The Commercial Agents Regulations

Written by Jane Elliot
2 March 94

New Years Day 1994 saw a revolution in UK agency law with the coming into effect of the Commercial Agents Regulations based on a 1986 EC Directive.

The salient points of the Regulations may be summarised as follows:

• A manufacturer will owe certain duties to the agent.  These include informing the agent of the acceptance, refusal or non-execution of a contract obtained by the agent.  It is also necessary that the agent be notified if the manufacturer anticipates the volume of contracts being significantly lower than the agent would normally have expected.
• Agency contracts may provide for commission to be paid only on active as opposed to passive sales. This is the difference between the customer’s first order going through the agent and subsequent orders going direct to the manufacturer.  Alternatively the agency contract may not provide for commission on generic sales – the fact that the customer is of a type or based in the area covered by the contract is of no value if the order is given directly to the principal.  However, this changed on 1 January 1994.  Agents are entitled under the Regulations to a commission on passive and generic sales – unless the parties contract out.
• There are similar principles under the Regulations entitling the agent to commission on transactions concluded after termination of the agency contract where the order was received before termination.  Alternatively the agent will be entitled to commission if the order was mainly attributable to his efforts whilst he was an agent and if the resultant transaction was entered into within a reasonable period of time after termination of the contract.  To escape paying commission in this situation the manufacturer has a choice.  He can seek to exclude the agent’s right to post-termination commission.  Alternatively, where a new agent has been appointed, he can hope that there is a dispute between the old and new agents as to who is entitled to commission.
• Under the Regulations commission will be due as soon as the manufacturer has executed the transaction, or as soon as the manufacturer should have executed the transaction or the customer has executed the transaction.  Unfortunately the Regulations do not explain what is meant by “execution”.  As such it seems that the agent is entitled to commission in situations where orders exceed supplies and the manufacturer fails to deliver against some orders, or the goods are returned by the customer on the basis that they are “faulty”.
• Irrespective of whether or not the supplier has been paid by the customer, the agent’s commission must be paid within 31 days following the quarter in which it became due.
• With the commission, the manufacturer has to provide the agent with a statement showing how the commission has been calculated.  The Regulations give the agent the right to look at the manufacturer’s books to check the accuracy of the statement.  To avoid disclosure of confidential information, the manufacturer will need to operate a separate book of account for each agent.
• Unless the contract is for a fixed term, notice is necessary to terminate it.  Depending on the length of the contract, the notice period required to be given can be superior to that which would have to be given to an employee.  However, where a fixed term contract comes to an end and is still observed by manufacturer and agent, it will cease to be a fixed term contract and again notice will have to be given.
• Probably the most controversial issue covered by the Regulations is the agent’s entitlement to an indemnity or compensation on termination of the agency contract.  An indemnity or compensation is clearly payable on termination where the contract is for an indefinite term.  It now appears that an indemnity or compensation is also payable on termination of a fixed term contract.  Unless the parties agree otherwise, the agent is entitled to be compensated rather than indemnified.  For the purpose of determining compensation the Regulations provide a non-exhaustive statement of certain situation where damage is considered as particularly occurring.
• An indemnity or compensation is also payable when the contract comes to an end either as a result of the death of the agent or if the agent terminates it as a result of his age, infirmity or illness!  Contracting out of these provisions is not possible.
• The nature of the Regulations is such that where an agent engages a sub-agent, the Regulations may also apply to that relationship.
• The Regulations also regulate the validity of restraint of trade provisions designed to operate after the agency has come to an end.
• The Regulations apply to all commercial agency contracts existing on or made after 1 January 1994.  In the case of existing contracts, benefits arising under the Regulations are in addition to the rights of an agent accrued under an existing contract.
• The Regulations apply to all commercial agents undertaking activities within Great Britain unless the parties have agreed that the law of another member state of the European Union shall apply.  The Regulations also apply to other agency contracts outside of Great Britain which are expressed to be subject to them.  Accordingly care is needed to ensure that the agent does not seek to rely on the law of another member state which also implements the EC Directive but gives the agent even greater rights!

Faced with these provisions, principals should consider the desirability of continuing with an agency sales force.  If a decision is made to continue with agents, steps should be taken to review existing contracts and, if necessary, replace them with new contracts.

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)