The Sub-Agent’s Enigma

Written by Steve Sidkin
25 June 04

According to the old adage, two’s company, three’s a crowd. The trouble is that whilst that might be correct in respect of certain personal relationships, in business it is often the case that an agent will engage a sub-agent.

Whether or not a relationship of principal, agent and sub-agent turns out to be crowded, the legal position of the sub-agent needs to be determined. This is particularly given the fact that the Commercial Agents Regulations contemplate only two persons, namely, the commercial agent and the principal. Indeed the definition of a commercial agent is that of a self-employed intermediary having continuing authority to negotiate the sale of purchase of goods on behalf of the principal or to negotiate and conclude such sales or purchases.

On this basis it would appear that a sub-agent cannot be covered by the Regulations – the sub-agent has a contractual relationship only with the agent, but the agent is not the owner of the goods for which the sub-agent is to obtain orders. As a result the sub-agent does not come within the strict definition of a commercial agent and the Regulations do not apply.

Whether this is in fact the correct legal analysis is another point. In the recent case of Light -v- TY Europe claimants entered into selling rights agreements with a third party which sold the defendant’s products on commission. The agreements required the third party to promote and sell the products and the terms and conditions for a price established by the defendant. The defendant had an absolute right to decline or cancel orders.

From June 1997 the claimants entered into sales agency agreements with the third party which provided that they were to remain in effect until the third party ceased to be the sole agent of the defendant. The agreements recited that the third party was the sole authorised agent of the defendant for the sale of its products. The agent was to make every reasonable effort to promote and sell the products in his territory on terms and conditions and a price established by the third party and be paid commission. When the agreements were not renewed, the claimants brought an action against the defendant claiming compensation under Regulation17.

At first instance, the claimants were successful. The defendant appealed.

The Court of Appeal held that the claimants were self employed intermediaries coming within the definition of a commercial agent within Regulation 2(1). However, it held that there had to be a contract between the claimants qua commercial agents and the defendants qua principal before the Regulations applied. The substantial rights and obligations laid down in the Regulations were only intended for those in a contractual relationship.

The Court of Appeal held further that it was clear from the Regulations that the agent must have been entitled to remuneration for his services from the principal. As such there must have been a direct legal, contractual or quasi contractual relationship between the principal and the agent. A sub-agent who did not have a direct contractual relationship with the principal could not qualify for compensation under the Regulations merely because he was self employed and had authority delegated to him by the principal’s agent. As no such legal relationship existed between the claimant and the defendant, the claimant was not entitled to compensation under the Regulations.

Before this in Pace Airline Services -v- Aerotrans was concerned with a claim by a sub-agent against its agent. The English general cargo agent of Ukraine International Airlines had an agreement with a German company by which it was to act as the sub-agent of the German company in the marketing of cargo space on UIA flights. When the parties fell out, Pace sought to recover monies due to it under unpaid invoices. In its defence, Aerotrans claimed that it was an agent under the Regulations. It claimed compensation in excess of £50,000. The court was uncertain as to whether or not the Regulations applied. It stated that guidance was needed as to whether the Directive was intended to cover sub-agency and a question was referred to the European Court of Justice.

It was hoped that the decision of the European Court of Justice would clarify this issue. However, as the case did not proceed, this will not now happen.

The Government has expressed its own view. At the time the Regulations were made, the Government referred in a written answer to a question asked in the House of Commons to the guidance notes on the Regulations which were at that time being prepared by the Department of Trade and Industry. It is the view of the DTI that whilst the position was unclear, the Regulations are, in principle, capable of covering sub-agency agreements.

Despite this it is considered likely that when in the future the issue does come before the European Court again, it will try to interpret the Directive (and therefore the Regulations) in a way as to include sub-agents. If this is correct, then a sub-agent will have the rights to which a terminated agent is entitled under the Regulations against his principal. But these will be rights that the sub-agent has against the agent. Accordingly an agent considering appointing a sub-agent should think carefully about the terms of the sub-agency agreement. Advantage should be taken where possible of the Regulations as if the agent stood in the position of principal towards its sub-agent acting as its agent.

Meanwhile a principal should consider whether he is content for his agent to appoint a sub-agent which in the future may try to pursue a claim against the principal, despite Light.

If the sub-agent is protected by the Regulations, on termination it will be possible to claim compensation or indemnity (depending on the terms so of the sub-agency agreement). In the event of compensation, a sub-agent will be able to claim entitlement equal to twice the average annual commission during the three years proceeding termination or the global sum of the last two years. In contrast if the sub-agency agreement provided for the giving of an indemnity, the sub-agent would be limited to a maximum of the average annual commission received by the sub-agent during the preceding five years (or shorter period reflecting the actual length of the sub-agency agreement).

If termination occurs without proper notice being given, the Regulations lay down the minimum notice depending upon the duration of the sub-agency agreement. It can be up to three months. But the Regulations specify that in the absence of agreement between the parties, a notice must expire at the end of a calendar month. If the agent gets it wrong, a notice period amounting to three months and thirty days could be claimed by the terminated agent.

On termination the sub-agent will also be entitled to commission accrued but unpaid. Usually this is recognised without too much difficulty. Less so, however, the sub-agent’s right to post-termination commission. In the case of an agent, the Regulations provide for commission to be received on transactions entered into within a reasonable period after termination of the agency agreement where those transactions resulted from efforts made by the agent during the agency. What is a reasonable period will vary and depend on the characteristics of the particular industry. But there is no reason why it cannot be for a period of eighteen months following termination, if not longer.

Sometimes a principal accepts an order obtained by an agent and then fails to deliver against that order. There can be a number of reasons for non-delivery such as late delivery, short delivery or simply poor quality. Although it is not permitted under the Regulations, an agency agreement often provides for the agent only to receive commission if and when the principal has been paid. Where, however, the principal is to blame for not being paid (as in the case of non-delivery of an accepted order), the agent will still be entitled to commission on such orders. Whether a sub-agent will be able to claim against the agent where the principal is to blame remains to be seen.

For principal and agent alike, the position of a sub-agent can result in many difficulties. Despite (in the case of principals) or because (in the case of agents) of Light both should be considering those aspects of the Regulations which can be utilised so as to try and prevent a substantial claim by the sub-agent. What is clear is that failure to act is likely to be costly.

This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin, who www.agentlaw.co.uk