UK: Commercial Agents - An Update

Last Updated: 20 December 2009
Article by Vanessa de Froberville

The recent Court of Appeal case of Sagal v Atelier Bunz GmbH held that an agent with the authority to contract (as opposed to simply an authority to negotiate) is only a commercial agent for the purposes of the Commercial Agents Regulations 1993 if they contract in the name of the principal. The case is important confirmation of the definition of a "commercial agent". The Court looked at the documentation agreed between the principal and the agent as well as the agent and the customer; the two limbs of the definition of a commercial agent under the Commercial Agents Regulations 1993 (the "Regulations") and the actual business practice between the parties to determine whether an agent falls within the scope of the Regulations.

The Facts

It is worth reviewing the facts to understand the reasoning behind the decision.

Mr Sagal was in the jewellery business. Atelier Bunz GmbH was a German company designing and manufacturing jewellery in 30 countries. The parties agreed under an oral agreement that Mr Sagal would sell jewellery for Bunz GmbH in the UK. Mr Sagal launched himself under the trade name "Bunz UK".

The Judge looked at Mr Sagal's business plan and the way the parties engaged in business and highlighted in the judgement that the following factors were relevant:

  1. Bunz UK took orders from UK customers sending out confirmation of purchase orders in its own name; it then placed purchase orders with Bunz GmbH.
  2. Bunz UK sent its own invoices to its customers requesting that payment be made to Bunz UK.
  3. Bunz UK's standard invoice referred to "Standard Conditions of Supply" regulating the contract between the customer and the "company" which the Judge said was Bunz UK.
  4. Mr Sagal did not hold Bunz GmbH stock nor did he sell the sample line. Mr Sagal only sold Bunz stock by placing an order with Bunz GmbH when he had a customer.
  5. Mr Sagal bought the jewellery from Bunz GmbH at a 20% discount to its wholesale prices. He set his prices by a calculation of Bunz GmbH's price list which meant that this gave him a 25% margin.
  6. Claims for non payment by UK customers were always pursued in the name of Bunz UK.
  7. Bunz GmbH dealt with returns and repairs but credit notes were issued by Bunz GmbH to Bunz UK and separately by Bunz UK to the UK customer.
  8. From time to time Bunz GmbH postponed payment until Mr Sagal had received payment from his own UK customer.
  9. Mr Sagal's purchases from Bunz GmbH and his sales to customers were itemised separately in his accounts for VAT purposes.
  10. Bunz GmbH provided a sample line to Mr Sagal (the UK Collection) and would insure this sample line.
  11. Bunz GmbH insured the UK Collection at all times while they owned it.
  12. Part of Mr Sagal's duty was to market Bunz GmbH in the UK and for that purpose Bunz GmbH authorised and funded the cost of marketing.

Following analysis of the documentation including both the agreement between Mr Sagal and his customers and the agreement between Mr Sagal and Bunz GmbH, the Judge at first instance held that it was clear that Mr Sagal had no authority to negotiate or conclude contracts on behalf of Bunz GmbH. Sagal appealed stating that he had no discretion over the prices charged to UK customers because this was calculated in accordance with Bunz's fixed prices and that this did not affect the commercial agency relationship. The Regulations Article 2(1) of the Commercial Agents Regulations 1993 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 and in the name of that principal."

In essence the Court had to decide whether Mr Sagal was a commercial agent within the definition of the Regulations. If so, he may have been entitled under the Regulations to an indemnity or compensation payment on termination of the agency relationship.

Decision

The Court of Appeal stated that invariably, by the very nature of their relationship, an agent would generally have the authority to negotiate (namely, to find out the terms on which a third party wishes to contract) on behalf of his principal. However, the second and more crucial element was whether the agent had authority to contract on behalf of the principal. The Court of Appeal reviewed the definition in the Regulations and stated that "the first limb of the definition envisages that the agent does not have authority to contract on his principal's behalf but only has authority to negotiate terms on behalf of his principal and then refer back to him to see whether he wants to make a contract on certain terms with a third party customer." It went on to state "... agents with the authority to contract (as opposed to authority to negotiate) are only commercial agents for the purposes of the Directive if they have authority to contract (and do contract) in the name of the principal as well as on his behalf. This is precisely the authority which Mr Sagal did not have, because the documents show that Mr Sagal did not contract in the name of Bunz GmbH but only in the name of Bunz UK which Mr Sagal recognised was a mere trade name for himself.

The Court of Appeal also considered the issue of the mark-up of prices and insurance and concluded that the absence of discretionary mark-up is not conclusive in favour of "commercial agency" if the contractual documents make it clear that the contract is in the name of the agent rather than in the name of the principal. The Court of Appeal referred to the case of Mercantile International Group Plc v Chuan Soon Huat Industrial Group Ltd [2002] which established that it is the documentation which is conclusive, unless it can be shown that the document is a sham. Lord Justice Longmore emphasised this point by stating that the workings of the agency in practice were all of "no consequence in comparison with the contractual documentation."

Therefore if the agent wishes to fall within the definition of a commercial agent under the Regulations, so as to benefit from the provisions of compensation or indemnity on termination of the agency, they should seek to make sure that the agency agreement and all ancillary documents including invoices make it clear that the agent is contracting on behalf of and in the name of the principal. It is also important that the agent does not, in practice, work in a way which conflicts with their agency agreement.

This decision also helps us to identify the factors which a court would take into consideration when assessing whether an agent is a commercial agent. All of the facts highlighted above were key in Lord Justice Longmore's assessment of the case and demonstrates that the Court appears to be commercial by concentrating on the form rather than substance of a trading relationship. It also emphasises that documentation and agreements are key in assessing commercial relationships.

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