Appointing a commercial agent in the UK

Commercial agents enjoy substantial legal protections which are unlike those given to employees. These are set out in the Commercial Agents (Council Directive) Regulations, which were introduced in 1993 to bring the law of agency in the UK into line with other EU member states.

The regulations continue to have effect in the UK as retained EU law following the UK's departure from the EU. However, UK courts are no longer bound by decisions of the Court of Justice of the EU (CJEU), meaning that they could decide to interpret the regulations differently going forward.

Note that the UK government is in the process of reviewing the operation of retained EU law. The Retained EU Law Bill, which is currently before parliament, provides for the automatic expiry of all EU-derived legislation after 31 December 2023 unless specifically extended or assimilated. How the UK will deal with retained EU law such as the regulations, and how the UK's future relationship with the EU will work more generally, continues to be a contentious topic of debate.

What is a commercial agent?

The regulations define a commercial agent as a "self employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of their principal or to negotiate and conclude such transactions on behalf of and in the name of that principal". There are a number of different elements of this definition which will need to be considered when deciding whether your proposed agent will be a commercial agent. Be aware that if there is any ambiguity or difference in how the contract is drafted and how it works in practice then the courts will usually construe the provisions in the agent's favour.

Self-employed

The use of the phrase 'self-employed intermediary' does not limit the scope of the regulations to an individual - they will apply whether the agent is an individual, partnership or company. You will not be able to escape the regulations simply because you have an agent who works through a limited company.

Not sale or purchase of services

Importantly, a commercial agent is one who buys or sells goods on behalf of its principal. It will not capture an agent who is dealing with the provision of services.

There have been various debates over what is regarded as the purchase or sale of goods. In particular, disputes have arisen in relation to computer software, and over mixed supplies of both goods and services.

• Computer software

English courts had historically held that software would not be considered as a "good" under the regulations unless provided via a physical medium, such as a disk. The legal position has changed following the high-profile Software Incubator case in 2016, although the full legal implications remain unclear.

In 2016, in the first ruling in the case, the High Court held that goods under the regulations could include software supplied electronically. However, the High Court's decision was reversed by the Court of Appeal in 2018, restoring the previous status quo. The case was then appealed to the UK Supreme Court, which referred the question to the CJEU for a preliminary ruling.

The CJEU, taking a similar approach to the High Court, held that software would be considered goods under the regulations when it is supplied electronically and sold on a perpetual licence - that is, the customer is permitted to use a copy of the software for an unlimited period in exchange for a fee.

The parties agreed to settle the case before the Supreme Court had an opportunity to make its own findings, so we don't know whether it would have followed the CJEU's decision - although it is very likely that it would have. As things stand, several open questions remain unanswered, particularly in relation to the treatment of agency agreements entered into before, during and after the post-Brexit transition period under UK law. The CJEU's decision related to a contract entered into before the end of the Brexit transition period and, because it was never implemented by the Supreme Court, the Court of Appeal's decision arguably remains the highest authority binding on a lower court in England.

In addition, the CJEU's decision did not address whether software that is licensed on a subscription basis - for example, software provided under a software-as-a-service (SaaS) licencing and delivery model, under which the customer pays to access software on servers hosted by the provider - would fall within the scope of the regulations. Arguably, the nature of the SaaS model does not involve the grant of a perpetual licence, and therefore would not be considered goods under the regulations - but there has not, as yet, been definitive guidance on this point.

• Mixed supplies

Careful consideration will be needed whenever an agency agreement covers a mixed supply of goods and services. It is unclear whether the courts would be willing to split the proportion of the agency that applies to goods, or to decide that the entire agency agreement falls outside the scope of the regulations if the services element is over a certain threshold. Principals may wish to split goods and services into two separate agency agreements to avoid uncertainty as to whether the regulations will apply, particularly if the supply of goods is the more minor element of the mixed supply.

Continuing authority

An agent who is authorised to conclude a single transaction on the principal's behalf is not generally thought to have 'continuing authority' for the purposes of the regulations. However, if the agent is negotiating any extension or variation to the terms of the contract it may then be regarded as having continuing authority even though the authority is only in relation to the one contract.

To negotiate

Although the regulations are unclear as to what would be captured by the word 'negotiate', this has been construed widely by the courts. There is no requirement for an agent to 'haggle' or bargain on behalf of the principal. Even pure marketing or referral agents who simply promote the principal's products and refer any orders to the principal for conclusion without any authority to negotiate terms or pricing can be caught by the regulations if their role is to develop and enhance the goodwill or reputation of the principal.

Contracting in own name

The courts have held that an agent who is entitled to contract in its own name as opposed to in the name of its principal will not be a commercial agent for the purposes of the regulations.

Outside scope

Certain categories of agent are excluded from the scope of the regulations including officers of companies, associations, partners and any insolvency practitioner. They will also not apply to any commercial agent who is unpaid, agents operating on a commodity exchange or in commodity markets, brand agents and agents whose activities are considered to be secondary to their other activities.

Similarly, the regulations do not apply to distributors - that is, independent traders who buy products from a principal and sell them on to their own customers, rather than helping the principal to create a legal relationship with the customer.

Right to a written contract

Either party has the right to request a written document from the other party setting out the terms of the agency agreement. This right cannot be contracted out of.

While there is no requirement to have a written contract from the outset, any restraint of trade clauses which restrict the agent's activities after the agreement has ended will not be enforceable unless they have been agreed in writing.

Duration

In most cases, an agency agreement will:

• have a fixed term with provision for termination on notice after that point;
• be for an indefinite term but terminable on notice from the outset; or
• contain a fixed term which requires extension by agreement of the parties.

