Commercial Agents and the Law

Séverine Saintier, Jeremy Scholes

• Publisher: Informa Law from Routledge
• Year: 2017
• ISBN:
  9781351571562
• Edition: 1
• Topic: Jura
• Subtopic: Schlichtung, Verhandlung & Mediation in Rechtsangelegenheiten

Commercial Agents and the Law is a practical approach to the modern law relating to commercial agency agreements, a complete guide to the workings of the relationship between commercial agents and their principal within its domestic and European context. This book is a complete guide to the workings of the relationship between commercial agents and their principal within its domestic and European context. The common law rules governing the relationship between principal and agent were pretty well established and well understood by English lawyers when, in 1993, the Commercial Agents (Council Directive) Regulations were enacted. The 1993 Regulations implement EC Directive 86/653 on self-employed commercial agents. The 1993 Regulations, like the EC Directives, are not, however, a complete code of rules governing the relationship, so they have to co-exist with the pre-existing common law rules. Both sets of principles therefore have to be applied.

Chapter 1
General Introduction

The Commercial Agents (Council Directive) Regulations 1993¹ (to which we shall refer hereinafter as ‘‘the Agency Regulations’’), implement Directive 86/653 on the Coordination of the Laws of the Member States relating to Self-Employed Commercial Agents.² The Directive was enacted for the double purpose of (1) reinforcing the protection of commercial agents, and (2) harmonising the laws relating to commercial agents across Europe in order to facilitate trade within the European Union.³ The goal of a reinforced protection has undeniably been met, since the Directive provides commercial agents with considerable cover at various stages of the commercial agency relationship. Yet, harmoni-sation has not been as successful, principally because the Directive leaves a considerable amount of freedom to Member States⁴ in their implementation.⁵ However, considering the huge disparity which existed between national rules on commercial agency prior to the Directive, this freedom was inevitable and compromises had to be made. Harmonisation is undeniably important within a European law context. It is less so however for the purpose of this book, which concentrates on the study of the Agency Regulations and their impact on the common law rules of agency and contract. As a consequence, in its analysis of the Agency Regulations, this book will focus on the protective stance of the Directive.

1.1 Background and Scope of the Book

It is well known that, when the Agency Regulations came into effect on 1 January 1994, they caused considerable uncertainty. This uncertainty is primarily attributable to the fact that the Agency Regulations implement the Directive, which is based on the civilian rationale that commercial agents are the weaker party within the relationship. As such, the Agency Regulations contradict the fundamental common law assumption that, because of the fiduciary nature of the agency relationship, principals are the ones in need of protection. Moreover, prior to the implementation of the Directive, the starting point of the law of agency at common law was the usual one of freedom of contract. In fact, ‘‘agency agreements were almost entirely regulated by agreements between the parties upon the general basis of the relevant laws of contract’'.⁶

This stark contrast was recognised by the EU institutions and the UK was consequently given additional time to implement the Directive.⁷ However, the government has not used this additional time to the full since the Agency Regulations are almost a reproduction of the Directive. This near-verbatim implementation, which seems to be the more recent ‘‘copy out’’⁸ manner in which the UK implements directives, is nevertheless regrettable as it is a major, yet under-reported, cause for uncertainty surrounding the Agency Regulations.

1.2 The Near-Verbatim Implemetation and the Legal Paradox of the Agency Regulations

In fact, the near-verbatim implementation of the Directive introduces a double layer of uncertainty. Directives only aim to provide a set of guidelines on a particular issue. As a consequence, directives are not generally drafted with the attention to detail which is appropriate in a piece of national implementing legislation.⁹ By almost reproducing the text of the Directive, the Agency Regulations therefore introduce a drafting style which is very different from that of English legislation. This represents the first layer of uncertainty, which could be termed as the ‘‘internal uncertainty’’.

This problem is further exacerbated by the fact that the Directive, and consequently the Agency Regulations, are not meant to be a complete code regulating every aspect of the relationship between commercial agents and their principals. As a result, the Agency Regulations not only apply alongside the common law rules of agency and contract, but the latter therefore also play the crucial role of filling the gaps left by the implementing legislation. However, considering that the two sets of rules are based on opposed rationales (see section 1.1), the relationship between the Agency Regulations and domestic law is sometimes fraught with tension. This second layer of uncertainty can be referred to as the ‘‘external uncertainty’’.

