A particular type of agent - a market maker. If they are successful then they are extremely key in a business's development. They create an ongoing asset of enhanced goodwill. EU law sees it as unfair that the principal should keep all the benefit for an asset whose value is ongoing. As civil law jurisdictions didn't agree on what rules were correct for commercial agents, the law was harmonised.
As this is a piece of EU law, interpreting EU law is necessary rather than using domestic law concepts: De Danske Bilimpotorer. Lord Templeman stressed that the UK courts are under a positive duty to take a purposive construction to the regulations and directives, and to make sure they follow the practices of the EUCJ: Lister v Forth Dry Dock. The purpose of the Directive (in light of which cases must be interpreted) was made clear by Morison J in Tamarind v Eastern Gas - the Directive is specifically aimed at protecting agents by giving them the benefit of the goodwill the principal will benefit from. The question is therefore, whether the agent develops the principal's interest market and expends their own time and resources.
Basic Definition
A commercial agent is defined in Part 1 s2(1) of the Commercial Agents Regulations (CAR):
'In these regulations -
"commercial agent" means 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...'
It is questionable whether English principles of agency law are supposed to have the same meaning under the regulations, specifically 'conclude the sale or purchase of goods on behalf of...[the] principal'. Lord Hoffmann in Lonsdale v Howard & Hallam justified different member states having different interpretations on the commercial agency Directive's rules on compensation. It is not self-evident that the Directive was intended to have a diverse meaning with member states.
Again, how the parties define the relationship can be pretty irrelevant: 'Evidence from parties or from witnesses of what they understand the words to mean and how they characterise a particular commercial relationship will rarely assist': Sagal v Atelier Bunz per HHJ Mackie.
The components of the definition shall now be considered in turn:
a) Self-Employed
This is necessary, as employees are already protected by employment law. To determine whether the agent is self-employed, you have to rule out that he does not come under an employee's definition, and that the effects/constituents of the agreement don't amount to a contract of service: Smith v Reliance Water. An employee provides his work/skill for his master, for consideration, agreeing that he will be subject to enough control to make that other the master, and the other provisions of the contract are consistent with it being a contract of service: per Mackenna J Ready Mixed Concrete v Minister of Pensions. NB a self-employed intermediary can mean a legal person (a company): Bell Electric v Aweco Appliance. In most cases, the agent's self-employment is self-evident: Marjandi v Bon Accord.
b) Continuing Authority
Having authority for a one-off contract doesn't make you a commercial agent. However, a single contract with authority for successive renewals and extensions of it applies. Continuing authority also exists where there is a string of individual contracts: Poseidon Chartering v Zeeschip.
c) 'Sale or Purchase of Goods'
Developing a market for services doesn't make you a commercial agent: Crane v Sky In-Home Service. The borderline can be murky however: for example computer hardware counts as good (The Sale of Goods Act 1972 applies) but software isn't: St Albans City v International Computers. The difference is that a sale requires a transfer of ownership - software only involves a licence to use it.
d) 'Negotiate on behalf of' or 'negotiate and conclude on behalf of and in the name of'
Agents who effect introductions ('canvassing agents') only fall within the commercial agents definition in reg 2(1) if a wide interpretation is given to 'negotiate'. But this issue is unresolved.
In Parks v Esso Petroleum Morritt LJ was prepared to give 'to negotiate' a wide construction. He stated that to determine whether the negotiations fulfill the commercial agent definition depends on i) whether the agent dealt with, managed or conducted the relevant transaction, and ii) what material process the negotiation involved. Subsequently however, Fulford J argued that Morritt LJ's statement was 'unduly wide': PJ Pipe v Audco India. This was reinforced by Tigana v Decoro where the agent cemented the relationship between the principal and his clientèle. It didn't matter that the agent didn't have authority to agree terms or price. Applying PJ Pipe what matters is protecting agents who generate goodwill. Fulford J said 'negotiate' meant 'to deal with, manage or conduct'.
