UK: New Protection For Commercial Agents The Commercial Agents (Council Directive) Regulations 1993

The Regulations implement the European Community Directive on self-employed commercial agents. They introduce very significant changes to the duties of principals, and new rules concerning commission, minimum termination notices, compensation and restraint of trade.

The Regulations apply to a commercial agent (not a distributor) who is self-employed, having continuing authority to negotiate the sale or purchase of goods on behalf of the principal, or to negotiate and conclude such transactions on behalf of, and in the name of his principal. So, the traditional sales agent is covered, and the more limited "marketing agent" (i.e. merely an introducer of customers) may also be covered.

The Regulations specifically exclude:-

• one acting as an officer of a company or association as between himself and that company or association; a partner as between himself and his partners, and an insolvency practitioner as between himself and the appointor of his office; and
• one who has agreed that he should be unpaid.

As the Regulations apply to goods and not services, many agents will not usually have any protection, e.g. travel, insurance and estate agents.

Also, a person is not covered if his activities as a commercial agent are secondary. The Schedule to the Regulations contains many factors to be taken into account to establish this. First, a commercial agent will not be covered if the primary purpose of the arrangement is other than one where:-

• the principal’s business is the sale or purchase of goods of a particular kind; and
• the goods are such that transactions are normally individually negotiated and concluded on a commercial basis and a transaction on one occasion is likely to lead to more transactions in the goods with the same customer or among customers of the same group or geographical area; and
• it is, thus, in the commercial interests of the principal to appoint a representative to devote effort, skill and expenditure to develop the market.

The Schedule lists those factors that indicate that the Regulations apply to a person and those that indicate to the contrary. Examples of positive indications include:-

• the principal is the manufacturer, importer or distributor;
• the goods are, in the market, identified with the principal;
• the agent devotes substantially the whole of his time for the principal or non-competing principals;
• the goods are not normally available in the market except through the agent.

Examples of the negative indications include:-

• agents are appointed without reference to other agents in the area or group;
• customers normally select the goods for themselves and simply place orders via the agent.

Moreover, mail order catalogue agents for consumer goods and consumer credit agents are usually taken to be outside the protection of the Regulations.

Thus, it will not always be at all clear whether a person is protected.

The Regulations came into force on 1 January 1994 in relation to new and existing appointments. Any provisions in existing agreements which are prohibited by the Regulations become void.

They will apply regardless of the length of the appointment.

The Regulations only apply to the activities of commercial agents in Great Britain but the parties can choose to have their agreements governed by the law of another member state. Other EC member states will have their own regulations.

These duties are similar to the existing common law duties, e.g. an agent must communicate to his principal all necessary information and he must comply with his principal’s reasonable instructions.

These are quite new. The principal, like the agent, must act dutifully and in good faith. He must give the agent necessary information and documentation relating to the goods and the performance of the agency contract, e.g. sales literature and technical specifications. He must tell the agent within a reasonable period of his acceptance, refusal or non-performance of any transaction, and must even notify the agent once he anticipates a lower than anticipated level of transactions.

Almost always, the parties will have agreed this, but if not, the Regulations provide that the agent shall receive the customary amount paid to other agents in similar circumstances, and if there is no ready measure, then he will be entitled to reasonable remuneration.

If the agent is to receive commission (as opposed to some other means of remuneration) then the Regulations identify the transactions in respect of which the agent is entitled to commission. Thus, commission will be due on any transaction which is concluded during the term of the agency contract:

• as a result of the agent’s action;
• with a third person whom he has previously acquired as a customer for transactions of the same kind; or
• with a customer from any specific geographical area or group to which he has been given an exclusive right under the appointment.

The agent will also be entitled to commission on transactions concluded after termination of the agency if either:-

• mainly attributable to his efforts during the agency agreement and entered into within a reasonable period after its termination; or
• the customer’s order reached the principal or the agent before the agency agreement came to an end, if the commission would have otherwise been due.

There are provisions dealing with the competing entitlements between successor and predecessor agents.

The Regulations detail when commission falls due, and an agreement will usually be consistent with this if it provides that the commission will only fall due when the principal has been paid by the customer.

Having established when the commission becomes due, the Regulations provide that it must actually be paid, regardless of any agreement to the contrary, at the latest on the last day of the calendar month following the quarter in which it became due.

The principal must supply the agent no later than the last day of the calendar month following each quarter with a statement of the commission due and his calculations. Moreover, the agent will be entitled to see all the principal’s information and records which he needs in order to check the amount of the commission due.

Either party may insist upon a signed document from the other party setting out the terms of the agreement. There are specific regulations about serving notices.

If the agency agreement was for a fixed period but the parties nevertheless continue to perform it, and subject to any contrary agreement they might make, the Regulations treat the contract as continuing for an indefinite period. In this case, or if it was originally for an indefinite period, then the following minimum notice is required by either party:-

• one month for the first year;
• two months for the second year started;
• three months for the third year started or thereafter.

If these periods are lengthened they must not be shorter for the principal than the agent.

Unless the parties agree otherwise, any such notice period must expire at the end of a calendar month.

Of course, immediate termination is still possible in the case of default or other exceptional circumstances.

Compensation or an indemnity will be payable where the agency agreement terminates, except where immediate termination is permitted as mentioned above, e.g. the agent’s fundamental breach.

The payment is also due where the agency is terminated by the agent’s death.

If the agent terminates, no indemnity or compensation is due, unless the termination:-

• is caused by circumstances attributable to the principal;
• is caused by the age, infirmity, or illness of the agent; or
• occurs where the agent, with the principal’s agreement, assigns the agency agreement to someone else.

It must be emphasised that the parties cannot during the agreement exclude these rights to compensation and indemnity.

The agent will be entitled to the compensation rather than the indemnity unless the contract otherwise provides.

The indemnity will be available only to the extent that:-

• the agent has brought new customers or significantly increased the business with existing customers;
• the principal continues to derive substantial benefits from this; and
• it is fair generally and in relation to the commission lost by the agent.

The compensation is for damage suffered by the agent as a result of the termination of the relationship. This would have to be proved, but the Regulations deem damage to have been suffered in circumstances which either:-

• deprive the agent of commission which proper performance of the contract would have earned him while providing substantial benefits to the principal; or
• have not enabled the agent to recover his costs.

There is no guidance as to the calculation of the amount of either the indemnity or the compensation, but the maximum indemnity is equal to the agent’s average annual remuneration (averaged over a maximum of 5 years).

The agent must make his claim within 1 year after termination.

The Regulations only allow a restraint of trade clause to apply after the termination of the agency agreement if it:-

• was concluded in writing;
• only relates to the geographical area, or group of customers or goods covered by the agency; and
• continues for not more than two years after termination.

Of course, such a restraint must also comply with all applicable national laws on restraint of trade.

The Regulations are very significant. Many of the provisions are mandatory. They bring into account new considerations for deciding whether to appoint an agent, a distributor or an employee sales or buying force. There are a number of grey areas in the Regulations.