This double layer of uncertainty is regrettable as it creates what could be termed as a ‘‘legal paradox’’. On the one hand, the Agency Regulations undeniably reinforce the protection of commercial agents by providing them with rights throughout the commercial agency relationship, the most important ones being the right to require the principal to behave at all times with good faith and the right to a lump sum payment on termination. On the other hand, the near-verbatim implementation means that many of the weaknesses of the directive, for example the lack of definition of crucial terms such as good faith and the calculation of compensation or indemnity, ambiguity over the status of certain articles, and even plain silence over the meaning of termination, are also present in the Agency Regulations. Domestic law must therefore step in, in order to fill gaps left by the implementing legislation. However, because the Agency Regulations are based on a civilian ethos which is directly opposed to the traditional common law position, domestic law is not always well equipped to explain concepts which are alien to English lawyers. This double layer of uncertainty therefore jeopardises the very protection that the Agency Regulations set out to put in place, and hence creates the legal paradox.

The primary aim of this book is to solve this double layer of uncertainty in order to provide the reader with as complete an understanding as possible of the workings of the relationship between a commercial agent and his principal. This will be done first by undertaking an in-depth and critical analysis of the Agency Regulations themselves in order to see what they entail for each party. However, because the Agency Regulations do not regulate all the facets of the commercial agency relationship, they must be studied alongside the common law rules of agency and contract. Only by studying the Agency Regulations and domestic rules on contract and agency side by side will we be able to see how the two set of rules dovetail, thereby allowing the readers to have a complete picture of the commercial agency relationship.

1.3 The Structure of the Book

In relation to the organisation of the book as a whole, it will start with a certain element of ‘‘scene setting’’. This will be done in Chapter 2, which will provide an overview of the ‘‘legal map’’, which is important in order to understand the impact of the Agency Regulations on the more traditional common law rules of contract and agency. Considering that the Agency Regulations emanate from a European source, it is necessary to place them in their European context (section 2.2). Chapter 2 will also briefly refer to the laws of France and Germany which are part of the protective stance of the Directive,¹⁰ in order to help us understand why the Directive considers the (commercial) agent to be the weaker party within the (commercial) agency relationship.

Chapter 2 will then concentrate on looking at the scope of application of the Agency Regulations (section 2.3). First, their territorial and jurisdictional scope of application. Secondly, considering that the Agency Regulations apply only to commercial agents as defined, to understand who they are and what kind of commercial function they serve is therefore important in order to differentiate them from other commercial intermediaries. This section, which represents the core of the chapter, will show that the courts in this country demonstrate a good understanding of who commercial agents are. Considering that prior to the implementation of the Directive the notion of commercial agent was a ‘‘legal category unknown to the common law’’¹¹ this is very good. This section will however show that the situation is not perfect, since there are problems in relation to subagents and, most seriously in relation to the issue of ‘‘secondary activities’’. Following the choice left in the Directive, the UK has opted for the possibility to exclude from the scope of the Agency Regulations, commercial agents whose activities are secondary. Member States were therefore left with the task of defining the criteria by which a person’s commercial agency activities are to be treated as ‘‘secondary’’ for the purpose of the Diretive. The Agency Regulations have done so in a schedule. The drafting of this schedule is far from clear and the review of case law shows that the schedule is applied so widely that it could jeopardise the protective stance of the Agency Regulations. The problem at the moment is such that we propose that the schedule be reviewed.

The following five chapters will provide an in-depth analysis of the core parts of the Agency Regulations. This analysis will chronologically consider the four areas where the impact of the Agency Regulations is at its most crucial in terms of the commercial agent’s reinforced protection: performance of the commercial agency relationship in Chapter 3, remuneration arrangements in Chapter 4, termination of the relationship in Chapter 5 and, finally, the calculation of the two termination rights, the French-based compensation and the German-based indemnity in Chapter 6.

The provisions of the Agency Regulations dealing with performance of the contract are contained in Part II (‘‘Rights and Obligations’’) and Part III (‘‘Remuneration’’). Of the two, Part II is undeniably the more important. It represents a very substantial improvement on the commercial agent’s protection from the traditional common law rules, since it establishes mandatory and reciprocal rights and duties, which place the parties on a much more equal footing than was previously the case under the common law rules. The most significant change is undeniably the introduction of the civil-law based obligation of good faith for both parties. Yet, the precise impact of the notion of good faith is unclear since the Agency Regulations, by doing no more than in effect almost copying the Directive, fail to explain what it means and what it entails for the parties. This is a regrettable illustration of the ‘‘legal paradox’’ mentioned above and will consequently be considered in detail in Chapter 3 (section 3.4). That chapter will, however, show through the review of the limited case law on the matter but also through analogies with other areas of English law, particularly employment law, that the substance of such good faith obligations is not so alien to English lawyers as we might have thought. Such analogies will provide a source of guidance on what the mutual obligations of good faith under the Agency Regulations mean, hence ensuring that the protection of commercial agents is reinforced. However, since commercial agency agreements are contracts, Chapter 3 will also set out key express terms for such an agreement, seen from the viewpoint of the commercial agent and the principal (sections 3.2 and 3.3). In order to assess the true impact of the Agency Regulations on the common law rules, they will be reviewed in the light of the commercial agent’s common law and fiduciary obligations.

