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Essay: The role and function of a commercial agent

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  • Published: 28 June 2023*
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In this essay I shall discuss the role and function of a commercial agent integrating whether the service provision by the agent is adequately remunerated or if the role of a commercial agent is depreciated by actions of principals. “A commercial agent is a self-employed agent with continuing authority to negotiate or to negotiate and conclude contracts for the sale or purchase of goods on behalf of and in the name of a principal”. Commercial agents have special rights and duties to their principals in accordance with the Commercial Agents Regulations 1993 however there appeared to be no reciprocal arrangements for commercial agents in relation to the nature and duties of Principals. “Principals may often attempt to exploit a situation at the expense of their agents and this has long been recognised by the courts”. Commercial agents were finally granted protection with the adoption of EC Directive 86/653, which was implemented by the Commercial Agents (Council Directive) Regulations 1993. Regulation 1(2) which outlines that ‘these Regulations govern the relations between commercial agents and their principals’. But the question still remains whether the introduction of this legislation did enough for the rights of the Commercial Agent and while the Directive was a step in the right direction, whether there was indeed scope for improvement of these rights for Commercial Agents.

Indeed Baskind et al, summed up the relationship perfectly in “it is therefore clear that the Regulations are primarily concerned only with the principal/agent relationship, and are less concerned with the relationships that such persons have with third parties”.

The introduction of this Directive attempted to balance the rights of commercial agents against Principals operating in the European Union and through the introduction of a system of compensation and indemnity.

Review of the Current Commercial Agent position:

In order to display the level of protection that was and now is available to Commercial Agents I believe it is necessary to discuss the level and scope of protection that is provided to the Agent. It is considered that commercial entities shall continue to employ the services of commercial agents in order to operate functionally otherwise “commerce overall would become significantly more burdensome and inefficient”.

Having reviewed the Directive, I noted that a person who promotes or sells services on behalf of another does not fall within the ambit of the Directive. This in turn results in an anomaly for the Commercial Agent. I also surmised that what constitutes a “good” and a “service” is not clearly outlined in the Directive which was highlighted by the French Commercial Code –

“ The uncertainty in this regard is exacerbated by the absence of a definition of a “good” in the Directive”. This uncertainty would indicate a less favourable indemnity position on behalf of the operations of a commercial agent in the agency relationship.

It is thus important in this discussion to outline some recent cases which illustrate how far the concept of a “good” can be related to the indemnity of the operations of a Commercial Agent and where such source of protection can become evident.

In the English case of Tamarind it was held that “gas is a good” and this exploratory judgement highlights the case in point regarding the definition of a good but in the same case “whether or not the provision of cargo space is a good or a service was considered to be sufficiently unclear as to warrant a reference to the European Court of Justice. Thus we can deduce on the one hand that the scope of the protection afforded to the Commercial Agent is broad in relation to the Gas- Good definition and in the same case protection could not be deduced in relation to the issue of Cargo space. This goes to the very heart of the issue presented to the protection of Commercial Agents operations and must therefore be further explored.

It appears the English courts were confining commercial agents to the exact terms and conditions upon which the contract was based between their operations and the Principal particularly pertaining to secondary activities and the definition thereof.

The aforementioned cases further dilutes the position adopted by Judiciary concerning the protection afforded to the operations of commercial agents.
In the Scottish case of Gailey v Environmental Control, Lord Drummond Young held a more favourable view whereby he stated that “the word secondary was not a mere numerical comparison and that the underlying mischief of the Directive to protect commercial agents is that they build a goodwill for the principal”. Saintier agreed that “since they cannot realise this goodwill for themselves, commercial agents are therefore in a vulnerable position, and hence, they require protection”. This case addresses a primary deficit which heretofore had been ignored whereby goodwill was finally recognised as a concern for which commercial agents required necessary protection. However the value of this goodwill appears to be disputed even to this very day whereby Principals continue to derive benefit from Commercial Agents operations with the knowledge probability that these commercial contacts if having already ceased will results in Commercial Agents having to reluctantly watch by as Principals gain benefit from previously built up client relationships.

Ultimately as Mc Donagh 2007 outlines “this point is a matter for the European courts as goods, for the purposes of the Directive, should be given its European (as opposed to domestic) meaning”. Accordingly if the European meaning is adopted by adjunct the protection for commercial agents under the EC Directive 86/653 would therefore apply in these instances which would by design strengthen the rights of Commercial Agents.

