Commercial Agency Contracts in United Kingdom

Common Law and EU Law

In England and Wales, the legal framework for all types of agency arrangements, including commercial agency relationships, is found at common law. At common law, parties have a broad freedom to decide the terms and conditions that define their relationship and obligations.

There was little regulation of commercial agency relationships before the introduction of the EU Council Directive 86/653/EEC on the Co-ordination of the Laws of the Member States Relating to Self-Employed Commercial Agents (“the Directive”), implemented through the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”). A main purpose of the Directive was to strengthen the position of the commercial agent in relation to the principal. The Regulations follow the wording of the Directive closely.

Within the wide common law framework, there are commercial agency agreements that are subject to the Regulations and commercial agency agreements that are not. Determining whether an agreement is within or outside the scope of the Regulations is important to identify what regulatory provisions might apply.

POST-BREXIT UPDATE: EU-derived legislation made under s.2(2) of the European Communities Act 1972 will continue to have effect in domestic law now that the UK has left the EU, pursuant to s.2 of the European Union (Withdrawal) Act 2018 (as amended by s.25 of the European Union (Withdrawal Agreement) Act 2020). As such, the Regulations continue to apply after the transition period expired on 31 December 2020, unless and until the UK Parliament decides to change or repeal this legislation.

Note, however, that the UK is no longer bound by CJEU decisions handed down after the expiry of the transition period, although the domestic courts may have regard to these decisions. Pre-expiry CJEU decisions continue to have force, but may be departed from by the higher courts in Great Britain.

The application of the Regulations

The Regulations give “commercial agents”, which are defined here more narrowly than at common law, stronger rights than those implied at common law.

The scope of the application of the Regulations is set out in Regulation 1(2). The Regulations apply to the relationship between commercial agents and their principals and primarily have territorial application: they govern the activities of commercial agents in England and Wales.

The primary rights afforded to agents under the Regulations are:

• rights to a minimum notice period for termination, and
• a right to compensation or indemnity on termination.

Parties are unable to contract out of the majority of the terms of the Regulations, and many can only be excluded if this operates in the agent’s favour. Some flexibility is permitted, in that Regulation 1(3) allows the parties to expressly agree that the agency agreement is to be governed by the laws of another Member State. The agent however, still benefits from the protection of the Directive by way of the implementing legislation in that Member State’s jurisdiction. Where the parties agree to the application of the law of a non-EU country to their agreement, the Regulations are intended to override that choice in respect of activities carried out by the agent within Great Britain.

The Regulations do not apply where an agent is appointed for a territory outside the EEA, even where English law (or that of another EEA Member State) governs the agency agreement. Common law will govern these relationships.

Definition of Commercial Agent

English common law broadly defines “agent” to be any person acting on behalf of another person, namely the principal.

Regulation 2(1) defines a “commercial agent” more narrowly as an intermediary who satisfies the following elements:

• the need to be self-employed;
• the need to have continuing authority to negotiate;
• the authority to negotiate must be in relation to the sale or purchase of goods;
• the agent must act on behalf of another person.

The Regulations therefore apply to both limited agents (with authority to negotiate) and full common law agents (with authority to negotiate and conclude contracts for sale or purchase of goods). The definition does not include the sale or purchase of services and the case law suggests that undisclosed principals may not come under the Regulations.

Exclusions under the Regulations

While they may fall within the definition of commercial agent, the Regulations do not apply to commercial agents wo are:

• unpaid;
• trading on commodities markets;
• Crown Agents for Overseas Governments and Administrations under the Crown Agents Act 1979.

Further, the following are also outside the scope of the Regulations:

• the employer-employee relationship;
• intermediaries negotiating the supply of services;
• agents dealing in goods that are only secondary to the supply of services;
• agents with authority extending only to one (or a specified number of) transaction(s);
• commercial arrangements, however described, which amount in substance to a distributorship.

Distributors

A distributor is in essence a reseller. Under a distribution agreement the supplier/manufacturer sells its products to the distributor who then resells the products to its customers in its own name. The distributor in this situation contracts with the supplier and then with the customer. The distributor is not an agent of the supplier/manufacturer in the common law sense as it buys and sells on its own behalf. It is possible, however, to have a distribution agreement combined with an agency agreement.

Distributors do not fall within the definition of “commercial” agent and are accordingly outside the scope of the Regulations.

