It is understandable that claims for compensation or indemnity made by agents under the Commercial Agents (Council Directive) Regulations 1993 (as amended) should lead principals to look to various defences.
One of the most obvious defences is that the agent is not a commercial agent for the purposes of the Regulations. In an awkward piece of drafting (that reflects the European Self-employed Agents Directive 86/653/EC) the Regulations define a commercial agent. However, they then proceed to identify certain types of agents to whom the Regulations do not apply. One category in particular are persons whose activities as commercials agents are to be considered secondary.
The provisions of the Schedule to the Regulations have effect for this purpose. How to interpret one important part of the Schedule was at the heart of the recent case of AMB Imballaggi v Pacflex.
The plaintiff, AMB Imballaggi Plastici Srl, was an Italian manufacturer. The defendant, Pacflex Limited, also manufactured plastic packaging materials. In addition, it imported the materials into England.
The case arose as a result of Pacflex’s failure to pay for more than £32,000 of materials received. Whilst it admitted certain invoices were unpaid, it claimed that it was entitled to unpaid commission and compensation following termination of an agency agreement between the parties. Did the Regulations apply between the parties?
Unfortunately the agreement between them was not in writing. The difficulty this caused was compounded by the fact that Imballaggi had been prepared to do business with Pacflex acting either as a distributor or as an agent. Nor was the situation helped by the fact that Pacflex’s sales director described agents both as middlemen who bought and resold goods and as middlemen who acted as agents for a commission.
On the facts the court had little difficulty in finding that Pacflex has chosen to act as a distributor. Furthermore it was noted that at no time did Pacflex have authority to negotiate on behalf of Imballaggi. This is a critical test in itself for establishing whether an agent is a commercial agent for the purposes of the Regulations. Conclusively the court found that Pacflex did not negotiate for Imballaggi.
Judge Jack QC then went on to consider whether, if Pacflex had been an agent, its activities would have been secondary. This is an important issue. The Regulations follow the EC Directive which they implement almost word for word. An exception arises, however, in respect of the Schedule to the Regulations, which determines if a party’s activities as an agent are primary or secondary. If the former, the Regulations will apply. If the latter, they will not.
As the court pointed out, the Directive gives no guidance as to the sense in which “secondary” is used. Logic dictates that “secondary “ is to be contrasted with “primary” and that it relates to the agent’s activities. As such it is a question of whether the activity of the agent is secondary in that his agency activity is not his primary activity. This is consistent with the purpose of the Directive – as agent whose activity as an agent is secondary will not need the protection that the Directive provides.
But this analysis conflicts with most of the provisions in the Schedule, which are concerned with the nature of the agent’s trade and not with whether the agent’s activities are primary or secondary. Indeed only one provision in the Schedule relates to the question of whether the agent’s activities are secondary in relation to his other activities.
The great irony of the situation is that whilst the Department of Trade and Industry drafted the Schedule it also published guidance notes to the Regulations in 1994. The notes make it clear that it is the DTI’s view that the comparison is to be made between the agent’s activities as a commercial agent and his other activities. The comparison is not with the relationship with the principal.
The court also went on to point out a further inconsistency in the Schedule. Paragraph 1 of the Schedule talks of “a primary purpose….. other than as set out in paragraph 2.” But no purpose is set out in paragraph 2! Instead it sets out aspects of the principal / agent relationship, which are aspects of the trading in question. This relationship’s primary purpose is invariably to undertake trade in the relevant goods and develop that trade. As Judge Jack QC put it:
“It is hard to see what purpose it could have secondary to that, which would be relevant to the application of the Regulations.”
The court concluded that had Pacflex been an agent, its activities would have been secondary in any event and so the Regulations would not have applied. Although it was unnecessary to do so, the court indicated that if compensation was to have been awarded, it would have been on the basis of French legal principals.
The judgment brings home four important issues to be borne in mind by both principal and agent as follows:
- it is desirable for agreements to be written. Failure to do so may prejudice reliance on them.
- If a party acts as both a distributor and as an agent for the same supplier/principal, there is a risk that the agent’s activities will be considered to be secondary resulting in the agent not having the benefit of the Regulations.
- This risk should be reduced for the distributor/agent by using separate trading entities – one as a distributor, the other as an agent. The risk is most unlikely to be reduced by the operation of separate books of account.
- In the case of indefinite term agreements, the agent should be looking for compensation equivalent to two years commission.
As a secondary purpose (!) the judgement also makes clear that corporate agents are covered by the Regulations along with individual agents. Surprisingly this issue is still raised by some principals who would wish that the Regulations did not exist.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any member of the Fox Williams’ agentlaw team.(www.agentlaw.co.uk)
Written by Steve Sidkin