Even in Irish legislation the judgement in Kenny v Ireland ROC Limited determined what constituted the role of a commercial agent, Clarke J held that “the test for determining whether a person was a commercial agent was whether that person brought a material level of skill or consideration to conducting, managing or otherwise dealing with the sale or purchase of products on behalf of a principal”.

In the Irish case Cooney & Company and Another v Murphy Brewery Sales Limited, Costello P. “when considering the definition of commercial agent, decided that negotiation does not in some way require bargaining or haggling so as to endeavour to reach some sort of arrangement between the agent and the proposed customer in relation to the purchase by the proposed customer of the products”. While the affordable protection available to European commercial agents extended herewith to Irish commercial agents by defining the commercial agent role, it failed to address service provision or indeed third party services.

A similar case to Kenny is Parks v Esso Petroleum Company Limited where Morritt LJ “considered the definition of ‘negotiation’ in the Oxford English Dictionary and concluded that this definition did not require a process of bargaining in the sense of invitation to treat, offer, counter-offer and acceptance”. While one could see this as monumental progress in the role of Commercial Agents and the protection afforded therewith, one could remain sceptical regarding the enforcement of these ruling in the modern day operations of Commercial Agency.

Indeed in the case of Michael McQuillan, Lorna McQuillan v Darren McCormick, Wizzeweb Limited, Pandora Jewelry Limited [2010] Grant outlines how “the ruling Judge decreed an agreed valuation which was not in line with what the experts valuations had calculated and his deductive reasoning in this case could have extensive implications for all other claims pertaining to Commercial Agent activities in that the spirit of the law behind the European Directive was not adhered with”. This examples display that not all European judgements cases adhere to the principals of the EU Directive regarding the affordability of protection for Commercial even for this Irish court ruling. The result of this can only negatively impact the overall level of protection afforded to Commercial Agents on cessation of their contract duty.

The introduction of the Commercial Agents (Council Directive) Regulations 1993 also provided for both a compensatory route and an indemnity route for the “downtrodden race” of commercial agents. Kaufmann 2006 outlines “a commercial agent is entitled on a termination of his agency contract to claim either an indemnity or compensation from his principal,… and the circumstances where they cannot make a claim are either if they resign or where they have breached the contract so fundamentally that his principal has had to terminate the agreement”.

According to the German model of compensation, the agent has a right to compensation on cessation of the contract provided certain conditions are met.
Sometimes referred to as the Indemnity system it outlines, “Within the system of compensation, the agent, once the contractual relationship is terminated, has the right to compensation, if and when he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers after the termination of the contractual relationship”. Saintier 2012 further expands on the idea of indemnity for the Commercial Agent where he outlines “under German law, the commercial code stipulates that if the commercial agent carries out his activity on a part time basis/as a secondary activity, the rules pertaining to termination notice, the goodwill indemnity and the reasonable advance will not apply and that the scope of the exclusion is clearly delineated and the requirement that such a restriction has to be entered in writing from the outset prevents abuse from unscrupulous principals”. On the basis of the German Indemnity model reference is noted that activity carried out on a Commercial Agent in a part time basis or a secondary activity is totally void of any protection regarding the system of compensation under German law.

However the issue of indemnity for Commercial Agents shall only arise if there is a prior specific joint agreement between the Commercial Agent and the Principal in the contract signed by both parties. The goodwill claim on termination of contracts shall only be valued upon customers which the agent introduced or increased business from existing customers.

Kaufmann 2006 further states that “It is still relatively uncommon to find an indemnity clause in an agency contract” which therefore further predicates the negative imbalance upon which the protection afforded for the role of a Commercial Agent.

According to the French model of damages, in the directive “the commercial agent is entitled to damages for the loss sustained due to the termination of the relationship with the principal when such damage particularly occurs when the termination takes place under such circumstances that the commercial agent is deprived of the commission which proper performance of the contract would have procured him whilst providing the principal with substantial benefits linked to the principal; and/or in circumstances which have not enabled the commercial agent to amortize the costs and expenses that he has incurred for the performance of the contract”. Hereupon the French model for compensation specifically makes reference to the goodwill rights and entitlements of the Commercial Agent on termination of contract which is in direct contrast to the German model.

In the early years of the Regulations Mc Gee 2011 outlines how “it came to be thought that the starting point in a compensation claim was that the agent should receive compensation equal to two years’ earnings, with the length of the agency being an important factor in justifying departures from that guideline.” The compensation approach appears to be derived from the French compensation model.

