PJ Pipe and Valve Co Limited v Audco India Ltd

One of the most recent cases concerning the Commercial Agents Regulations decided by the High Court has gone some way to clarifying three aspects of the Regulations which previously had given rise to dispute.  Unfortunately in doing so it leaves open the probability of continued dispute as to how to measure both compensation and an entitlement to post-termination commission.

PJ Pipe and Valve Co Limited was an agent in the petrochemicals industry.  It was concerned to promote and sell products (particularly valves) in that industry.  The defendant, Audco India Limited, was a manufacturer of valves, some of which were used in the construction of petrochemical process plants.  In February 2002 the parties signed a general exclusive agency agreement for a period of two years.  However, in the Autumn of 2002, Audco acted in repudiatory breach of the agreement.  In December 2002 PJ Pipe accepted the repudiatory breach. 

The first issue in respect of the Regulations to be determined by the Court was that of the agent’s authority to negotiate.  The Regulations do not make clear what is meant by “negotiate”.  With reference to this it was clear to the Court that PJ Pipe did not have authority to negotiate sales in the sense that it was not empowered to agree terms or pricing.

PJ Pipe maintained that it had authority to “negotiate the sale” of Audco’s products in a wider sense of the term “negotiate” relying on an earlier decision of the Court of Appeal in Parks v. Esso Petroleum.  It also claimed that its role as an agent was similar to that of the agent in the earlier case of Tigana v Decoro.  Accordingly it was necessary for the Court in PJ Pipe v. Audco to consider, first, whether PJ Pipe dealt with, managed or conducted the relevant transaction and, second, whether a material process of negotiation was involved.

The Court accepted that one of a number of factors that may demonstrate the existence of a commercial agent is whether it has the authority to negotiate the sale of relevant products.  However, subject to that the defendant’s argument was rejected.  Instead PJ Pipe was found both in the short and the long term to be retained in order to develop goodwill on the part of Audco.  In reaching this decision the Court pointed to the role of PJ Pipe which was to deal with and conduct (and, in part, manage) the relevant discussions and transactions at the time when the manufacturers where being selected by the contractor.  In particular PJ Pipe had effected the crucial introduction and played a significant role in persuading the contractor to be interested in Audco’s products.  PJ Pipe then assisted in ensuring that Audco was placed on the approved list of vendors and received the invitations to tender.  In addition PJ Pipe assisted with quotations and queries and provided feedback and advice on how the quotation could be improved. 

In this respect the decision is to be welcomed.  For some time there was uncertainty as to whether a so called introductory agent was a commercial agent for the purpose of the Regulations.  In part, this was as a result of the DTI’s Guidance Notes of September 1994.  However, following on from Parks and TIgana, it is clear that PJ Pipe represents the final nail in the coffin of those who would seek to argue that an introductory agent is not a commercial agent for the purpose of the Regulations.

The Court then turned to the question of how compensation under the Regulations was to be calculated.  In doing so the Court was presented with both a challenge and an opportunity.  The challenge was to determine a way of providing compensation to PJ Pipe given the short duration of the agency agreement as against the two year benchmark approach applied usually in the French courts.  The opportunity was to try and lay down a definitive approach to the calculation of compensation both for PJ Pipe as well as for those disputes between agent and principal which might follow. 

Justifying departure from the two year French benchmark approach, the Court decided that regard was to be had to the “balance sheet” of relevant consideration by reference to the circumstances (that is, facts) of the case. 

It also decided that in calculating compensation whilst it is necessary that there is an appropriate fair result, it may be necessary in some situations to accept that compensation cannot be calculated with a high degree of precision and that instead it will be necessary to apply a broad brush approach.

The Regulations provide that an agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal.  However, the Court held that this did not mean that it was a necessary precondition that the principal had benefited from the agent’s prior efforts.  Instead the issue of the benefits to be provided to the principal may have a prospective or retrospective focus (or both) depending on the circumstances.

Following on from this and given his wish to arrive at an appropriate and fair result, the judged decided that it was necessary to try and determine whether PJ Pipe would have been able to earn commission by proper performance of the agency had the agreement not terminated in December 2002.  In doing so the court was to look at what had been achieved in the past.  With reference to this it was noted by the court that PJ Pipe had been let down repeatedly and seriously be Audco.  As such it was unlikely that the relationship between them would have continued beyond the expiry of the twelve month period.  However, the Court recognised also the importance of the first successful introduction given that once a manufacturer has achieved a foothold in the market further opportunities may reasonably be expected to follow.

The Court held that the fairest and most proportionate result was to approach compensation on the basis that over that twelve month period and, given the distrust which existed between the parties, PJ Pipe would have effected one further successful introduction in fulfilment of its agency. 

The Court had then to determine the amount of commission which that order would have generated.  In doing so it chose to take the average of the commission paid or awarded by the Court in each of the six projects (or phases of projects) where the agent’s activities had resulted in orders for the principal.  In doing so it recognised that there was an element of “rough and readiness”. It recognised also that the average produced a relatively low figure given that PJ Pipe had been able to effect introductions at a rate well over one a year and that one of the commission rates used in determining the average had been 2 per cent.  In order to provide a balancing factor for the agent it was ordered that compensation would be paid on a gross rather than net basis.

If the judgment given in this case is followed then in determining the amount of compensation the courts will look to the following: 

1. Flexibility is critical.  As such regard is to be had to the “balance sheet” of relevant considerations by reference to the circumstances of each case. 
2. If the agency agreement has had a short life, the two year French benchmark approach will be of a little assistance in securing a just result.
3. On the contrary it is necessary to apply a fact driven, broad brush approach in determining the amount of commission which the agent would have earned had the agency agreement not terminated.

The other issue concerning the Regulations was that of the calculation of post-termination commission.

In looking at this issue it is clear from the judgment J that the facts are all important.  First in determining whether an order received after termination was “mainly attributable to the agent’s efforts made before termination”.  It was also important in determining what might be a reasonable period.  In PJ Pipe v Audco it was accepted by the court that it was normal given the engineering requirements of large-scale petrochemical projects that there could be a gap of nineteen months between one order resulting in a further order being made. 

Overall the nature of the judgment given in PJ Pipe v Audco is such that in respect of compensation it is likely that the battlefield will turn to arguments as to the factors to be taken into account for the purpose of the balance sheet.  Moreover is assessing post-termination commission it can be expected that if the facts permit, agents will seek to be inventive in linking orders placed pre-termination with those received by the principal after termination.  As such, some may question whether the Regulations have been clarified at all by this judgment.

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