e) 'On behalf of another person (the principal)' or 'on behalf of and in the name of that principal'
Undisclosed principal's can't have commercial agents because of this requirement as they appear to act on their own behalf: Sagal v Atelier Bunz. The same goes for a commission agent, who concludes the contract in their own name: Mavrona v Delta. And an agent who sells for a mark-up, as they are acting on their own behalf: Imballaggi Plastici v Pacflex. If the agent makes any contractual relationship with the third party then they act for their own benefit, falling outside of the second limb: re Nevill.
f) Sub-agents
If the agent delegates their tasks they don't receive the benefits of the regulations: Light v Ty Europe. Otherwise apportionment would be necessary and 'chaos and confusion' would arise.
g) Domestic Law Extensions
Member States cannot narrow the concept of a commercial agent, but they can be more generous to them. For example, in Dutch law, the distinction between goods and services doesn't arise.
Secondary Activities
A qualification to the definition of a commercial agent is that they don't receive the benefit of the regulations if their activities are considered 'secondary' (Directive art 2(2))
Since the UK previously had no concept of commercial activity, there was also no concept of a 'secondary activity'. This needed creating and defining, and it was so in Reg 2(3) and The Schedule to the CAR. The burden of showing this lies on the agent. This may not fit every situation, so in cases where 2 purposes of the agent's arrangement have equal value, this doesn't mean the agent's tasks are secondary: Crane v Sky-In-Home.
The Schedule;
1. The activities of a person as a commercial agent are to be considered secondary where it may reasonably be taken that the primary purpose of the arrangement with his principal is other than as set out in paragraph 2 below.
2. An arrangement falls within this paragraph if—
(a)the business of the principal is the sale, or as the case may be purchase, of goods of a particular kind; and
(b)the goods concerned are such that—
(i)transactions are normally individually negotiated and concluded on a commercial basis, and
(ii)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 among the same group of customers, and
that 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 the representative devoting effort, skill and expenditure from his own resources to that end.
3. The following are indications that an arrangement falls within paragraph 2 above, and the absence of any of them is an indication to the contrary—
(a)the principal is the manufacturer, importer or distributor of the goods;
(b)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;
(c)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);
(d)the goods are not normally available in the market in question other than by means of the agent;
(e)the arrangement is described as one of commercial agency.
4. The following are indications that an arrangement does not fall within paragraph 2 above—
(a)promotional material is supplied direct to potential customers;
(b)persons are granted agencies without reference to existing agents in a particular area or in relation to a particular group;
(c)customers normally select the goods for themselves and merely place their orders through the agent.
5. The activities of the following categories of persons are presumed, unless the contrary is established, not to fall within paragraph 2 above: Mail order catalogue agents for consumer goods. Consumer credit agents.
To not be secondary, the court must be convinced that the commercial interest of the principal is furthered in the ways outlined in paras 2(a) + (b). In Imballaggi Plastici v Pacflex Waller LJ saw force in the argument that if the agent's arrangement with their principal falls within para 2, only by using indications under paras 3 and 4 for the purpose of making that assessment, then it must be taken to not be secondary.
In Crane v Sky-In-Home Briggs J thought the question of what the agent's primary purpose is best determined by looking to the time the agent was appointed.
a) Applying the Schedule
Apply in order:
Reg 2(3): Directs to the Schedule to determine what activities are secondary.
Para 1: The focus of the Schedule, that is, determining the primary purpose of the agent and principal's relationship
Para 2: If the primary purpose then falls outside of para 2, then the commercial agent's activities are secondary and they cannot take advantage of the Regulations.
Para 3 + 4: Amplifies activities which may be secondary
Crane v Sky In-Home: Determine what activities are secondary by reference to the time of the contract's conclusion.
Edwards v International Connection: How the agency is performed has no direct relevance to the question of whether the primary purpose test is satisfied. Accordingly, whether transactions are generally negotiated on an individual basis aren't in point.