The high-water mark of this approach came in King v Tunnock, where the Court of Session specifically embraced it for the reasons given namely “The Directive and Regulations, as presented, seem to harmonise with the French approach and given their terms, and the general objective of achieving harmonisation, we see no justification for construing the Regulations as being radically different from the French approach” Mc Gee 2011 comments “This approach at least had the advantage of being relatively simple to operate”.

However this judgment was ignored in the Lonsdale v Howard & Hallam Limited case 2007 where the court chose to resolve the case “by determining two issues: what agents are to be compensated for upon termination of the agency, and how that compensation is to be calculated whereby Lord Hoffmann, “rejected the French approach to compensation in a relatively succinct leading speech and refused to accept a submission that the European Commission had endorsed the approach in its report on Article 17 of the Directive by commenting favourably on it and decreed “as the market conditions in France differ from those in England, a variation in judicial methods of dealing with termination is justifiable”. This judgement negatively impacted the European Directive for Commercial Agents whereby it appeared local jurisdictional judgments and interpretations were being applied which did not benefit the Commercial Agent during termination of contracts.

While the independence of the judicial system is to be respected at all times, it is however envisaged that best practice would indicate a joined up thinking approach by the judiciary of all countries pertaining to the introduction and adherence to the principals of the EU Directive.

While it appears that European courts are in agreement with certain aspects of the legislation concerning compensation upon cessation of an agency contract, there appears to be vast differences regarding interpretations in relation to the calculation of such compensation. Indeed “the decision of the European Court of Justice in Honeyvem Informazioni Commercial Srl v De Zotti, ruled “that it is a matter for each member state”.

Therefore, it appears the calculation of the protection on offer for Commercial Agents as regards compensation has been clearly identified as a matter for the autonomy of each member State to consider resulting in no hard fast “one rule fits all” being applied to the detriment one would deduce of the protection availability for Commercial Agents. This has to negatively impinge on the operations of all Commercial Agents particularly regarding the compensation claim after cessation of contract.

Mc Gee 2009 outlines “that the result of applying what Lonsdale appears to say may be to reduce significantly the compensation awarded to agents., in some cases the compensation may be reduced to nothing, although that might seem an undesirable result, the logic of the approach is hard to deny. Indemnities are more problematic because it is far from clear what the indemnity method seeks to achieve”.

Therefore it is quite clear that the compensation route and indemnity route for Commercial Agents remain vague and theoretical concerning the termination entitlements for Commercial Agents resulting in perhaps a deep mistrust by Commercial Agents of the advantages championed in the EU Directive.

Severine et al 2005 outlines “the requirement for economic protection for commercial agents was the primary driving force behind the introduction of this directive where heretofore France and Germany recognised the need for compensation but the manner with which each country dealt with the economic protection couldn’t be more different, France concentrated on the losses suffered by the agent while Germany concentrated by the goodwill received by the principal from the agents efforts”. The welcome introduction of the EC directive combines both systems allowing for the possibility of a uniform approach to be adopted by each member State however as we have observed this has been challenged and tested and resulted in many variances throughout each member State.

Bradgate et al (2012) furnishes the case involving Ingmar GB Ltd v Eaton Leonard Technologies Inc. in which he outlines “the mandatory rights of the Commercial Agent upon termination of contract and indeed goes further by outlining the applicable scope area upon which these mandatory rights can be applied- wherever a commercial agent carries on activities as an agent within the territory of a Member State, even if one of the parties to the contract is a national of a non-EU state and if the contract expressly provides for it to be governed by the law of a non-EU state”.

This ruling positively expands the scope of protection available to Commercial Agents who may operate whereby if either party is a member of a non-EU State and had a contract tied down to the laws applicate to the non-EU State, the scope of the EU Directive can stretch to include protection for the Commercial Agent which in theory is excellent but throughout my research I have been unable to ascertain substantial examples whereby this ruling has been enforced indeed in some instances quite the opposite.

There is also affordable protection available to both the agent and principal in Commercial Agency contracts whereby under Regulation 18 of the Commercial Agents (Council Directive) Regulations 1993 “both parties can walk away from the contract without the fear of compensation to either party, if agreement to dissolve the contract is reached between both”. It is however worthy to note that the termination of the contract by a Commercial Agent must be “justified” and that such parameters do not appear to apply to the Principal under the Regulations. The 1993 Regulations while providing a principal of fairness of protection for both the Commercial Agent and the Principal upon termination of contract is slightly skewed in its level of protection afforded to the Principal.

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