Introduction agents

Introduction agents are a type of limited representative responsible for finding buyers for the principal’s goods and services. Introductory agents may also be referred to as marketing or canvassing agents.

The Introductory agent does not have authority to enter into contracts on behalf of the principal. Although not a full common law agent, many of the common law rights and duties applicable to full common law agency agreements will apply. Provided the requirements of Regulation 2(1) are met, an introduction agent would also benefit from the protection of the Regulations.

Estate agents

Estate agents act for principals on the sale and purchase of land. They do not fall within the scope of the Regulations as they do not deal in goods. However, they are subject to common law duties of agency and are also governed by the Estate Agents Act 1979, which falls outside the scope of this article. Del credere agents A del credere agent guarantees to his principal the payment of the price of goods or services sold. These type of agents are uncommon in modern commercial situations as a result of the availability of alternative credit protection arrangements.

Mercantile agents

A mercantile agent is an agent having authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods. This type of agency is governed by the Factors Act 1889.

There are no formal requirements for commercial agency contracts under the English common law, so such contracts can be made orally or in writing. Nor do the Regulations impose formal requirements on these types of agreements. Nevertheless both the agent and principal are entitled to receive from the other a signed document setting out the terms of the contract upon request under Regulation 13.

Principles are able to appoint agents on an exclusive or non-exclusive basis. But note that at common law, contracts restraining trade are prima facie unenforceable. However, they will be held valid where it can be demonstrated that the restraint is reasonable for the protection of a legitimate business interest and is not contrary to the public interest.

Most clauses granting exclusivity for the lifetime of the agreement are likely to be upheld, but careful drafting of the exclusivity provisions is advised: Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269.

There is a distinction between the terms ‘sole agent’ and ‘exclusive agent’. Under an exclusive agency, only the agent can sell in his area, but under a sole agency arrangement, the principal can continue to sell or solicit orders directly with customers within the agent’s area. The level of exclusivity should be defined clearly in the agency agreement, for example whether the principal is permitted to make online sales in the agent’s territory and the conditions for doing so.

The principal’s ability to restrict a commercial agent through non-compete clauses is limited by the Regulations as well as by the common law (see above).

Under Regulation 20(1), such a clause will only be valid if it is in writing, relates to the territory or the customer group allocated to the agent, and concerns the same type of goods covered under the agency agreement.

Under Regulation 20(2), a non-compete undertaking will not be valid for more than two years after the termination or expiry of the agency agreement.

In cross-border agency agreements the parties may wish to agree that any claim or dispute arising out of the agreement will be governed by the law of a particular jurisdiction. However, where they do, the relevant provisions of the Regulations are complex. The position is broadly as follows, but you should take specific advice.

Regulation 1(3)(a) of the Regulations requires a court of one member state to apply the law of another member state where the parties have expressly agreed that the agency agreement is to be governed by the laws of another member state – and so not the apply the English Regulations – even if the agent’s activities are in England and Wales.

Regulation 1(3)(b) provides that the court shall apply the English Regulations where (1) the parties have agreed that their agency agreement is to be governed by the law of England and Wales or Scotland and (2) the law of another member state corresponding to the English Regulations (i.e. where the agency activities are performed) enables the parties to agree that the agency contract is to be governed by the law of a different member state.

Including a governing law clause makes it clear which substantive law will be applied to identify and interpret the rights and obligations incumbent on the parties to the agreement. The Rome regulation on the law applicable to contractual obligations EC No 593/2008 (“Rome I”) applies, which underlines the principle of party autonomy (Art 3(1)), to determine which law applies to the contract.

There are limitations to the scope of a governing law clause. For example, it may not be accepted by the courts if there are public policy objections; the choice was made purposely to avoid a mandatory provision of domestic law; and the foreign law has no link to the parties or transaction (Articles 9 and 21 of Rome I).

POST-BREXIT UPDATE: The substantive rules of the Rome Convention continue to have force in the UK post-Brexit, subject to changes made under the Law Applicable to Contractual Obligations and Non-Contractual Obligation (Amendment etc) (UK Exit) Regulations 2019. As such, it is expected that the UK courts will continue to uphold governing law clauses providing for a choice of England & Wales law.

So even post-Brexit, the England and Wales courts will apply the Regulations where there is a governing law clause naming England and Wales law as the applicable law, provided that this is possible under the law of the member state of the contracting parties. If a different law is named, the England and Wales courts will apply that law in accordance with Rome I.

