sales commitments if possible, and provide that compliance is a condition of the contract (see (e) and (g) above); ensure that the agent signs a waiver of rights and claims after termination. Note that such a waiver signed on settlement of a dispute, where the agent is to 20