When is a contractor a commercial agent? Businesses should look closer to home

13th February 2019

Commercial Dispute Resolution Partner Nick Lees explains why a recent case means that businesses need to look closer to home than ever before to establish whether any of its contractors will be afforded the enhanced protection of the Commercial Agents Regulations.

What do businesses need to know?

It is important for businesses to understand whether or not independent contractors working for them fall within the definition of ‘commercial agent’ under the Commercial Agents (Council Directive) Regulations 1993 (the Commercial Agents Regulations).  If they do, the contractor/agent will be afforded enhanced protections, including the right to receive minimum periods of notice to terminate and the right to receive compensation or an indemnity on termination of the agency [1].

In accordance with the European Withdrawal Act 2018 (and subject to the terms of any final Brexit deal), the Commercial Agents Regulations will remain in force post-Brexit.

What is a ‘commercial agent’?

The Commercial Agents Regulations define commercial agents as self-employed intermediaries with continuing authority to negotiate, or to negotiate and conclude, the sale or purchase of goods on behalf of the principal. However the recent case of Zako SPRL v Sanidel SA [2] seemingly increases the ambit of that definition, such that more contractors than was hitherto thought might fall within it.  Furthermore, on a practical level, they might be more difficult to spot.

The European Court of Justice decided in this case that a contractor could be a commercial agent even though it performed its activities from the principal’s premises and even though it performed some duties for the principal which were not solely focused on the negotiation or conclusion of the sale or purchase of goods.

Zako v Sanidel: What are the key takeaways?

The key points to note from this important case are:

• A contractor who operates from the principal’s premises may nevertheless be a commercial agent so long as the agent’s use of the principal’s facilities does not prevent it from performing its activities independently.
• To determine whether an agent’s independence is compromised by its physical proximity to the principal, it is necessary to consider:
  • whether the agent is subject to the principal’s instructions;
  • whether the agent’s ability to organise its own activities is limited;
  • whether the agent’s economic risks of acting independently are affected.
• A contractor who carries out other, unrelated, non-commercial agency roles and responsibilities for the principal may nevertheless be a commercial agent so long as those duties do not prevent it from performing its agency activities independently and so long as the agency work is ranked equally in importance.
• To determine whether an agent’s independence is compromised by its carrying out other, non-agency activities, it is necessary to consider:
  • the nature of the various activities;
  • the manner in which various activities are carried out;
  • the proportion of agency versus non-agency activities;
  • the method of calculation of remuneration;
  • the reality of any financial risk incurred by the agent.

Practical advice

The Zako v Sanidel case means that potentially more contractors than ever before will be entitled to the additional protections and remuneration afforded by the Commercial Agents Regulations.  The case therefore highlights that it is essential for businesses to properly understand the legal status of all of their relationships with contractors/agents – even those who work very closely with the principal ‘on site’ and/or those who undertake non-agency related tasks or responsibilities.

In addition, whilst businesses cannot contract-out of the Commercial Agents Regulations, they may be able to structure commercial arrangements in such a way as to minimise the risk of the additional protections applying; they may be able to agree with any agent mutually acceptable compensation or indemnity provisions; and/or they may be able to otherwise minimise the practical and financial impact of the Commercial Agents Regulations or any claims made under them.

If you would like any further advice or assistance in connection with the Commercial Agents Regulations or any other agency-related matter, please do not hesitate to contact Nick Lees or any other member of the Commercial Dispute Resolution Team.

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[1] The underlying purpose of these additional protections is effectively to safeguard and reward the agent in return for the increase in goodwill that the agent may have generated for the business/principal during the agency period.
[2] (C-452/17) [2018] All ER (D) 112 (Nov)