Staying in Harmony

Written by Steve Sidkin
1 August 00

The rights given to agents by the Commercial Agents (Council Directive) Regulations 1993 (as amended) have caused many principals to look at a variety of methods of circumvention. One in particular which has been considered by principals outside of the European Economic Area has been providing for the applicable law to be that of a non-EEA Member State.

In 1998 the extent to which such a provision could be relied on in order to avoid the application of the Regulations came before the Court of Appeal in Ingmar GB Limited v Eaton Leonard Technologies Inc [specify reference]. From 1989 Ingmar had acted as the UK and Ireland commercial agent of the defendant, California corporation. The applicable law was that of California. However, when the agreement terminated in 1996 Ingmar claimed that it was entitled to compensation under the Regulations. Unsurprisingly Eaton disputed this claim on the basis that the applicable law was that of California. At first instance in 1997 the defendant was successful. On appeal, the Court of Appeal decided to make a reference to the European Court of Justice as to the applicability of the European Self-Employed Agents Directive (86/653/EC) where a non-EU State law had been chosen as the applicable law of the contract.

The purpose of the Directive is the co-ordination of the laws of Member State relating to commercial agents. Its justification is that differences in national laws concerning commercial representation substantially affect the conditions of competition and the carrying on of that activity within the European Union. This is detrimental both to the protection available to commercial agents vis-à-vis their principals and to the security of commercial transactions. The Directive further provides that the harmonization measures which it prescribes shall apply to the laws of the Member State.

So far as the Regulations are concerned it is made clear that they govern the relations between commercial agents and their principals and apply in relation to the activities of agents in Great Britain (Regulation 1(2)). Neither the Directive nor the Regulations expressly address the issue of what is to happen where the applicable law of an agency contract is that of a non-EU State.

On 11 May 2000 Advocate General Léger delivered his opinion on the question which had been referred by the Court of Appeal.

In considering whether the Directive had extra-territorial effect, the Advocate General drew upon the decision of the ECJ in Åhlström and Others v Commission [1988] ECR 5193. This was a case concerned with Article 81 (formerly 85) of the EC Treaty. In its decision the Court made it clear that the ability of the Community to apply its competition rules to anti-competitive price fixing was covered by the territoriality principle as universally recognised in public international law. It rejected the appellant’s claim that public international law precludes the Community from regulating conduct restricting competition adopted outside of the European Union merely by reason of the economic repercussions which that conduct has within the European Union. Accordingly where economic operators have a link with the territory of the Community (such that their conduct may affect the Community’s interests) they would be subject to the Community’s jurisdiction.

Advocate General Léger considered this to be a vital principle, particularly given the harmonization objective set out in the Directive. Furthermore once one of the parties to an agreement had a link to the territory of Member State (either through physical presence or economic activity) the jurisdiction of Community law to the relationship in question would be established. This was so whatever the relationship between that party and the other party outside of the Community. In this respect the Advocate General pointed to Articles 43 and 49 (formerly 52 and 59) of the EC Treaty and to Articles 47(2) and 55 (formerly 57(2) and 66) of the EC Treaty on which the Directive was adopted.

Eaton had also argued that the Directive did not apply where one of the parties was outside the Community given the language of the second preamble to the Directive. This refers to the principal and commercial agent being established in different Member States. This argument had found favour with the High Court.

In essence Eaton’s argument was that if the principal was not based in the Community, his relationship with the commercial agent could not be dealt with under the principles of the free movement of persons and of services. But this was given short shrift by Advocate General Léger. He pointed out that the second preamble presupposed that harmonization would enable commercial agency contracts to be made more easily. Harmonization should continue irrespective of a commercial agent within the EEA being linked to a principal outside the Community.

He then went on to refer to the other purpose of harmonization of the Directive, namely to reduce the differences affecting the conditions of competition and to ensure a minimum level of social protection for commercial agents. This is addressed by the first part of the second preamble. But it makes no reference to the location of the contracting parties. As such it provided further weight against Eaton’s argument.

But then what of the right of the parties to any contract of freedom to chose the applicable law? In answering this question the Advocate General highlighted these provisions of the Directive which do not allow derogation. Prime among these is Article 17 providing for the payment of an indemnity or compensation to a terminated agent. This constitutes both a guarantee for the agent and a burden for the principal.

In this situation the choice by the parties of California law would reduce the protection available for the agent. More fundamentally it would rupture the harmonization objective of the Directive. In turn this would encourage any principal in a position of economic superiority vis-ά-vis the prospective agent to demand that the applicable law be that of a non-EEA State.

In this respect Advocate General Léger’s opinion is to be welcomed. It would clearly by unsatisfactory for such an important part of the Directive to be circumvented by the expedient of specifying the law of a non-EEA State as the applicable law. It can be expected that the ECJ will agree with this opinion. The consequences for non-EEA (in the main US) principals will be grave.

However, what is far from satisfactory is the Advocate General’s distinction between those provisions of the Directive which do and do not permit derogation. The Advocate General gave Article 6(I) as an example of the former. Similarly in respect of Article 13, which was recognised by the ECJ in Bellone v Yokohama [1998] ECR I-2191. These Articles confer a right of derogation for member states.

In contrast certain provisions of the Directive do not refer to any right of derogation. In Advocate General Léger’s words they are “rules of a mandatory nature” and “the parties may not contract out of them.”

But in comparing the rights of derogation of member states and of contracting parties, the Advocate General has overlooked those provisions of the Directive (and the Regulations) which whilst expressed in absolute terms do not prohibit derogation by the parties. For example, the concept of post-termination commission under Article 8. Will the ECJ address this lacuna in the Advocate General’s opinion?

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)