In relation to the rules on remuneration provided by the Agency Regulations, Chapter 4 will show that they largely (though not entirely) yield to contrary agreements. However, it will also show that remuneration is an area where the highly pervasive quality of the mutual obligation of good faith should not be underestimated (section 4.2).

Chapter 5 will concentrate on the issue of termination. Termination is undoubtedly the stage of the commercial agency relationship where the protection of commercial agents has been the most substantially reinforced by providing commercial agents with the right to claim compensation or indemnity on termination. However, illustrating the ‘‘legal paradox’’ mentioned above, even at this most crucial stage of the Agency Regulations, the near-verbatim implementation jeopardises the efficiency of the level of legal protection which they provide to the commercial agents. The first threat to the protection of the commercial agent is the fact that the Agency Regulations pose as a mandatory rule that compensation and indemnity are due on ‘‘termination’’ and yet they fail to define the process by which, and the circumstances in which, termination will occur. This is regrettable since understanding what constitutes termination and how it can occur is as important as understanding how the termination rights function. In the first part of Chapter 5 we will therefore consider the process of termination itself by looking at the various methods by which and circumstances in which a commercial agency agreement can come to an end (section 5.2). We will see how, thanks to the interpretation of the Agency Regulations by the courts of this country, protection of commercial agents has indeed been substantially reinforced. However, we will also see that the situation is not perfect, and the reinforced protection is threatened by problems of incompatibility between the Agency Regs and the common law rules of contract in relation to summary termination of contract for serious breach. We have proposed a solution which, because it has not been tested by the courts in this country, is somewhat uncertain.

The second part of Chapter 5 will then study the consequences that termination has for the parties; the right for all commercial agents to claim, one of two kinds of termination payments, a French-law based ‘‘compensation’’ or a German-law based ‘‘indemnity’’ (section 5.3). Such a right is undoubtedly the most substantial enhancement of the protection of commercial agents. Prior to the implementation of the Directive, commercial agents in English law were only entitled to receive damages if, by termination the contract, the principal was acting in breach of contract and normal contract law rules of causation, mitigation, etc. This Chapter will show that it is now accepted by the courts in this country that the two termination payments have a meaning which is very specific to the commercial agency relationship and must therefore not be confused with the more traditional common law concept of compensation for loss. The scope of application of the two termination payments themselves is also well understood.

Chapter 6 will complement Chapter 5 by concentrating on the contentious issue of the calculation of the two termination rights. This Chapter will show that the lack of details in the Agency Regulations as to how the two termination rights should be calculated provides the last illustration of the ‘‘legal paradox’’ mentioned above. The lack of details is most serious in relation to the French-law based ‘‘compensation’’. Because of the way the Agency Regulations implement the Directive, ‘‘indemnity’’ will only apply in English law when the parties expressly opt for it; ‘‘compensation’’ therefore applies as the default position and most case law in the UK consequently involves ‘‘compensation’’. The lack of details in the Agency Regulations means that the task of calculating such payments is left to the judiciary. This is however where the problem lies. The problem is that the English and the Scottish courts are divided on the issue. Whereas the Scottish courts are generally inclined to look at French law for guidance, the English courts refuse to do so. In the first part of this chapter, we will therefore consider the question whether the courts in this country must follow what their French and German counterparts do (section 6.2). We will then look at compensation (section 6.3) and indemnity (section 6.4). Following the continental origins of such termination payments, Chapter 6 will contain more substantial reference to the relevant laws of France and Germany. Such references will not be made as illustrations of how the Agency Regulations should be interpreted, but merely as examples of how France and Germany apply concepts which sometimes still elude English lawyers. A comprehensive review of the case law to date will reveal how the English and the Scottish courts have coped with these alien notions of compensation and indemnity. We shall see that the reluctance of the English courts to follow the French c...