The Laws of Intermediation

Written by Steve Sidkin
1 October 00

The idea of using middlemen in business is centuries old. Commonly, middlemen have been agents and distributors. In some economies, they occupy a powerful position. For example, in Japan wholesalers currently account for approximately 4 million jobs.

Many newcomers to the e-economy have looked at the proliferation of such middlemen as an opportunity. For them the use of agents and distributors do not represent a barrier to market entry. On the contrary, disintermediation is the unofficial watchword of many industries as suppliers seek to eliminate the agent’s commission or the distributor’s profit and improve their own margins.

There is, however, a flip side to such activities. This has manifested itself in a number of ways.

For example, ebookers announced last month that it had expanded into financial services and was to look at offering other products and services. It earns commission on sales made via a website which it launched with Moneygator.com. The site provides access to well known financial service brands.

Another way is where companies offer on their website a click through facility to a supplier, such as Amazon.co.uk. Orders made through the use of this facility result in “referral fees” being paid to the website owner. In essence such fees are commission payments.

There has been also a growth in B2B and B2C portals offering for sale third party products. In some instances these are targetted vertical or “affinity” portals. To all intents and purposes they operate as distributors.

The nature of these businesses focuses attention on the need to incorporate terms and conditions of sale or comply with the Distance Selling Regulations. But legislation aimed at the terrestial economy can also apply, and this may be forgotten.

The Commercial Agents (Council Directive) Regulations 1993 (as amended) implement into English law the European Self-Employed Agents Directive (86/653/EC). The Regulations provides many rights and protections for commercial agents.

It is in the definition of a “commercial agent” that the Regulations may impact on e-commerce. In order for the Regulations to apply the agent must be a commercial agent. Furthermore the Regulations do not apply to a commercial agent whose activities are considered to be secondary.

The Regulations define a commercial agent as a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (“principal”) or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.

For some time it was argued that a “self-employed intermediary” excluded partnerships and companies. This shibboleth was slain in AMB Imballaggi v Pacflex Limited (unreported, 9 February 1998). But in respect of “negotiating” neither the Directive nor the Regulations give any guidance. Nor were the guidance notes issued by the DTI in September 1994 of any real help. What is meant by “negotiate” is uncertain as a result of decisions of the English Court of Appeal and the Scots Court of Session.

In Parkes v. Esso Petroleum [1998] EuRL550 the Court of Appeal considered whether Mr Parkes who operated a self-service petrol station as an agent for Esso was a commercial agent within the meaning of the Regulations. The court looked at the definition of “negotiate” found in The Oxford Dictionary . It decided that “to deal with, manage or conduct” went beyond Mr Parkes’s activity. Such activity simply did not exist in the environment of a self-service petrol station.

In contrast, the Court of Session considered the entitlement to compensation under the Regulations of a self-employed bakery roundsman. It decided in King v T Tunnock Limited [2000] IRLR 569 that he was entitled to compensation equal to the gross amount of commission paid during the last two years of the agency.

The situation is complicated by two facts. The first is that the Court of Appeal in Parkes v. Esso Petroleum failed to take account of German cases which considered the issue of “negotiate” and found that managers of self-service petrol stations did “negotiate”. In essence it ignored the harmonisation principle which underlies as the Directive. At the same time it must be acknowledged that in respect of the issue of “continuing authority to negotiate” a question mark was raised by the Court of Session which noted that it had not been disputed that the appellant was a commercial agent. On balance it seems likely that when the issue next comes before the English courts a broad meaning will be given to “negotiate” to the extent that those providing click through operations on their websites will be commercial agents.

This will have serious implications for their principals in the event that agency agreements are terminated. As a result principals will be concerned to demonstrate that that even if the agent was a commercial agent for the purposes of the Regulations, the agent’s activity was secondary. Unfortunately what is meant by secondary activity is as confused the meaning to be given to “negotiate”. The reason for this is that the Regulations provide that the schedule to the Regulations is to have effect for the purpose of determining whether the activities of a commercial agent are to be considered as secondary.

