Why the non application of the Commercial Agents Regulations might continue to be bad news for principals

An update on W Nagel (a firm) v Pluczenik Diamond Company NV

Diamonds are not forever. That was the opening line of the High Court in a dispute between a diamond broker and its diamond wholesaler client.

The diamond wholesaler appointed the broker as its broker for purchasing rough diamonds from De Beers in London. But following the wholesaler’s termination of the relationship, the broker sought compensation pursuant to the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”).

Although the court found that the broker was for all intents and purposes a commercial agent, its claim under the Regulations failed. This was because of a lesser known exception under the Regulations that excludes commercial agents when they operate on commodity exchanges or in a commodity market.

What is the reason for the exception? Well, no one knew the answer to that. So it is no surprise that, when the High Court found in favour of the agent (in respect of common law damages as opposed to compensation under the Regulations) and the diamond wholesaler appealed, the broker brought a cross-appeal that the Regulations should in fact apply!

The appeal was heard in the Court of Appeal in August 2018. The decision is expected shortly.

The High Court trial: a reminder

The High Court had two questions to consider under the Regulations:

1.     Did the broker have continuing authority to negotiate?

2.     If so, was the broker operating on a commodity market or commodity exchange?

The relationship between the wholesaler and the broker was not reflective of most principal / agent relationships. The broker, as agent, did not have authority to conclude purchases on behalf of its principal, the wholesaler. The wholesaler determined which diamonds it bought and mostly negotiated the price to be paid.

So what did the broker do? The broker used the relationships it had with senior executives at De Beers to promote the wholesaler’s interests, lobbied to secure the best possible allocation of diamonds for the wholesaler, and fostered a relationship of trust and confidence between the wholesaler and De Beers that increased the wholesaler’s status in the eyes of De Beers. Crucially, the broker contributed to the wholesaler’s success and goodwill. As the Court reminded the parties this is, after all, the purpose of the Regulations: to protect agents by giving them a share of the goodwill that they have generated.

But the Court’s approach to question 2 was less purposive. Without the benefit of any explanation for the exception within the Regulations which excludes commercial agents who operate on commodity exchanges or in the commodity market, the Court carried out an analysis of the nature of the goods sold, and the manner and place of sale, in order to determine whether the sale of rough diamonds amounted to sales on a commodity market or exchange.

The Court held that it was because the diamonds were (mostly) sold:

  1. in bulk, indistinguishable in origin or features from other goods of the same type;
     
  2. in boxes of a generic class of a certain description at a fixed price;
     
  3. in unopened boxes and were therefore often sold unseen;
     
  4. at a regular, organised event in which a regulated and restricted class of persons was able to buy a share in the commodities in question,

all being features of goods sold on a commodity market or exchange.

The Appeal

The broker challenged this finding on appeal. It highlighted that sales of diamonds at De Beers did not involve dealing in futures, whereas features form a substantial part of trading on most, if not all, commodity exchanges. De Beers was also the only seller, whereas most exchanges or markets involve multiple sellers and purchasers.

Moreover, the broker argued for a purposive construction. It argued that the purposive approach, taken when answering the question of whether the broker had continuing authority to negotiate, should equally be taken when determining whether the broker operated on a commodity market. Therefore, the Court should examine whether the purpose of the commercial agency is, or is not, for the agent to develop goodwill for its principal, this being the defining feature of the parties’ relationship.

In response, the wholesaler argued before the Court of Appeal that the original judge was correct to find that the Regulations did not apply to the broker and that it is not appropriate to apply a purposive construction to the exclusion, which is intended to deny the benefit of the Regulations in specific circumstances. In addition, the wholesaler argued that the judge was wrong in how he had determined the amount of damages for the wholesaler’s failure to give proper notice of termination given that there is a difference between how damages are determined for breach of contract and how compensation is calculated under the Regulations (see also: Why the non application of the Commercial Agents Regulations can still be bad news for principals).

Take home point

Agents and principals dealing in commodities will be eagerly anticipating the Court of Appeal’s imminent decision. It is hoped that the Court of Appeal will provide some clarification as to the purpose and meaning of the commodities exchange exception under the Regulations. Or, will it be determined that goodwill is what really matters?

Veronique Bergau
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