Parties may decide to submit disputes arising from an international agency agreement to a particular state court through inclusion of a jurisdiction clause within the terms of the agreement. This is known as a choice of ‘forum’ for resolving the dispute.

A jurisdiction clause enables the parties to decide which country’s courts may hear disputes arising from the contract.

POST-BREXIT UPDATE: The main EU instruments on jurisdiction and enforcement of judgment – namely the Brussels (Recast) Regulation (EU) No 1215/2012 and the 2007 Lugano Convention – no longer apply to cases commenced in the UK on or after 1 January 2021. The UK acceded to the 2005 Hague Convention on Choice of Court Agreements (“the Hague Convention”) in its own right from 1 January 2021, preserving some but not all of the previous relationship between the EU and UK. The UK has submitted an application to accede to the 2007 Lugano Convention, but requires the unanimous approval of the Contracting States (including the EU) to be admitted.

The Hague Convention does not apply to non-exclusive clauses and does not provide for reciprocal recognition and enforcement of interim protection measures. There is also some uncertainty as to whether EU member states will consider the UK to be a Contracting State in the period between 1 October 2015 – when the EU acceded – and 1 January 2021, although the UK legislation provides that the Convention will apply to exclusive jurisdictions concluded during that period.

Given the uncertainty, it is suggested that any clause should be express, in writing and specify if the chosen court has exclusive jurisdiction. Parties that entered into contracts containing exclusive jurisdiction clauses concluded between October 2015 and 31 December 2020 may wish to re-state the clause to leave no doubt.

The parties may also decide to refer a dispute to arbitration, either through an arbitration agreement as part of the contract of agency, or by later agreement between parties (known as a submission agreement). The arbitration should specify the ‘seat’ of the arbitration: i.e. the country whose arbitral law will govern the arbitral process. State courts treat arbitration agreements differently from jurisdiction clauses (discussed below). If the parties choose arbitration, any choice of law can be made, as arbitrators can be drawn from any legal system.

London-seated arbitrations continue to be enforceable under the New York Convention after Brexit.

Outside of the Regulations, there are no specific statutory provisions for commercial agency relationships. The relationship between principal and agent will be determined by the provisions of their commercial agency contract. Agency agreements under English law may be for a limited or unlimited period.

Fixed period: Where the period is limited, it will under common law expire automatically on the stated expiry date. But in practice, it is relatively normal for parties to continue to act upon their agency agreement beyond the expiry date. For this reason, it is common for fixed term commercial agency contracts to contain provisions for termination on notice where the agency agreement runs on. Where the contract has run beyond its fixed period, it is deemed to be of an indefinite period under the Regulations.

Indefinite agreements: Under English common law, agency agreements will tend to be entered into for an indefinite term or for a fixed term contract that has continued. Such agreements can be terminated on notice in accordance with the termination provisions in the agency contract.

The Regulations prescribe at Regulation 15(2) minimum notice periods for contracts of an indefinite period that fall within their scope. Parties may agree a longer notice period, but may not give the principal a shorter notice period than that for the agent. If the contract was for a fixed period but has run on, the full duration of the contract must be accounted for when calculating the notice period.

Indefinite agency agreements falling outside the scope of the Regulations may be terminated on reasonable notice (Winter Garden Theatre (London) Ltd v Millenium Products Ltd [1948] AC 173), with the meaning of reasonable period depending on the particular circumstances at the time that the notice was given (Martin-Baker Aircraft Co v Canadian Flight Equipment [1955] 2 QB 556). This might be more generous than those periods provided for under the Regulations. Factors including the duration of the contract, the level of agent investment, restrictive covenants and non-compete clauses, and the agent’s turnover proportion are all matters that the court might take into account.

The UK regulations require that, unless the agency agreement provides otherwise, all notices should be served according to certain procedures set out in Regulation 22. By implication, notice must be given in writing.

Termination on breach

Both fixed and indefinite term agency contracts can be terminated immediately if the other party is in fundamental breach of contract (i.e. a breach of such severity that the contract can be terminated by the innocent party, instead of simply sued upon). The Regulations permit immediate termination where a party fails to carry out all or part of its obligations under the contract or under exceptional circumstances, which the English courts have held to cover fundamental breach of contract: Crane v Sky in Home Ltd [2007] 2 All ER 599.

If the terminating party fails to establish a ground for termination without notice, however, the purported termination will be a breach of contract for which the other party might be entitled to damages or relief: Decro-Wall v Practitioners in Marketing Ltd [1971] WLR 361.

