23 August 2017

Brexit: Impact on commercial agents

As negotiations for the UK’s withdrawal from the EU are now underway we look at what this process could mean specifically for the appointment of commercial agents.

The current proposed approach of the European Union (Withdrawal) Bill is to repeal the European Communities Act 1972 (ECA) and then incorporate all EU laws into UK domestic law ‘where practical’ to ensure no unintentional gaps are left by the repeal of the ECA. 

The aim being that this will allow for gradual adjustment of each piece of incorporated EU law on a topic by topic basis following the Brexit date of actual separation rather than the impractical task of requiring every adjustment to be completed by that deadline date.  This will also mean a focus can be brought to bear on the issues which need new legislation immediately upon the Brexit date, such as customs or immigration rules to meet the negotiated position.

Given the British Government’s lack of a parliamentary majority, passing the EU Withdrawal Bill is now looking like a very difficult part of the Brexit process in itself.  It is likely to face significant challenges and amendments before achieving Royal Assent by March 2019.  Likewise, legislative changes required in any of the other 27 Member States as a result of the negotiations are also going to need their domestic parliamentary approval.

EU Treaties and Regulations are forms of legislation which are directly applicable, having an automatic status of law applicable in each Member State.  Where EU institutions have exclusive competence they tend to use Regulations as a legislative instrument as, generally speaking, these will have direct effect throughout all Member States without requiring any further domestic implementing legislation being put in place. 

Directives are the legislative instrument which tends to be used, instead of the Treaties or Regulations, in instances of attempts to harmonise laws across the EU.  It puts the onus on each Member State to implement domestic legislation to achieve the desired harmonised approach.  This is usually in relation to topics on which the EU institutions do not have exclusive competence.

What’s the difference between an agent and distributor?

In today’s global market manufacturers often look for local expertise when diversifying into markets outside of their usual remit.  They will want to take advantage of an agent or distributor’s local knowledge, cost savings and utilising their established relationships in a market which would otherwise be hard to crack as an outsider.

It is commonplace for the terms “agent” and “distributor” to be used interchangeably, but the legal position in relation to each is very different and this can cause a high degree of confusion, particularly when determining what the parties expect from each other.

An agent acts on behalf of the principal and usually introduces a customer to the principal. The relationship is then usually concluded between the principal and customer independently.  An agent can, however, create a contract between the principal and customer without being a party to it.  The extent of this ability is usually set out in the agreement between the principal and agent.

A distributor differs in that they contract directly with the customer. The distributor purchases goods from the manufacturer and title in those goods is transferred to the distributor.  The distributor then sells on to the customer under a separate arrangement and transfers title to the end customer.  Subject to certain warranty provisions, the manufacturer has no direct agreement with the customer in this situation.

It’s worth bearing in mind that some commercial arrangements can be a mixture of both agency and distribution elements.  For example, it is common to have a distribution arrangement for off the shelf, low value products, but to rely on an agency relationship for bespoke, high value products for which the manufacturer wishes to retain its direct contact with the customer.  After all, it is the manufacturer who has the most in depth knowledge of their product range and its constraints.

What are the current laws governing agency relationships?

The common law principal of agency has developed over a number of years through the English courts, independently of any EU membership or EU legislation which has otherwise come into effect. As such, when the UK leaves the EU following the completed Brexit process the position in this regard will remain unchanged.

The focus of this article is, instead, the impact that Brexit will have upon agency arrangements currently governed by the Commercial Agents (Council Directive) Regulations 1993 (Regulations).  The Regulations are UK domestic law which implement the EU Directive and a considerable amount of EU and UK case law has developed since the Directive and Regulations were introduced.

It is important to note that the Regulations apply to arrangements between principal and agent whether agreed in writing or subject to oral discussions.  The Regulations only apply where the agent is involved in the sale or purchase of goods.  Services are not covered by the Regulations.  The Regulations also mean that many important terms cannot be excluded from agency arrangements unless such exclusion operates in the agent’s favour.

