Written by Steve Sidkin
11 April 02

Two of the most common forms of commercial relationships are supplier and distributor and principal and agent.  In some parts of the European Union the protection afforded to distributor and agent is such that a third party observer might question the need on this ground alone for any distinction between the two forms.  But the position in the United Kingdom is significantly different.  In short, a distributor enjoys the benefit of his contract and common law.  An agent, however, has the added protection given by the Commercial Agents (Council Directive) Regulations 1993 (as amended).

Unsurprisingly, the question as to whether a party is an agent or a distributor is one that has now come before the Court of Appeal on two occasions.  Most recently in Mercantile International Group PLC v Chuan Soon Huat Industrial Group Plc the Court of Appeal had to grapple with what was, on the face of it, an unusual arrangement.

The defendant was a Singaporean manufacturer of timber products.  For twenty years it had a relationship with the claimant under which the claimant contracted with retailers in the UK.  The defendant was stated to be a party to each contract made with the retailer.  Each contract was confirmed by the claimant to the defendant.  Critically the terms of the confirmation differed in a number of respects to the terms agreed by the claimant with the retailers.  The most significant difference was that the claimant charged the retailers more than the price confirmed the defendant.  The difference between the two prices was its return.

This difference was relied on by the defendant.  It argued that it was consistent with the claimant buying and reselling the timber products as part of a chain.  It pointed to the fact that the claimant’s remuneration was controlled by it – the defendant did not know or control the claimant’s “mark-up”.  Overall the terms confirmed by the claimant to the defendant differed to those agreed with its buyers.  One result of this was that the defendant was always paid by the claimant before the claimant was paid by a purchaser.

So far so good for the defendant in disputing the claimant’s status as an agent.  But the defendant conceded before the Court of Appeal that the claimant had purported to act as its agent for the sale of timber products.  In addition the defendant accepted that the three agreements made by the parties during the lifetime of their relationship had used the language of agency. 

The Court of Appeal’s judgement drew attention to AMB Imballaggi Plastici SRL v Pacflex Limited (see our briefing note entitled A tale of two cases).  In that case the claimant had offered the defendant a choice whether to act as an agent or distributor.  The defendant was found to have chosen the latter.  This was because whilst the relationship between the parties was not formalised in a written agreement, business was done on a sale or return basis.  In addition there was nothing to indicate that Pacflex had any authority, or even purported to have any authority, to enter into contracts as an agent on behalf of Imballaggi.  (There was also a useful discussion as to the issue of secondary activities under the Regulations.)

Unlike Imballaggi the contracts between the claimant and the defendant described the claimant as an agent.  It was this documentation that was found by the Court of Appeal to be of great significance.  Its effect could not be ignored.  The contracts authorised the claimant to negotiate and conclude contracts in the defendant’s name.  At the same time the contracts between the defendant and the retailers were valid.  The defendant had never thought to argue otherwise or to complain about the claimant’s way of doing business on its behalf. 

On this basis the Court of Appeal had no difficulty with the mark-up that the claimant had enjoyed.  The effect of the parties’ conduct was as if they had expressly agreed that the claimant could keep as its remuneration the mark-up which it was able to negotiate.  The fact that such remuneration was not commission was irrelevant.  Put another way, commission is not essential to an agency relationship.  Indeed, and whilst not mentioned by the Court of Appeal, this is implicitly recognised by the Regulations.

In view of the agreement between the parties as to mark-up, the payment arrangements, as well as the invoicing and such like, were perfectly natural.  As the Court of Appeal pointed out, deliveries were always effected to the purchasers and the claimant never kept goods in stock.  On the contrary, the process from beginning to end was one in which the purchaser’s individual orders were placed with the defendant, discussed, amended and agreed in advance of contract and then secured in the contract forms mentioned above.

Is the Court of Appeal’s decision a victory of form over substance?  It is clear from the judgment that it was much taken with the title given to the earliest agreement between the parties and the fact that the two most recent agreements used the expressions that they did.  Nevertheless whilst the facts of the case are unusual, together they add up to making it clear that the claimant was acting as the defendant’s commercial agent (in contrast the defendant in Pacflex which was clearly acting as a distributor and not as an agent).

Accordingly the claimant was found to be a commercial agent for the purpose of the Regulations and a hard fought battle was won.  What is uncertain is whether an agent in the same position as the claimant would achieve victory in the war to obtain compensation under the Regulations.  The Court of Appeal took the opportunity to speculate as to the relevance of the one year notice period afforded to the claimant, the significance of the mark-up arrangement and the “damage” suffered by the claimant for the purpose of the Regulations.  However, in this case, it was not required to provide answers.  In the Court of Appeal’s words, such issues “are for another day”.

In the interim, the Court of Appeal’s judgment is useful.  It provides clear indicators as to when a relationship will be considered as that of agency.  Accordingly those proposing to enter into relationships should stop and reflect on whether or not one of the parties is to act as an agent and if this reflects the parties’ intentions.  In addition for those who are already parties to an agency agreement, the Court of Appeal’s decision may clarify whether or not the agreement is subject to the Regulations. 

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).

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