Failure to perform ‘just cause’ for termination?

Although it has been considered by the courts, there is no authoritative caselaw from England & Wales addressing whether the failure to achieve specified sales targets permits the principal to terminate the contract for material breach.

The High Court has said that setting unrealistic sales targets could not be relied upon by a principal seeking termination. Attempt to terminate on the basis of an unreasonable target could leave a principal exposed to a claim under the Regulations.

Because compensation for commercial agents under English common law will be simply a matter of seeking contractual damages, the question of whether the Regulations apply to the commercial agency contract is more significant in this jurisdiction than it will be in many Member States.

Compensation and indemnity under the Regulations

The Regulations introduced a requirement that an agent is either indemnified or compensated for damage upon termination of the commercial agency contract. Unlike in some Member States, the UK implemented both alternatives, allowing for the parties to decide. In the absence of agreement, the agent would be entitled to compensation rather than indemnity. Usually, compensation will be more generous to the agent than an indemnity.

The claim to an indemnity or compensation is a ‘no fault’ entitlement. It arises where the contract was for a fixed period and has expired and where the principal has terminated an indefinite contract in accordance with notice provisions (although not where a fixed term contract expired but the agency agreement is renewed). It also arises under the Regulations where the agent retires, or his or her death brings the contract to an end. The agent must, however, notify the principal of his or her claim within the statutory period of one year following termination. Parties may not contract out of the agent’s entitlement to indemnity or compensation before the contract has expired.

Indemnity: Where the commercial agency contract provides that the commercial agent shall be indemnified, the agent will be entitled to an indemnity under Regulation 17(3) intended to reflect that agent’s good will in the business. Indemnity will be awarded if and to the extent that:

• the agent brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers; and
• the indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers.

Once a principal has given contractual notice to terminate a commercial agency, it cannot withhold an indemnity if it subsequently discovers a breach of contract by the agent during the notice period that would have entitled the principal to withhold the indemnity: Volvo Car Germany Gmbh v Autohof Weidensdorf GmbH, Case C-203/09. The English courts have yet to consider whether this similarly applies where compensation is due.

Compensation: Where the commercial agency contract does not specifically provide that the agent shall be indemnified upon termination, Regulations 17(6) to 17(8) provide for the agent to be entitled to compensation for the damage suffered as a result of the termination. Damage will be deemed to occur where:

• the commercial agent has been deprived of the commission which the agency contract would have procured for the agent, whilst providing the principal with substantial linked benefits; and/or
• the commercial agent has not been able to amortize the costs and expenses incurred in performing the contract on the advice of the principal.

The English courts considered the approach to valuation of compensation in Lonsdale v Howard & Hallam [2007] UKHL 32, and confirmed that the damage was to be the loss of the value of the agency relationship, this being the future income stream that this relationship would have generated. Parties must consider what a hypothetical purchaser might reasonably be willing to pay for the agency at the termination date – an approach that will tend to require expert evidence if litigated.

It is established under English law that an agent may still claim for common law damages even where he or she has received an indemnity or compensation under the Regulations: McQuillan & Anr v McCormick & Ors [2010] EWHC 1112. This is most likely to occur where the principal failed to comply with the notice provisions under the Regulations.

Regulation 18 provides limited grounds on which an agent may lose the entitlement to indemnity or compensation payment.

Non-Regulation contracts

Where the agency does not fall under the scope of the Regulations, the indemnity or compensation alternatives have no application and an agent will seek a claim for damages for breach of contract.

The position under English common law is much less beneficial to the commercial agent than that under the Regulations. Unless an entitlement to contractual compensation has been agreed between the agent and the principal, the agent will not have any claim to be compensated for any loss of income or loss of his client base or goodwill due to termination of the commercial agency contract.

There are a number of aspects specific to the jurisdiction and law of England and Wales, including in relation to issues of competition law that might arise, and it is worth seeking legal advice prior to appointing a commercial agent in the country.

It is worth noting that the Bribery Act 2010 applies where either party has a close connection to the UK.

Also, the UK has also introduced legislation to tackle slavery and human trafficking under the Modern Slavery Act 2015. Parties will be automatically subject to the jurisdiction’s anti-slavery laws if they carry out business as a body corporate or in partnership in the UK, but might wish to include appropriate termination clauses in the event of breach to protect themselves and demonstrate reasonable efforts to reduce the risk of modern slavery in the supply chain.