In drafting the Regulations, the DTI adopted the copy-out technique and therefore the substantive provisions of the Regulations follow almost word for word the English language version of the Directive. But in respect of the issue of “secondary activities” the DTI was forced to abandon the copy-out technique as the Directive provides no guidance on this issue. The result is a schedule of provisions which seem at odds with their purpose. It is no wonder that confusion abounds.

Earlier this year in Tamarind International v. Eastern Natural Gas (Times Law Reports, 27 June 2000) the High Court was asked to decide on the status of agents engaged by the defendant gas company to obtain orders for its gas.

It was suggested that the agents’ activities were secondary on the basis that the gas being sold did not constitute “goods of a particular kind” as required by the schedule. The gas supplied by Eastern was not different to that supplied by British Gas. In addition it was claimed that procuring a transaction on one occasion was unlikely to lead to further transactions in those goods with the same customer on future occasions, or to transactions in those goods with other customers in the same geographical area or among the same group of customers. Morrison J dismissed these arguments. In particular he pointed to the branding of the gas supplied by Eastern.

However, it would seem from Morrison J’s judgment that no account was taken of the earlier decisions in Hunter v. Zenith Windows or Pacflex. This is regrettable, particularly in respect of the Court of Appeal’s decision in Pacflex (1999) CLC 1391.

For Morrison J there was no easy recognizable way of measuring whether activities are secondary or not. In his view the contrast was simply between agents who are covered and those who are not. Indeed, it was clear to Morrison J that what Parliament had done was to ask the court to enquire as to the primary purpose of the agency agreement. That purpose is to be judged by reference to the criteria specified in paragraph 2 of the schedule to the Regulations. The court is to look at the nature of the commercial bargain between the principal and agent.

In view of the uncertainties contained in the language of the criteria, this is unsatisfactory. It was an approach criticized (although accepted given the language of the Regulations) by Waller LJ in Pacflex. To him the comparison to be made is between the agent’s activities as a commercial agent and his other activities, and not the relationship with the principal.

This is the better view. The activities of some who operate click through websites will be such as to take them outside of the rights and protections given by the Regulations. Alternatively there will be other website operators who surprisingly will find themselves covered by the Regulations.

A detailed description of the rights and protections given by the Regulations to commercial agents go beyond the ambit of this article. They can be summarised as a right to a minimum period of notice coupled with the payment of an indemnity or compensation in most termination situations. In addition a commercial agent will be entitled to commission on all orders accepted by the principal unless the reason for the principal not being paid for an order is one for which it is not to blame. The commercial agent will also have a right to commission on transactions made by the principal within a reasonable time following termination which resulted from the agent’s activities.

Many of the Regulations’ rights and protections cannot be contracted out. Unsurprisingly the amounts paid to agents can be considerable. Certainly they can run into millions of pounds and frequently will result in six figure payments.

The position of a website offering for sale third party goods is more straightforward. Under English law termination for cause will not result in compensation being payable to the distributor in the absence of the contractual provisions. However, this is not the position in other countries. Some years ago the German Constitutional Court extended by analogy to distributors the protection given to agents by the German Commercial Code. If the agreement with the website owner is governed by German law, it may be that on termination a payment will need to be made to the distributor along the lines of the indemnity concept set out in the Regulations.

Whether the agreement between the parties is one of agency or distributorship, it is also necessary to bear in mind the new European Commission Regulation exempting various categories of vertical agreements from Article 81(1) of the Treaty of Rome (Regulation 2790/99/EC).

The guidelines to the Regulation make it clear that the European Commission’s view is that every distributor must be free to use the Internet to advertise or sell his products. A restriction on the use of the Internet by distributors can only be compatible with the Regulation to the extent that promotion on the Internet or sales over the Internet will lead to active selling into other distributors’ exclusive territories or customer groups. On this basis a contractual prohibition on the distributor from using a website for passive selling would take the distributorship agreement outside the safe harbour of the new Regulation. In this situation the parties to the agreement will be subject to Article 81 with the possibility of their agreement being void, their being fined by the European Commission and damages being claimed by third parties.

What is clear is that e-commerce provides no hiding place from the laws of intermediation.

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)