Crane: If the agent has two purposes of equal status, so that neither can be described as primary, para 1 does not apply (since there needs to be a primary purpose) and the agent's activities won't be secondary for the purposes of the Regulations.
Specific Exclusions
Agents which cannot be commercial agents:
- Company directors, partners and insolvency practitioners: reg 2(1).
- Gratuitous agents of those acting on commodity exchanges: reg 2(2)(a), (b).
- Certain Crown agents: reg 2(2)(c).
Fiduciary Obligations under the Commercial Agents Regulations
Mandatory mutual duties (reg 5(1)) to act 'dutifully and in good faith' from the agent (reg 3) and from the principal (reg 4). 'Dutifully and in good faith' is a concept of the civil law. We can analyse this duty by analogy with English employment law where duties of mutual trust and confidence are recognised. In Vick v Vogle-Gapes it was held that the duty in the CAR is at least as wide as the implied reciprocal obligations in an employment contract. They approved the formulation of this duty from Malik v Bank of Credit that a party 'shall not without reasonable and proper cause' act in a manner 'calculated and likely to destroy or seriously damage the relationship of trust and confidence between employer and employee'.
It is arguable that due to these mutual duties, 'good faith' could act as a qualification on the principal's powers. Although it has not been confirmed, it is arguable that a commercial agent could invoke reg 4 to prevent a principal acting arbitrarily in deciding whether to deal with a party brought forward by the agent: Page v Combined Shipping & Transport. The most this restriction could be is the principal must have a good reason not to contract. A lesser restriction would be that the principal must at least give genuine consideration to contracting with an introduced third party. However, reg 4 cannot be invoked where the contract between the principal and commercial agent addresses the issue of the principal's obligation to act reasonably (in some respect): Npower v South of Scotland Power.
The consequence of a breach by either party are damages to the innocent party under normal contract law rules - the breach is of a performance obligation, not a fiduciary one: reg 5(2).
Remuneration for Commercial Agents
The definition of commission is set out in reg 2(1):
'"[C]ommission" means any part of the remuneration of a commercial agent which varies with the number or value of business transactions.'
Hence, mark-up is not commission: Mercantile International Group v Chuan Soon Huat because 1) Mark up doesn't even count as 'remuneration': Imballaggi Plastici v Pacflex 2) The language of the regulation suggests commission connotes a much closer relationship between the remuneration and the number or value of business transactions than mark-up has 3) It is confirmed by regs 7 and 8: If there is agreement as to the remuneration, the principal can calculate commission by reference to the number or value of transactions. Reg 12 (mandatory) also states that a principal can supply a statement of the commission due. These regulations are inoperable in cases of mark-up in an amount not known to the principal.
Entitlement to and payment of commission
Entitlement during the agency contract
Set out in reg 7(1):
'A commercial agent shall be entitled to commission on commercial transactions concluded during the period covered by the agency contract -
(a) where the transaction has been concluded as a result of his action; or
(b) where the transaction is concluded with a third party whom he has previously acquired as a customer for transactions of the same kind.'
'As a result of' is clearly based on causation, but we don't know if it goes so far as the effective cause rule.
Another right of the commercial agent is for commission from groups of customers or parties in his area, reg 7(2):
'A commercial agent shall also be entitled to commission on a transaction concluded during the period covered by the agency contract where he has an exclusive right to [1] a specific geographical area or to [2] a specific group of customers and [in case 1 or 2] where the transaction has been entered into with a customer belonging to that group or area'.
This is an exclusive right: there is no need for a causal link between the activity of the agent and the customer in his area/group: Kontogeorgas v Kartonpak. But, commission is only possible where the principal acted, directly or indirectly, in its conclusion: Chevassus-March v Groupe Danone (following from references to the principal in regs 10 and 11).
Entitlement after the agency contract has terminated
Determined by regs 7, 8 and 9.
