After Brexit: Commercial Agents

Background

CAR93 came into force on 1 January 1994, being the UK’s implementation of the EU Commercial Agents Directive. It provides protections to self-employed commercial agents by imposing obligations on principals in respect of commission, length of and grounds for termination, compensation and restraint of trade, in some respects akin to employees’ rights.

Who is a Commercial Agent?

CAR93 defines a commercial agent at Article 2(1) as: 

…a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal…

Officers (i.e. directors), partners, insolvency practitioners, agents acting on commodity exchanges and unpaid agents are specifically excluded from the definition. However, “self-employed” is misleading in that a commercial agent protected by CAR93 may be an individual, a partnership, or a body corporate (e.g. a limited company or LLP).

Case law has clarified that the reference to “goods” does not necessarily mean tangible goods. Goods have been ruled to include gas and electricity. However, a slightly odd distinction exists for software. As recently as 2018 the Court of Appeal in Computer Associates UK Ltd v Software Incubator Ltd confirmed that software supplied on a disk qualifies as goods, but (as is increasingly the case) software supplied electronically does not qualify as goods for the purposes of CAR93

Rights and Obligations

CAR93 imposes a number of obligations on the parties, beginning with a mutual duty of good faith (not something generally implied by English contract law), general obligations to assist each other in concluding transactions, and the right to receive written terms of the agreement between each other on request. Remaining key rights exist as follows:

• The agent is entitled to remuneration at the agreed rate, or at a rate which is customary or reasonable;
• An agent remunerated by commission is entitled to commission where a transaction is concluded as a result of his actions, or a transaction is concluded with a third party the agent had previously acquired as a customer for transactions of the same kind even where the transaction is concluded after the expiry or termination of his agency;
• Minimum periods of notice for termination, being 1 month for each year of the contract up to a maximum of 3 months. If exceeding the minimum, the principal is not allowed to set a shorter notice period than the one the agent has to give under the contract.

Termination Payments

On termination, unless as a result of the agent’s breach; the assignment of the agent’s rights and duties; or termination by the agent (where it is not in relation to the circumstances of the principal or circumstances relating to the agent’s age or health whereby he cannot be reasonably be required to continue), the agent is potentially entitled one of two forms of payment:

A ‘Compensation Payment’ is payable based on the loss of value of the agency business arising from termination (i.e. the price a hypothetical purchaser might pay for the agency business on termination attributable to the benefit of the agency contract if ongoing). This is not subject to any cap.

An ‘Indemnity Payment’ is payable if:

• The agent has generated new customers for the principal or significantly increased the volume of business with existing customers;
• The principal continues to derive substantial benefits from business with such customers following termination; and
• The payment of an Indemnity Payment is equitable in all the circumstances, particularly with reference to the commission lost by the agent as a result of termination.

Unlike the Compensation Payment, the Indemnity Payment is subject to a cap of one year’s remuneration, taken as an average of the preceding five years.

Restraint of Trade

CAR93 forbids restraint of trade clauses unless they are made  in writing; relating to the geographical area, customer group and kind of goods entrusted to the agent under the contract; and also they must be limited to a maximum of two years following termination.

Brexit

As mentioned at the start, CAR93 derives from an EU directive. So, is the regulation now ineffective following the end of the UK’s transition period (deemed legislatively as “IP Completion Day”)?

No. The European Union (Withdrawal) Act 2018 states that any EU derived legislation (unless modified first) will continue to apply following IP Completion Day as domestic legislation. CAR93 therefore continues to be effective until modified or repealed under UK law.

Implications

Issues may arise where the agency contract covers EEA territories but is made subject to English law, or vice versa, where an agency agreement covering the UK is operating subject to the laws of an EEA jurisdiction. 

EU case law up to IP Completion Day had made clear that it was not possible to contract out of the mandatory provisions of CAR93, or equivalent legislation in other EEA jurisdictions, by having the contract subject to a non-EEA jurisdiction.

However, CAR93 or equivalent legislation in other EEA jurisdictions did not apply where the agency agreement covered territory outside the EEA.

With the UK now being outside the EEA, agency contracts covering all or any part of EEA territory, with a choice of English law, will still be subject to any mandatory provisions in the legislation of the relevant EEA jurisdiction. Existing contracts, commenced before IP Completion Day, are likely to be construed by EEA courts on the basis of the UK being a member state at the point when the contract was entered into, so that CAR93 could apply if English law had been chosen, although this cannot be viewed as a certainty in all 30 EEA jurisdictions.

Going forward, agents within the EEA being appointed by a British company may resist contracting under English law, especially if any changes to CAR93 occur (should the UK diverge from EUCAD), or there is otherwise any uncertainty that the agent  can avail himself of the mandatory provisions in the EUCAD and of their respective jurisdiction.

For agency contracts covering UK territory, the mandatory provisions of CAR93 will apply where the parties choose a jurisdiction other than that of the UK or the EEA. If an EEA jurisdiction is chosen, then at the time of writing CAR93 still states that courts are to apply the law of EEA member states where one has been chosen. On the basis that CAR93 is still in a form equivalent to other jurisdictions that have applied EUCAD, this makes sense, unless and until changes are made to CAR93, or the EU makes updates to EUCAD.

For new agency agreements caught by CAR93, especially with cross-border aspects, parties will need to be mindful of the implications of their choice of law clauses, and consider whether CAR93, or and EEA equivalent will apply. Whilst the focus has been on the operation and scope of the compensation/indemnity provisions in commercial agency contracts, now the whole area has become more complex. So, a clear commercial appraisal should be undertaken before appointing an agent assessing the risks of the proposed appointment and legal advice and careful drafting will be needed.

For further information, contact Jemille Gibson