Commercial Agents Regulations Update:
How will the changes affect your business?

How does 'Lonsdale' effect the court's approach to compensation claims?

The Effect of the Commercial Agents Regulations on Termination of the Agency Agreement
Commercial Agents are entitled to statutory compensation on termination of their agency agreements. This compensation arises under the Commercial Agents (Council Directive) Regulations 1993 (“the Commercial Agents Regulations”). Compensation can be substantial and is in addition to any existing contractual rights.

As a result of the Commercial Agents Regulations, there are important questions for both principals and agents to consider before entering into or terminating agency agreements. These include:

• Do the Commercial Agents Regulations apply to the contract?
• How much compensation is payable and what is the basis of the assessment?
• In what circumstances is compensation payable?
• What steps can be taken (both on negotiating the contract and on terminating it) to: - limit any compensation (if principal); or
  - ensure appropriate compensation is paid (if agent)

There have been a number of changes in the law over the last two years. The most recent (17 July 2007), was when judgment was given in the House of Lords case of Lonsdale v Howard & Hallam Ltd.

It is important that the changes in the law are considered when addressing these issues. We are continuing to receive instructions from businesses which have made decisions on agency agreements, without obtaining up to date advice and have incurred large and potentially avoidable liabilities.

Do the Regulations Apply to your Contract?

Some principals are still unaware that the regulations apply to their contract. As a consequence, too many businesses are contacting us after they have terminated an agent’s contract and an agent is claiming compensation from them. By this stage some of them have incurred substantial liabilities (running to hundreds of thousands of pounds) as a result of the compensation provisions under the Commercial Agents Regulations. By the same token, there are a number of Agents that have failed to obtain compensation because they were unaware of their entitlement.

Some Principals have historically been advised that the Commercial Agents Regulations do not apply to their contracts and, whilst this advice may have been correct at the time, the way that the courts interpret the regulations has changed as a result of the case of P J Pipe & Valve Co. Ltd v Audco India Limited [2005].

The Commercial Agents Regulations only apply to contracts involving Commercial Agents. Article 2 of the regulations defines a Commercial Agent as a self-employed intermediary (which includes limited companies) who has continuing authority to negotiate the sale or purchase of goods.

Historically it was thought that it was possible to circumvent the provisions of the Commercial Agents Regulations by restricting the Agent’s ability to “negotiate” contracts. As a result, when contracts were drafted for Principals they were often drafted in such a way so that the Agent was prohibited from “negotiating” aspects of the contract so as to circumvent the Commercial Agents Regulations and the protection provided by them. In this way, it was thought that that Principals could avoid paying compensation provided for by the Commercial Agents Regulations.

This is no longer possible. In the PJ Pipe case, the Courts made it clear that they will not interpret the Commercial Agents Regulations in the manner previously envisaged. Thus, the regulations (and the provisions that apply to compensation) apply to all Agents that make introductions and play a significant role in persuading the purchaser to be interested in purchasing the Principals products, irrespective of whether they have continuing authority to negotiate.

As a result of the PJ Pipe decision, the Commercial Agents Regulations are far more wide-reaching than originally considered to be the case and now apply to a number of contracts, which were thought previously to be exempt. Importantly, it may well be that Principals have been previously advised that they were exempt and, whilst that advice may have been correct at the time, it may not be now.