Reg 8:
'Subject to regulation 9 below, a commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated if -
(a) the transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contract terminated; or
(b) in accordance with the conditions mentioned in regulation 7 above, the order of the third party reached the principal or the commercial agent before the agency contract terminated'
As 8b) says, reg 7 must be satisfied during the agency.
To determine the length of a 'reasonable period' and how 'attributable' the contract must be to the commercial agent is determined by the facts of the case, and both must be satisfied - their relationship is 'conjunctive and cumulative': Tigana v Decoro per Davis J. It will depend on the nature of the agency. If the agency operates in a market where the value of goods are subject to fluctuation, or consistent changes (such as IT and clothing), then the reasonable time will vary. The same goes for life-long equipment, such as aircraft and automative machinery in Ingmar v Eaton Leonard where 21 months was 'within a reasonable period' due the product and customer base. The 'reasonable period' may also be determined by the contracting parties: Vick v Vogle-Gapes.
When there are 2 commercial agents, where one replaces the other, both may be able to claim for commission: the first under reg 8, and the second under reg 7. This issue is dealt with by reg 9, which says that the starting point is that reg 8 takes priority over reg 7. Reg 8 is more meritorious - by definition the work done is still mainly attributable to the first agent. However, reg 9 concedes some circumstances where it may be unfair to give all the commission to the first agent: 'unless it is equitable under the circumstances for the commission to be shared', this gives a judicial discretion to apportion the commission. But there needs to be significant input by the second agent, even though most of the work is still attributable to the first.
Loss to the right of commission
Determined by reg 11(1):
'The right to commission can be extinguished only if and to the extent that -
(a) It is established that the contract between the third party and the principal will not be executed; and
(b) That fact is due to a reason for which the principal is not to blame.'
'Established' = a fact rather than a supposition. 'Blame' does not connote fault in the English sense - it merely means that non-performance was caused by the principal. It's clear that if the transaction won't occur due to the third party or frustrating event won't generate commission for the agent.
Financial Consequences of Termination of Authority
Commercial Agent's Entitlement to Compensation or Indemnity
For entitlements at common law, they must be explicit in the contract. But in commercial agency, the relationship is at arm's length. If the agency terminates then they are entitled to be bought of their hypothetical shares - meaning significant reparation is given. Although the regulations don't use this language, this is their effect.
reg 17(1)
'This regulation has effect for the purpose of ensuring that the commercial agent is, after termination of the agency contract indemnified in accordance with paragraphs (3) to (5) below or compensated for damage in accordance with paragraphs (6) and (7) below.'
Compensation is the French approach, and in indemnity if the German approach: a single 'European' method couldn't be agreed upon, so both were adopted.
Unless the contract provides for indemnity, compensation is paid: reg 17(2). Reward is always payable to the commercial agent with 2 exceptions:
1) Reg 18 applies:
18. The compensation referred to in regulation 17 above shall not be payable to the commercial agent where—
(a)the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to regulation 16 above; or
(b)the commercial agent has himself terminated the agency contract, unless such termination is justified—
(i)by circumstances attributable to the principal, or
(ii)on grounds of the age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities; or
(c)the commercial agent, with the agreement of his principal, assigns his rights and duties under the agency contract to another person.
2) The agent fails to notify the principal within 1 year after the agency's termination that they intend to pursue their entitlement (reg 17(9)). In the absence of a formal termination notice stipulating a clear termination date, the question is when on the facts the agent ceased to have authority not just to negotiate or negotiate and conclude on behalf of the principal but also to liaise with customers on behalf of the principal in connection with any orders: Claramoda v Zoomphase.
Regulations 17 and 18 are mandatory (reg 19). They are even mandatory if the principal is from a non-member state and there is a choice of law clause favouring their non-member jurisdiction: Ingmar GB v Eaton Leonard.
Termination of the Agency Contract
The trigger for compensation or indemnity is any termination - the precise trigger is 'termination of the agency contract', which means to agency relationship: Moore v Piretta. Reg 17 isn't triggered by each expiry in a string of contracts as the relationship is ongoing.
