The Applicability of the Regulations

Written by Steve Sidkin
1 May 01

The dominance of national law over what the contracting parties have agreed is a well understood issue. By way of example, it has been the case for many years that an employer cannot avoid a claim for unfair dismissal by providing for the employment contract to be governed by foreign law. In the context of commercial agents, however, many a non-European Economic Area principal has relied on his national law being the applicable law of the agency contract so as to avoid the operation of the Commercial Agents (Council Directive) Regulations 1993 (as amended).

The Court of Appeal considered the validity of this reliance in Ingmar GB Limited v Eaton Leonard Technologies Inc. Eaton, a Californian corporation appointed Ingmar as its UK and Ireland agent in 1989. The agency contract provided for the law of California to be the applicable law. In 1996 the contract came to an end. Ingmar argued that as the contract was subject to the Regulations, it was entitled to compensation. Eaton disagreed. It claimed that the applicable law was that of California. Accordingly the Regulations did not apply. The Court of Appeal decided to refer to the European Court of Justice the question of the applicability of the European Self-Employed Agents Directive (86/653/EC) to an agency contract where the applicable law was that of a non-EEA state.

Before the European Court of Justice, Eaton argued that provisions of the Directive concerned with the right of the agent to compensation (or indemnity) on termination were not mandatory. Such mandatory rules arose only in extremely limited circumstances. The Directive was intended to harmonise the domestic laws of the member states. Accordingly there was no reason for it to apply to a principal established outside of the European Union.

This claim was rejected by the European Court of Justice. It decided simply that the provisions of the Directive concerned with compensation and indemnity were mandatory. Their purpose were to protect all commercial agents, freedom of establishment and the operation of undistorted competition in the internal market. In making its decision its reasoning was fundamentally more simplistic than that of Advocate General Léger whose opinion was given in May 2000.

The European Court of Justice’s decision was expected. But it is still of great importance for non-EEA principals who have agents within the EEA. No longer can they rely on their national laws safeguarding them against claims from agents on termination. The fact that such claims for compensation or indemnity are regularly in five or six figures means that, for example, a US principal with an agent in each of the eighteen member states of the EEA could easily face a £1 million plus claim if it decided to reorganise its selling structure.

The decision leaves open the issue of where do the mandatory rights given to agents by the Directive end in a situation such as that of Ingmar. In reaching its decision the European Court of Justice highlighted that the choice of law made by the parties would be overcome where the purpose of the provisions in question was to harmonise the differences in national laws. As the European Court of Justice pointed out, differences in national law are detrimental to the protection available to agents and to the security of commercial transactions.

This was certainly the case in respect of the right to compensation or indemnity. But what of the other rights given to commercial agents. The right, for example, to minimum notice of termination?

In the short term non-EEA principals should try to tighten up the terms of agency contracts where it is possible to do so within the terms of the Regulations or the equivalent national laws within the EEA.

In the long term, such principals should consider the desirability of agents as opposed to employees, distributors or franchisees in the relevant member state. There will be costs involved. For example, employees will have employment law rights. (Indeed German law gives distributors rights which are parallel to those of agents). However, depending on the principal’s commercial objective, it may well be better for him to pick and choose which route to follow in particular member states so as to reduce his exposure to claims.

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