Commercial Agents (Council Directive) Regulations 1993 — rules for principals and agents

It is not uncommon in these uncertain financial times to begin to carefully consider your business structures, relationships and potentially re-evaluate whether certain aspects of your business need to be reorganised, contracts terminated or working practices streamlined.

This can be especially the case whereby companies or individuals (known as ‘agents’ in these context) are used to help drive sales of goods on behalf of another (known as a ‘principal’).

Within this article, we will take a whistlestop refresher of the regime which governs these relationships (namely the Commercial Agents (Council Directive) Regulations 1993) and the possible implications to keep in mind, whether you are a principal or agent.

What are the Commercial Agents (Council Directive) Regulations 1993 and do they apply to my business?

The Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”), were born from a European Council Directive designed to confer special rights to certain agents, known as “commercial agents”. This Directive was brought into effect within domestic law through the Regulations and following Brexit, will remain in effect (for the time being).

If the name wasn’t enough of a clue, these Regulations only apply to commercial agency relationships. A commercial agent relationship isn’t always clear cut. However, some main distinguishing factors include:

• The agent must be a “self-employed intermediary”. Examples of this includes that they are independent from the principal business and must be paid. It should also be noted that an intermediary can take the form of both an individual as well as partnerships and other corporate bodies (such as limited companies).
• The relationship must centre around the supply of goods as opposed to services. Additionally, where a business deals partly with goods and services (for example a bike shop which also deals with repairs), the supply of goods must not be secondary to the provision of the services. Where the supply of services is the primary focus of a business, such relationship will not be governed by the Regulations.
• The agent must have continued authority to negotiate the sale or purchase of goods (and potentially conclude) these deals on behalf of, and in the name of the principal.
• The agent’s activities must also be undertaken in England, Scotland and Wales in order for the Regulations to apply. Whilst individual agents may be brought on board to help stimulate business from further afield and break into unfamiliar markets, the exact whereabout of their workings will need to be considered in order to see whether the Regulations apply.

What do the regulations cover?

The Regulations set out a regime of duties which should be considered and adhered to when such relationships are in place. In brief, areas covered include:-

• Duties owed to a principal from their commercial agent including that an agent must “make proper efforts to negotiate and, where appropriate, conclude the transactions he instructed to take care of”, must communicate all necessary information to and comply with all necessary instructions from their principal;
• Duties owed towards an agent from their principal, such as ensuring all necessary documentation relating to the goods are supplied, keeping the agents up to date should there be any significant changes expected to the volume of transactions and to inform the agent in good time of their acceptance/refusal of any transaction that the agent has procured for them;
• In the absence of any formal agreement, the Regulations step in to outline (albeit somewhat vaguely) the amount of remuneration an agent is entitled to; and
• Provisions relating to an agent’s entitlement to commission both during and after the agreement has been terminated, as well as outlining circumstances whereby commission is not payable.

Termination of an agent

Should you wish to terminate an agent, or if you are an agent and are on the receiving end of a communication to that effect, the Regulations set out the minimum notice periods which must be provided (dependent on the length of the relationship). These periods cannot be shortened by way of agreement between parties (other than in exceptional circumstances) and therefore be sure to double check any contractual documents as to whether notices are validly served.

Unlike straightforward terminations of contracts (if there is ever such a thing), the Regulations provide that all agents are entitled to either the payment of compensation (the default position unless where expressly stipulated within an agency contract) or payment of an indemnity in respect of commission payments. These amounts are payable on top of any termination payment provided for.

An agent may be entitled to an indemnity in certain circumstances if they have significantly increased the volume of business with existing customers and the principal continues to reap the rewards of their efforts. The calculation of the indemnity is set out in the Regulations and is capped at a maximum of one year’s remuneration calculated on the agent’s average annual remuneration over the preceding five years (or the period of the agency agreement if less than this).

In contrast to the indemnity, the calculation of compensation is less straightforward and is also not a capped amount. The UK courts have taken a view that this should compensate the agent for damages they suffer as a result of the termination. Such calculation is to be based on the valuation of the agency on the assumption it continued and what someone could have expected to have received should they have “stepped in the shoes” of the departing agent.

Conclusion

Whilst the Regulations may not be as well-known and are more complex than other statutes, they pose significant obligations on principals and agents alike and may expose your business to significant liabilities. As such, the Regulations should be carefully considered when entering, continuing, or terminating a commercial agency relationship.