A Breeding Ground for Uncertainty

Written by Steve Sidkin
1 July 01

The concept of no fault compensation being payable by one business to another was always likely to be a breeding ground for concern and uncertainty. It is unlike other areas of English common law which require fault or wrongdoing. But given that the Commercial Agents Regulations implemented a European Directive, the potential for problems has existed since the Regulations came into force.

This potential is exacerbated by the failure of the Regulations (and the Directive) to provide any means of quantifying the compensation to be paid. It was therefore a relief that in March 2000 in King v T Tunnock Limited the Scottish Court of Session appeared to lay down the very means that had been missing for over six years.

By adopting the principles applied by French courts, the Court of Session provided that an agent terminated without cause should receive compensation equal to the gross commission paid to him during the last two years of the agency. Alternatively a multiple of twice the average commission earned during the last three years would operate. In essence this was a benchmark or tariff to be applied in most cases but with the possibility of variance if circumstances so required.

But the relief given by this judgment has been short lived. Recently in Barrett McKenzie & Company Limited v Escada (U.K.) Limited the English High Court disregarded the decision.

In turning its face against what would otherwise be persuasive authority, the Court attacked the application of a benchmark or tariff system. It was considered to be unfair. Instead there is to be determined the value of the agency, and the connections established by the agent, at the time at or immediately before termination.

This value is to be arrived by considering various factors.

Accordingly the duration of the agency and its history are relevant. So too are the form of the agency agreement and its precise terms. Also important is the agent’s client base. Is it a regular, repeating client base? Alternatively are one-off transactions made with different persons?

But despite identifying these factors, the Court’s judgment lacked one vital ingredient. Namely, how were they to be applied? As a result the wheel of uncertainty has turned almost full circle. It is only prevented from completing a revolution by the Court’s decision that there is to be deducted from the agency’s value the expenses that the agent would have incurred in earning the commission on which the agency is based.

The tone of the decision is that the Regulations are to be applied in what can only be described as an “English” or fair way. The underlying intent is that this should result in reducing the amount that would otherwise be awarded by the benchmark or tariff system to terminated agents. But the irony is that there is every reason why the judgment may have the opposite effect. The decision may well encourage terminated agents to rely on valuations based on multiples of net earnings that result in claims considerably greater than those that would result if the Scottish decision had been followed.

Meanwhile, another recent decision of the High Court has introduced a degree of certainty into a separate area of the Regulations.

Many agents obtain orders for their principals but also hold products in stock for resale. Prior to the Court’s decision, it was a generally thought that the part of the agent’s business concerned with resale would fall out outside of the Regulations. But worse, if the agent’s activities as an agent were considered secondary under the Regulations, such activities would also be deprived of the rights and protections given by the Regulations.

In Mercantile International Group PLC v Chuan Soon Huat International Group PLC the claimant had acted for 20 years as the defendant’s agent for the sale of timber products. Unlike most agency agreements, the agent was not remunerated by way of commission. Instead it received the difference between the prices charged to it by the defendant and the prices that it negotiated with customers. In addition, the agent was responsible for paying the defendant for the products supplied.

On the facts it was accepted by the Court that the agent made contracts as an agent and not as a principal. Furthermore, property in the goods passed from the defendant to the end buyer when the defendant received payment. The agent did not obtain title. Accordingly, the agent was entitled to claim compensation under the Regulations.

But if an agent is to demonstrate that the “mark-up” achieved is remuneration for acting as an agent and not a turn made on resale, it is clear that the facts will be crucial.

This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.agentlaw.co.uk).