Written by Steve Sidkin
11 April 03
With the confused decision in Ingmar v Eaton Leonard the pendulum which had been swinging between agent and principal was sent into a spin. Accordingly it was hoped that the next High Court decision on interpreting the compensation provisions of Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993 (as amended) would stop this giddiness. Unfortunately, the very recent decision in Tigana Limited v Decoro Limited has resulted simply in the roundabout picking up more speed.
The agent was very successful in obtaining orders for Decoro’s leather furniture from a significant number of well known furniture retailers. All went well until Spring 1999, when it appeared that Decoro’s products did not comply with the Fire Safety Regulations. Unsurprisingly, this strained Decoro’s relationships with its customers and also Tigana.
As a result of a number of steps taken by both Tigana and Decoro, the goodwill of many retailers was retained. Unfortunately the agency relationship did not survive. Commission payments were not made on time by Decoro. In addition, one retailer proposed to deal directly with Decoro whilst another began to communicate directly with the manufacturer. Ultimately Decoro decided not to renew the agreement when it expired on 31 December 1999.
Although Tigana was no longer the agent, Decoro’s sales in the UK increased substantially in 2000. They then dropped by more than a fifth in 2001 before recovering significantly in 2002.
Tigana claimed for unpaid commission, post-termination commission under Regulation 8, and compensation under Regulation 17. Just before trial Decoro conceded the entitlement of Tigana to unpaid commission.
In Ingmar the agent had been awarded post-termination commission although the basis of the claimant’s entitlement under Regulation 8 was not explained. In contrast a significant part of the judgment in Tigana was concerned with the agent’s entitlement to post-termination commission.
Regulation 8(a) provides an agent with an entitlement to commission on transactions concluded after the agency contract is terminated if the transactions are mainly attributable to the agent’s efforts before termination and they were entered into within a reasonable period of time after termination. The court considered that what was a “reasonable period” depended on the circumstances of the case. In respect of Tigana, the view was taken that the agency was very much dependent on the activities of Tigana’s owner, Mr Coleman, at the outset. While recognising that it was important that Mr Coleman maintained a regular liaison with customers which he had introduced to Decoro and assisted in after sales service, it was considered that these were aspects of cementing the relationship created by the initial introduction. The role played by Mr Coleman was contrasted with that of Tigana’s successor whose activities were more of a technical consultant for a period of 9 months after the end of Tigana’s agency agreement.
On this basis, it was decided that 9 months would be a reasonable period for the purpose of Regulation 8(a). Accordingly, Tigana was entitled to commission on orders received by Decoro during the 9 month period following the expiry of the agency agreement. Interestingly this was mid-way between the 18 month period for post-termination commission claimed by Tigana’s counsel and the zero entitlement to post-termination commission pleaded on behalf of Decoro.
However, the question has to be asked whether it was correct to award post-termination commission given the facts. The rationale for Regulation 8(a) is that effort may be expended by the agent before termination which only results in an order being placed some time after the agency has terminated. In this situation the particular order (or pipeline contract) would not be taken into account when calculating indemnity or compensation under Regulation 17. Accordingly the purpose of Regulation 8(a) is clear – the agent should receive something given that his efforts will not be rewarded under Regulation 17. As such it can be queried whether the draftsmen of the Directive intended an agent to benefit in the circumstances which faced Tigana. It was fortunate for Tigana that the court focussed on the concept of front loading the relationships with customers.
Attention then turned to the question of whether Regulation 17 applied to an agency agreement expiring by effluxion of time. Following on from an earlier Scots case, it is surprising that this matter was addressed in the way it was. However, it was pointed out that Decoro’s counsel had conceded that Regulation 8 applied to agency contracts which had so expired. As such it would not do for there to be a difference between Regulations 8 and 17 on this issue. Attention was also given to the report of the European Commission published in July 1996. The report noted that the indemnity concept clearly provides for payment on the ending of a fixed term contract. Given that Regulation 17 is concerned with both indemnity and compensation it would be surprising if there was to be a difference as to the application of each to the expiry of fixed term agreements.