The purpose of the remuneration is to compensate the agent in light of the value of their work. Thus, payment is still due in the event of termination caused by the agent's death: reg 17(8). Other instances constituting termination include:
i) Expiry of the agency in accordance with the contract's terms: Tigana v Decoro
ii) The closure by the principal of their (healthy) business, even if there is no formal termination of the agency: King v Tunnock.
Indemnity
Available only if the contract says so. Regs 17(3) and (4) set out the 3 stage process of quantifying the amount:
i) Reg 17(3)(a): What has the principal gained from the agency?
ii) Reg 17(3)(b): What is the agent losing due to termination? With commercial agency, there is no requirement for the agent to mitigate their loss. The regulations are designed to reward the agent's success in developing goodwill towards the principal's business. Indemnity affords the agent a hypothetical share in the business corresponding to the contractually agreed percentage commission, unless that is 'grossly disproportionate either way to the efforts of the agent so as to produce an inequitable result': Moore v Piretta per John Mitting QC.
iii) Reg 17(4): sets out a ceiling figure on what the commercial agent may receive: an average of their annual remuneration calculated over 5 years (or less if the contract didn't last that long). There is no such cap on compensation.
The German method of calculating indemnity was ruled unlawful where the principal enjoyed substantial benefits in excess of the value of the agent's lost commission: Semen v Deutsche Tamoil.
The award of an indemnity doesn't prevent the agent suing under normal contract law principles for any additional loss suffered: Reg 17(5).
Compensation
Defined in reg 17(6) as compensation 'for damage [the commercial agent] suffers as a result of termination of his relations with his principal'. Guidance in applying this is found in reg 17(7) which provides 2 examples of what sort of termination could give rise to these damages:
'...circumstances which -
(a) deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; or
(b) have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.'
Essentially compensating the time and effort expended to develop goodwill. Compensation serves both to prevent the unjust enrichment of the principal and to compensate the agent for the loss of the contract's remuneration.
'Proper performance' - see the previous discussion of Reg 4(1)
'Substantial benefits' - there is no pre-condition to compensation that the principal has already benefited from the agent's activities - this is relevant, but not essential. Substantial benefits 'may have a prospective or retrospective focus (or both), depending on the circumstances': PJ Pipe v Audco India per Fulford J.
The difficulty in calculating compensation with the French approach is that a 3 year average of commission is calculated, and then 2 years worth of commission is given. This doesn't require proof of damage, so the UK courts had to consider how effective this would be applied to the regulations, HL:
Lonsdale v Howard & Hallam - Lord Hoffmann made several points:
Under reg 17(6) compensation is given for the value of what the agent loss by the contract's termination. The value is determined by the goodwill he generated, and the loss is being deprived from exploiting that goodwill. Thus, the sum is determined by future income from the agency, and we must assume the possibility of sale - so the market's fluctuations would affect this hypothetical price. In this case the agent wouldn't have lost anything by termination of the agency contract, so he was denied compensation.
Failure of Entitlement to Compensation or Indemnity - reg 18
No indemnity or compensation is payable where
18 (a) the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to regulation 16 above; or
(b) the commercial agent has himself terminated the agency contract, unless such termination is justified -
(i) by circumstances attributable to the principal, or
(ii) on ground of age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities; or
(c) the commercial agent with the agreement of his principal, assigns his rights and duties under the agency contract to another person.'
under 18(a) permitting a fixed term agency to expire and refusing to renew doesn't amount to termination, and definitely doesn't amount to termination by default: Cooper v Pure Fishing.
'By circumstances attributable to the principal': refers back to reg 16. Bell Electric v Aweco Appliance affirmation by the agent in response to a repudiatory breach by the principal forfeits their right to indemnity or compensation under the Regulsations.
'Age' is an independent factor which may render it unreasonable to oppose cessation of activity: Abbott v Condici. There is no need to prove age related physical or mental wear. It's usually difficult to oppose the UK retirement age of 65 as a standard.
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