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COMMERCIAL AGENTS GUIDE

CONTENTS

What is a commercial agent?

Duties of and to a commercial agent

Remuneration of commercial agents

Duration and termination of the agency contract

Compensation for agent on termination of the agency

Where compensation does not apply

Restraint of trade clauses

Further information

Comment

Commercial agents can be valuable to any business.  By working for a number of clients, or because of his contacts, an commercial agent can extend the marketing reach of the business and bring in customers which it otherwise could not obtain.  However, commercial agents enjoy substantial legal protection which is not unlike that given to employees.  Both parties need to be aware of the position. 

In 1993, the Commercial Agents (Council Directive) Regulations 1993 regulations were introduced pursuant to EU directive to bring the UK into line with other member states, notably France and Germany.

As so often happens with UK legislation imported from the EU, the regulations are not as clear as they should be. Whatever may be said about the shortcomings of English Law it is often better drafted than European law. Unfortunately the English tradition of clarity has not been carried into these regulations which in the writer's view leave an enormous amount to be desired.

What is a commercial agent?

The regulations say that a commercial agent is 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.

However, a person who has power to enter into commitments on behalf of a company in his capacity as an officer of a company is not a commercial agent. Neither is a partner acting as a partner in his firm.

Duties of and to a commercial agent

A principal owes duties to a commercial agent:-

• To provide him with the necessary documentation regarding the goods concerned
• To obtain for the agent the information which the agent needs to perform the agency contract
• To notify the agent if he anticipates that the volume of commercial transactions will be lower than the agent could normally have expected.

An agent owes duties to the principal:-

• To make proper efforts to negotiate and conclude transactions.
• To communicate to the principal all the necessary information available to him.
• To comply with the principal's reasonable instructions.

The parties cannot contract out of these duties.

Remuneration of commercial agents

Rules make provisions which include the following:-

• If there is no agreement as to remuneration (which as a matter of good practice there should be) the agent is entitled to remuneration customarily allowed to agents for the type of goods involved in the area where the agent carries on his activities. If there is no such customary practice, the agent is entitled to reasonable remuneration.
• Where remuneration is wholly or partly commission based, there are general rules dealing with entitlement to commission payments, commission on transactions concluded after the end of the agency contract, apportionment of commission between old and new agents, and when commission becomes due.
• The principal must provide statements of commission quarterly and the agent must be provided with all available information which hew needs to check the amount of commission due to him. He is entitled to extracts from accounting records and this rule probably allows a right to inspect the actual books so far as relevant.

Duration and termination of the agency contract

Each of the agent and the principal is entitled to receive from the other on request a signed statement setting out the terms of the agency.

Where an agency contract is for a fixed term but continues after the end of that term, it is converted into a contract for an indefinite period.

Where there is a contract for an indefinite period, either party may terminate it by notice. The periods of notice are:-

• 1 month for the first year
• 2 months during the second year
• 3 months during the third and later years.

Shorter periods may not be agreed, but longer ones can be. However, if longer periods are agreed, the notice to be given by the principal may not be shorter than the notice to be given by the agent.

Unless otherwise agreed, notice must be given to coincide with the end of a calendar month.

These rules do not prevent immediate termination for breach or exceptional circumstances where the general law permits.

Compensation for agent on termination of the agency

The rules provide that on termination the agent is entitled either to be indemnified OR to compensation for damage.

Except where the agency agreement otherwise provides, the commercial agent is entitled to be compensated rather than indemnified.

Where the agent is entitled to compensation the rule is that the agent is entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal. The rules do not go on to say what is meant by damage and how compensation is to be calculated. However, damage is deemed to occur particularly when termination takes place in either of both of the following circumstances:-

• Circumstances where the agent is deprived "of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to activities of the commercial agent".
• Circumstances where the agent has not been "enabled to amortize costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal".

The meaning of these extracts from the regulations is obscure. The provisions appear to be saying that compensation is to be related to:-

• Continuing benefits (i.e. sales) to the principal which are the result of the agent's work; and
• Allowing the agent to recover compensation where in the early years of a contract he has built up goodwill and sales at considerable expense not reflected in commission earned for those years.

Where the agent is entitled to be indemnified, the entitlement to an indemnity applies if the agent has brought in new customers or significantly increased volume of business with existing customers and the principal continues to derive substantial benefits from business with such customers. The amount of the indemnity is whatever is equitable having regard to all the circumstances and, in particular, the commission lost by the agent on the business transacted with those customers. However the indemnity is not to exceed one years average annual remuneration calculated over the last 5 years of the contract (or over the whole contract if of less than 5 years' duration).

Surprisingly, the agent is entitled to compensation if the contract ends because of his death.

The agent loses his right to claim if he fails to notify the principal within a year of the end of the contract that he intends to make a claim.

Where compensation does not apply

The rights to compensation and/or indemnity is lost where:-

• The principal terminates the agreement where he could have justified immediate termination because of the agent's default.
• The agent terminates, EXCEPT where termination is justified because of the principal's default or where the agent terminated because owing to age, infirmity or illness he cannot reasonably be expected to carry on.
• The agent assigns the agreement to another person with the agreement of the principal.

The parties cannot contract out of the rules for compensation and indemnity to the detriment of the agent.

Restraint of trade clauses

A restraint of trade clause is an agreement restricting the business activities of a commercial agent after the agency contract comes to an end.

A restraint of trade clause is valid only if and to the extent that:-

• It is in writing; and
• It relates to the geographical area or to the group of customers or to the type of goods entrusted to the agent under the contract.

There is a maximum restriction period of two years.

Any such clause must also satisfy the usual common law tests of validity and must not be in unreasonable restraint of trade.

Further information

You can get the full text of the regulations at www.opsi.gov.uk/legislation/about_legislation.htm  and navigate to the Commercial Agents (Council Directive) Regulations 1993 (Statutory Instrument No 1993/3053). These were amended by the Commercial Agents (Council Directive) (Amendment) Regulations 1993(Statutory Instrument 1993/3173).  Remember that the regulations as they appear on that site are as originally enacted.  changes made after enactment are not incorporated into the text.  The DTI website (www.dti.gov.uk )used to provide some guidance but it was not much help and it seems to have been removed.

Comment

Whether commercial agents should be protected in the way set out in these regulations is not a matter open for debate in the UK. The UK was bound by EU law to enact provisions complying with the directive. What may be criticised is the lack of precision in the drafting of the regulations, particularly with regard to the provisions for compensation. Terms such as "indemnity" are used in ways which differ from their normal English law usage. No real guidance is given as to how much agents should receive. This makes disputes difficult to resolve. It is hard to form a view on whether the fault lies with the UK government or the EU. The problem for the UK is that it has no tradition of compensating agents in this way, whereas our European partners do. We have to look to foreign jurisdictions for guidance on how to treat individual cases. However there are now a few reported cases in the UK courts showing the approach which our legal system will adopt in this field.