If the regulations apply, an agency agreement entered into for an indefinite period can be terminated by either party on notice. This also applies where a fixed term contract is converted into an indefinite agreement.

Mandatory minimum notice periods are specified under the regulations. These are one month for the first year, two months for the second year and three months for any third or subsequent years. You may agree longer notice periods than those specified by the regulations but, if you do, the notice provisions imposed on the agent must be no longer than those to be given by the principal.

Duties of an agent

The regulations impose mandatory obligations on both the agent and principal and sets out each party's duties. These may not be contracted out of but there is nothing to state that you cannot impose additional obligations on your agent if required.

The agent's duties under the regulations are:

• to act in the best interests of the principal and act dutifully and in good faith;
• to make proper efforts to negotiate and, where appropriate, conclude transactions;
• to communicate to the principal all necessary information available to the agent;
• to comply with the reasonable instructions of the principal.

In practice these add little to an agent's duties under common law which include:

• to obey lawful instructions of the principal;
• to only act within the limits of authority;
• not to put itself in position where there is a conflict of interest;
• not to make a secret profit or accept bribes;
• not to delegate authority.

Principal's duties

The duties imposed on the principal by the regulations are:

• to act dutifully and in good faith when dealing with the agent;
• to provide necessary documentation relating to the goods;
• to obtain for the agent all information necessary to perform the agency contract;
• to notify the agent of any anticipated drop in volume of transactions;
• to notify the agent of any refusal or non-execution of a transaction by the principal which the agent has procured.

The principal is also subject to common law duties to pay commission or remuneration, and to pay the agent's expenses and indemnify it against losses suffered during proper performance of the agreement.

Remuneration and commission

If the agent is to be remunerated by way of commission, any agency agreement should clearly set out what commission is payable to the agent and when. There is a fall-back position set out in the regulations, but you can agree alternative provisions with your agent.

If you do not specify what commission is payable then the regulations provide that the agent should receive the customary amount paid to agents working on the same type of goods in the same geographical area. Where there is no custom and practice, the regulations state the commission payable to an agent is reasonable remuneration taking into account all aspects of the transaction.

The regulations list three circumstances in which the agent is entitled to commission on a transaction. These are where the transaction between the principal and third party is concluded:

• as a result of the agent's action;
• with a third party whom the agent has previously acquired as a customer for transactions of the same kind; and
• with a customer belonging to any specific geographical area or group of customers to which the agent has been given an exclusive right under the agency agreement.

Commission post-termination

Commission is payable on transactions concluded after the agency agreement is terminated if the transaction is:

• 'mainly attributable to' the agent's efforts during the agreement term and was entered into 'within a reasonable period' after the agency contract has terminated; or
• where the customer's order reaches the agent or the principal before the agreement expires or is terminated, or where the order is only accepted after the agency agreement has terminated.

These regulations are not mandatory, so will not apply if there are express terms in the agency agreement relating to commission.

The only circumstance in which the agent's right to commission is extinguished is if the sale contract will not be executed due to a reason for which the principal is not to blame, and then only to the extent that the principal is not to blame. Any commission paid to an agent on such a transaction is refundable to the principal in these circumstances. This provision cannot be departed from to the detriment of the agent.

Commission must be paid to the agent no later than the last day of the month following the quarter in which it became due. Unless otherwise agreed, the first 'quarter' runs from the date of the agreement.

Restraint of trade

The regulations set out the parameters for any restraint of trade clause to apply post-termination which you may wish to include in the agency agreement. This restriction must be concluded in writing and relate to the geographical area, goods and groups of customers covered by the agency agreement. The restriction can last for no more than two years post-termination.

Termination

When an agency agreement is terminated there are three potential areas of claim to consider:

• any outstanding commission if this hasn't been specifically excluded from the agreement;
• any 'pipeline' commission if this hasn't been specifically excluded from the agreement; and
• any compensation payable as a result of the termination.

Compensation may be calculated on an indemnity basis or compensation basis. This is intended to reflect the value of the goodwill the agent has generated for the principal. If the agreement does not contain any provisions for how this payment is to be calculated, the payment will be calculated on a compensation basis by default.

Indemnity basis

For an agent to be entitled to an indemnity, it must have:

• brought in new customers; or
• increased volume from existing customers; and
• the principal must continue to derive substantial benefits from the business.

The payment of any indemnity must be equitable and is subject to a cap based on one year's average gross commission based on the five years before termination or the whole life of the agreement if shorter.

Compensation basis

Unless otherwise specified, the agent will be entitled to compensation for the damage it suffers as a result of the termination of the agreement. Damage will be deemed to occur when the termination takes place in circumstances which:

• deprive the agent of commission which it would have earned had the agreement continued; and/or
• have not enabled the agent to recover the costs it has incurred in connection with the performance of the agreement.

Current case law states that in order to establish the amount of compensation, you will need to look at the value of the agency that has been lost. This is often a difficult sum to quantify, especially in a market where agencies are not traded as businesses. One important thing to note is that there is no cap on the level of a compensatory payment. The agent may also be entitled to an additional amount in lieu of notice.

The only circumstances where an agent will be unable to claim a termination payment will be:

• where the principal has terminated the agreement due to a material breach of the agreement by the agent or due to exceptional circumstances;
• where the agent has terminated the agreement, unless this is due to the principal's breach or where the agent is unable to continue to perform their duties due to age or infirmity; or
• where the agent has assigned the agreement to another agent with the principal's agreement. 'Assignment' in this context may cover any transfer of an agency business from an existing agent to a new agent regardless of whether there has been a formal deed of assignment.