Written by Jane Elliot
16 September 04
It is extremely common for an agent to have a number of agencies. Indeed it would appear to make good business sense for an agent to act for a group of principals selling the same, similar or “complimentary” goods. However, in such situations, the agent may be exposing himself to attack from one or more of his principals and, at the same time, risks losing the rights and protections granted to agents by the Commercial Agents Regulations.
Agents – your duties
An agent cannot serve two or more principals unless the agent has fully disclosed to both principals all material circumstances and both principals have given their consent. This rule arises under both the English common law and the Regulations.
At common law, an agent owes to principal A a fiduciary duty not to put himself in a position in which his personal interests or his duty to principal B may conflict with his duty to principal A without the fully informed consent of principals A and B. Under the Regulations, there is in every agency agreement a duty on an agent to look after the principal’s interests.
Often an agent believes that there is no problem as principals A and B are aware of the situation. However, as the burden is on the agent to show that principals A and B consented to the situation, it is advisable to obtain the prior written consent of each principal. In addition, principal A’s consent in respect of principal B cannot be taken by an agent as principal A’s consent to his acting in the future for principal C. Fully informed consent must be given in each and every case.
More often than not, an agent will claim that there is no risk of a conflict of interest arising as a result of his acting for more than one principal. Various explanations are put forward. Most frequently, it is claimed that the products do not compete with each other. However, whether or not a product competes with another product can be a difficult question to determine. It depends on how the market is defined. The more narrowly the relevant market is defined, the less likely it is that the products compete. For example, take the situation in which principal A sells furry teddy bears and principal B sells baby dolls. If the relevant market is the baby dolls market, A’s and B’s products do not compete. Conversely, A’s and B’s products are likely to be competing products in, say, the cuddly toy market or, wider still, the toy market.
Another rationale may be that the products of each principal carried by the agent complement, rather than compete with, each other. For example, shirts and ties. An alternative argument is that certain customers are known to prefer the classic/ conservative/ traditional style of one principal’s range over another’s. Accordingly the agent can chose which range to present to a particular customer. However, if it is the agent who determines which product range to put forward, he is choosing which principal to prefer. A conflict of interest is the inevitable result. The fact that the agent’s decision may reflect the customer’s wishes is irrelevant.
It should be noted that, even where there is clearly no product overlap, an agent may still be breaching his fiduciary and statutory duties. This is on the basis that by spending time on developing one principal’s business that could otherwise have been devoted to the development of another principal’s business, a conflict of interest is the unavoidable result.
These duties apply irrespective of whether there is a written or oral agency agreement. At the same time, it should be noted that these duties are entirely separate from any non-compete restrictions on the agent in an agency agreement, which will also apply and which may impose stricter obligations than an agent’s fiduciary or statutory duties.
Principals – your rights
Even though it is open to a principal to rely on the common law or the Regulations, it is prudent to include specific non-compete provisions in the agency agreement. Such provisions will alert an agent, who may not be aware of his fiduciary duties or his duties under the Regulations, to the issue. They will also assist the principal in showing that he did not consent to the agent acting for another principal. At the same time, the principal needs to be aware that the law prohibits a principal from imposing too onerous non-compete restraints on his agent.
Under the common law doctrine of restraint of trade, non-compete restraints agreed with an agent will only be enforceable to the extent that they do no more than is reasonably necessary to protect a principal’s legitimate business interests. Such restraints must also be reasonable in terms of extent, duration and geographical scope. The wider the scope of a non-compete restriction included in an agency agreement, the greater the risk that the principal will not be able to enforce it against the agent.
The Regulations place comparable constraints on principals, by stipulating that non-compete restraints will only be valid if they:
- are in writing;
- relate to the territory and products given to the agent;
- do not last more than two years after termination of the agency; and
- do not contradict the common law doctrine of restraint of trade.
A principal who has not consented to an agent acting for another principal is entitled to terminate the agency agreement immediately. As a result the agent will lose the right to compensation or indemnity payable under the Regulations, which could mean that the agent has lost a very considerable sum. Further, the principal may claim damages or even an account of profits from the agent, who will have no defence.
If the principal does nothing or delays taking action after learning that his agent is acting for another principal, then the principal is at risk of giving up (or “waiving”) his right to object and so to terminate the agency agreement without liability under the Regulations.
Irrespective of this, it is open to the principal to elect to treat as continuing (or “affirm”) the agency agreement without giving up his right to claim damages from the agent for loss suffered as a result of the breach. However, mere inactivity by the principal after learning of the breach does not amount to affirmation.
In order to affirm the agreement, the principal must be aware both of the facts giving rise to the breach by his agent and of his right either to treat the agency agreement as at an end or as continuing. Whilst an election to affirm the agreement can be express or implied, a principal finding himself in this situation would be well-advised to write without delay to the agent confirming that the agent is in breach and the remedy the principal has chosen.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact , Jane Elliot, Stephen Sidkin, www.agentlaw.co.uk