Most notably, the Regulations introduced a right to compensation or indemnity in certain circumstances at the end of the agency relationship.  This right is lost in cases where the principal terminates for the agent’s serious breach, the agent terminates themselves or the agent assigns the agreement with the principal’s consent, amongst others.

A right to compensation applies unless the parties have expressly chosen the right to indemnity.  The right to claim either must be exercised by the agent within a year of termination.  Under the compensation calculation there is no financial cap, unlike the indemnity model which can be capped.  In a compensation calculation, the agent is entitled to be compensated for the damage he suffers as a result of the termination of his relationship with his principal. 

The loss of value of the agency is calculated by reference to the amount a hypothetical purchaser would be willing to pay for it as at the date of termination.  The exact determination of compensation has been subject of extensive case law which is outside the scope of this note but given the inability to cap this cost, there is a high degree of uncertainty for any principal. It is for that reason why it is usual to see an indemnity payment included within written agency agreements.  This position is challenging for businesses who cannot make precise cash flow predictions where an agency arrangement is coming to an end.

How is this area of law likely to be affected by Brexit?

Whilst it is, of course, somewhat of an exercise in crystal ball gazing at this stage, the above context of the different forms and interaction of domestic and European legislation in the field of commercial agency means we can make some reasonable predictions about likely areas of challenge and possible areas where the status quo is likely to remain intact during this legislative transformation.

Whatever the approach taken during the Brexit negotiations, given the approach of the EU Withdrawal Bill referred to above, as the Regulations are national law we can expect there to be no immediate change on day one following our separation from the EU.  So what we then need to consider is where this particular legislation will rank against others when considered for change or repeal against its backdrop of an originating EU Directive. 

Given that the Regulations have long been regarded in the UK as being over-protective of agents, there may well be pressure to withdraw or at the very least significantly alter the Regulations, particularly where there is a focus on extending free market policies.  It is also worth recognising the extent of some complex UK case law which, over the years, has developed in an effort to clarify particularly contentious elements of the legislation, including the compensation and indemnity based post-termination payment scheme.

Whilst we might speculate that this is a likely area of legislative change post-Brexit, it is also predictable that it would be a topic on which consultation would allow UK principal and agency businesses the opportunity to make representation on the subject before steps are proposed.  Businesses making use of such agency arrangements or wishing they could do so in a less agent-friendly environment, might watch out for such consultation opportunities to express their views on the subject.

If after Brexit the UK continues to form part of the EEA as a member of EFTA, steps would need to be taken so that the Directive continues to be implemented within the UK.  So far, this is an option which the UK Government has appeared to rule out.

Summary

Although nothing is likely to change around the commercial agents regime prior to Brexit taking effect, now is a good time to check your existing agency agreements to understand the key terms and any opportunities for variation at a later date, should that become desirable. 

The definition of the applicable territory in your arrangements is important as national laws implementing the EU Directive can vary greatly across the EU with some jurisdictions such as France and Germany taking an even more protectionist approach in favour of agents.

It is also a good opportunity to review these agreements in light of impending expirations or renewals so that plans can be put in place to deal with payments which may become due to agents in this potentially transitionary period, whether they be on a compensation or indemnity basis.  Now would also be a good time to ensure that, where possible, a move towards an indemnity payment at the end of the agency relationship is documented in new relationships or those up for renewal, allowing a financial cap to be set from the outset and creating a degree of certainty around such potential liability.

Where there is to be a change in the law, possibly to relax the position on compensation and indemnity payments post-termination, it would be worth considering a variation to the indemnity payment clause.  You do not want to remain exposed to a higher payment than what would be required under any change in the law.

If you’d like some assistance in considering the steps your business should be taking to review its global sales strategy in light of such developments, please contact a member of our Commercial team.

© Shulmans LLP 2017
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. Shulmans LLP is not responsible for any activity undertaken based on this information.