The amount of Tigana’s compensation was then considered. In the judge’s opinion, Article 17 of the Directive was a compromise between the German indemnity system and the French compensation system. Whilst recognising that Regulation 17 provided for both, he implied that the application of either indemnity or compensation should be the same. In doing so, he failed to recognise that the reason for the Directive providing for indemnity or compensation was that the European Council had accepted the possibility of different outcomes depending on which system was applied.
In Barret McKenzie, the court tried to identify certain criteria to be taken into account in determining the amount of compensation. In Ingmar, it had come up with different criteria. Unfortunately in Tigana, the judge chose not to comment on these earlier criteria. Instead he developed his own list of criteria. It partly overlaps with that in Barret McKenzie and shares as a common criterion with Barret McKenzie and Ingmar the issue of the duration of the agency agreement. Unfortunately, but consistently with the two earlier cases, no attempt was made to explain how this criteria were to be applied or, indeed, how they had been applied them in arriving at the decision as to compensation.
It may be that part of the reason for this was that the judge was clearly determined not to be subject in any way to the decision in King and, therefore, French law. But in making this assertion the court deliberately ignored the need to apply a purposive approach to the Directive.
To bolster his position, the judge then pointed to the provision dealing with indemnity and compensation in the European Self-Employed Agents Directive. He considered that if the corresponding provisions and the Regulations were to be interpreted so as to provide for an award for compensation very significantly in excess of the maximum available be way of indemnity, then this would simply enhance the diversion between the two types of remedy available for terminated agents. Such an approach is self-serving. It is unlikely that if the indemnity approach had been applied, Tigana would have received as much as it did by way of compensation. It also ignores the very different ways in which German and French laws (sources of indemnity and compensation respectively) provide for their calculations. Furthermore it ignores the fact that only the United Kingdom provides in its legislation for both indemnity and compensation. No other EU member state is faced with this problem.
The judge also expressed concern about a benchmark or tariff system applying in this situation. He mentioned the situations where following termination the principal had no benefit resulting from the agency and where the agent would have derived no benefit after termination in any event, and the situation where the principal retained substantial benefit and where the agent would have continued to derive considerable commission had the agency continued. But the very essence of a benchmark is the possibility that different “prices” will apply. Furthermore by using these particular examples he relied on Regulation 17(7)(a) to interpret Regulation 17(6) itself.
Having rejected the benchmark approach, the court considered that in assessing the compensation to be paid to an agent it was necessary to have regard to the “balance sheet” of relevant considerations by reference to the circumstances of each case. In the present case it drew particular attention to the substantial benefits which Decoro had derived from customers introduced by Mr Coleman. On the other hand it was noted that Tigana had been able to act for other principals and was not subject to a post-termination non-compete provision.
Nor did the judicial somersaults finish at this point. Was compensation to be awarded by reference to the gross or net commission received by the agent? Despite the statement made in Barret McKenzie, the judge in Tigana did not think that it would be wrong in principle for compensation to be awarded by reference to an agent’s gross remuneration. However, he also considered that he was fully entitled to award compensation on a net basis. But again, the judge chose to rely on Regulation 17(7) to justify his analysis of Regulation 17(6). On this basis he decided that Tigana should be awarded compensation equal to its remuneration during the almost 15 months of the agency relationship. From this he applied a deduction of 20% to the gross commission.
Before concluding the judge made clear that had he applied the two year benchmark approach, he would have departed from it so as to arrive at the same decision that he did!
Whether or not the judge felt compelled to cover the benchmark issue, it would appear that he was concerned to justify what he considered was a fair amount of compensation. It also had the advantage of avoiding applying the two year benchmark approach of King to a situation where the agency agreement had been for a fixed term of one year and the relationship itself had lasted for less than 15 months.
It was therefore probably best that Tigana did not also claim against Decoro for back commission under Regulation 10 or damages under Regulation 4 (although it is clear from the judgment that it could have done so). Others will have to interpret these further rights of agents under the Regulations.
A curate’s egg both for Tigana and Decoro.
This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.agentlaw.co.uk).