The appointment of an agent who then goes on to appoint one or more sub-agents is fairly common. But despite being fairly common, less certain is the application of the Commercial Agents Regulations both to agents and sub-agents.
What is the uncertainty for agents?
Whether the sub-agents are appointed to cover a particular product range, group of customers, or a territory, the starting point is to determine the appointment of the agent. The definition of a commercial agent is one of a self-employed intermediary having continuing authority to negotiate the sale or purchase of goods.
But lurking in the shadows is one of the exceptions to when an agent is not a commercial agent for the purpose of the Regulations. This is the issue of “secondary activities” as defined by the Regulations.
It is, therefore, possible to envisage a situation where an agent is appointed to recruit and manage a number of sub-agents. In effect, the agent creates a salesforce for the principal. But in this situation, there is an argument to say that as the agent’s primary activity is the recruitment and management of a salesforce, the Regulations do not apply.
This situation can be contrasted with the situation where the principal appoints the agent to obtain orders on behalf of the principal – in essence, giving the agent continuing authority to negotiate the sale of goods as mentioned above. If the agent chooses to do so by recruiting a number of sub-agents, it would be a hard judge who decided that the agent was not a commercial agent and, therefore, that the Regulations did not apply.
The only reported English court judgment to date does not make the situation clearer. In its judgment the Court of Appeal decided that an agent concerned with managing a number of sub-agents could have a claim against the principal under the Regulations and that the claim was by reference to the success of both the agent and sub-agents in obtaining orders for the principal’s products.
What is the uncertainty for sub-agents?
Before the Court of Appeal judgment the High Court had considered the position of the sub-agents in this case. The High Court decided that sub-agents could claim compensation against the principal (not the agent) under the Regulations.
In an attempt to avoid liability, the principal appealed to the Court of Appeal. The principal claimed that for the Regulations to apply, there would need to be a direct contractual link between principal and sub-agents and that was not the position in this case because the sub-agent’s contractual relationship was with the agent (not the principal).
The Court of Appeal agreed with the principal. However, it was clear from the Court of Appeal’s judgment that the thought that the sub-agents would be unable to benefit from the Regulations concerned the Court of Appeal. To seek to address this concern, the Court of Appeal expressed the view that the sub-agents should be entitled to a share of what was obtained by the agent by way of compensation (or indemnity) from the principal. However, this was at best a pyrrhic solution for the sub-agents as the agent was unable for financial reasons to mount a claim against the principal.
Take home points
- The scope of the appointment of the agent may provide the principal with an escape route from a claim for compensation or indemnity under the Regulations where the appointment of sub-agents is anticipated.
- It follows that the reverse is also the case for the agent. Careful wording of the scope of the appointment may result in the agent being able to claim compensation (or indemnity) under the Regulations.
- Sub-agents, meanwhile, may be able to claim a share of the compensation (or indemnity) recovered by the agent. Alternatively, it might be argued that there was an implied trust between agent and sub-agent and that the agent holds the compensation (or indemnity) (or at least part of it) on trust for the sub-agent.
- Alternatively, given that the law treats an agent as an extension of the principal, would it be so hard for a court to accept that either the sub-agency agreement between agent and sub-agent provides the contractual link to the principal or that there could be a collateral contract between principal and sub-agent?