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Commercial agents: recent developments

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18/12/2015

The English court recently decided two cases on commercial agency arrangements. The first revisits the question whether a commercial agent is entitled to compensation or indemnity on termination; the second considers when agency contract provisions are in restraint of trade and unenforceable.

Compensation or indemnity?

The Commercial Agents (Council Directive) Regulations 1993 (the Regulations) govern the relations between commercial agents and their principals and specify that an agent is entitled to indemnity or compensation on termination of the agency contract. The default position is set out in regulation 17(2): “Except where the agency contract otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified“.

The distinction between compensation and indemnity is important because, generally, an indemnity will cost the principal less on termination than compensation. In Charles Shearman (t/a Charles Shearman Agencies) v Hunter Boot Ltd [1], the court disallowed a clause in an agency contract providing that, on termination, the agent would receive an indemnity, unless compensation would be lower in which case he would receive compensation. The basic entitlement under the Regulations to either compensation or, alternatively, indemnity, was not clear at the time the contract was made. Instead, it came down to whichever was the cheapest option for the principal, calculated at the end of the agency. The clause was incompatible with the legislation, which existed primarily to protect agents.

The agency contract in the recent case of Brand Studio Ltd v St John Knits, Inc [2] contained a similar (invalid) clause. However, it also contained one permitting invalid or unenforceable provisions to be “severed”, so that those remaining would continue to have full force and effect. The agent claimed a default entitlement to compensation. The principal contended that the second half of the clause (the offending part restricting entitlement to compensation only where that was lower than an indemnity) could be severed from the first, leaving behind a valid clause entitling the agent to an indemnity, and not to compensation. Severance had not been argued before the court in Shearman.

The court held that the question of severance should be decided before finally determining whether the agency contract “otherwise provides”. The first half of the clause contained a valid election by the agent to accept an indemnity instead of compensation. Such a concession by the agent is permitted under the Regulations. The second half of the clause amounted to a further concession, which was invalid and unenforceable. The question for the court was not whether the enforceable part of the clause depended on the unenforceable part (as the claimant contended), but whether removal of the unenforceable part so changed the character of the contract that it became “not the sort of contract that the parties entered into at all[3]. In this case, it did not. Both before and after severance, there was an agency contract where the agent agreed to accept an indemnity. The result is that the contract “otherwise provides” for the purposes of the Regulations. Agents may no longer be entitled to what could effectively amount to a bonus compensation payment.

Restraint of trade?

In One Money Mail Ltd v (1) Ria Financial Services (2) Sebastian Wasilewski [4], the agent agreed not to operate as principal or agent for another money transfer organisation. He also agreed post-termination restrictions preventing him from working for or setting up a similar business for a period of six months within a five mile radius. Three years later he entered into another agreement with a competitor.

The court found that both sets of restrictions were unreasonable, in restraint of trade and unenforceable. Commercially, the contract was very one-sided. The exclusivity provision was unfair because the principal was not similarly restrained from appointing another agent in the area. It also had the benefit of a short notice period for termination, which was not available to the agent. As to the post-termination restrictions, the principal was able to protect its income source because the agent no longer had access, on termination, to the principal’s software containing customer details. The principal appealed and the appeal was allowed.

The basic position (which applies to restrictions both during the contract and post-termination) is that terms which are in unreasonable restraint of trade are unlawful [5]. However, the Court of Appeal sounded a note of caution regarding the treatment of restrictions in place during the currency of the contract, because care needed to be taken not to “fetter” ordinary commerce.

The restraint of trade principle would only apply if the exclusivity provision effectively “sterilised” the agent’s ability to work (i.e. because the principal might not make use of that agent’s services) [6]. That was not the case here. The agent was able to earn his commission because the principal was obliged to process all of his money transfer requests. The court also noted that every agent has a duty of loyalty to his principal which is difficult, though not impossible, to perform where an agent has two principals. The exclusivity provision was reasonable and the agent was in breach of contract for entering into another agreement with a competitor. The lower court’s finding regarding the short notice period for termination was also reversed. It was not critical, and there were other termination provisions in the contract which were reciprocal.

Following those conclusions, it was difficult to view the post-termination restrictions as unreasonable if the principal had a legitimate interest to protect, which it did. It was clear on the facts that customers’ loyalty tended to rest with the individual agent rather than the principal. All the time and money invested by the principal in supporting its agents would be wasted if the agent could simply transfer customers across to a competitor at the point of termination of the agency. Five miles was a narrow radius and six months was a commonly agreed length of time for such a restriction, which was not unreasonable.

Agents and principals should check their contracts to ensure that they reflect clearly the wishes and intentions of both parties. Principals need to be careful not to include mechanisms or restrictions which might fall foul of the law, but can take comfort from the court’s approach in both of these cases.

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[1] [2014] EWHC 47 (QB), see our previous commentary Commercial agents: entitlement to compensation or indemnity?
[2] [2015] EWHC 3143 (QB)
[3] Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388
[4] [2015] EWCA Civ 1084
[5] A. Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308
[6] Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269

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