Rights of Agents on Agency Agreements

This dissertation is concerned with the rights of agents to compensatory payments on the termination of their agency agreements. Agency may be defined as the relationship arising where one person, the principal (P) appoints another person as his agent (A) to “bring about, modify or terminate legal relations between the principal and one or more third parties (T).” [1] An agency may be disclosed or undisclosed. Where the agency is undisclosed, the third party will not be aware that an agency agreement exists between P and A. There are many different forms of agent. In broad terms, an agent may be a specific agent in that they are appointed to act in a specific transaction or may be a general agent who acts generally in a particular class of transactions. [2]

Prior to the implementation of the Commercial Agents (Council Directive) Regulations 1993 there was little UK legislation applying to agency arrangements, with the rights of the parties being based instead on the express or implied terms of the relationship between them. [3] The Regulations created a range of new rights to be afforded to commercial agents on the termination of their agency agreements, which did not previously exist in UK law. [4]

The Commercial Agency Regulations 1993 implement an EC Directive which aims to reinforce the legal protection of commercial agents. A significant feature of the Directive is that it provides commercial agents, on the termination of their agency relationship, the right to claim a lump sum payment. [5] However, there has been some uncertainty surrounding the concepts which are used in determining the lump sum payment. The Directive allowed Member States to choose between ‘indemnities’ or ‘compensation for loss’ as based on the German and French laws, yet it offered little guidance on the meaning of the terms or how they should be calculated. [6] As the British Government did not choose between the two terms, it has been for the parties to choose and in the absence of choice, compensation has applied. It has then been for the courts to clarify the nature of damages and compensation.

This dissertation therefore seeks to explore the attempts by the courts to clarify the application of the compensatory rules. The hypothesis driving the focus of the dissertation is that the judiciary have raised more questions than answers when interpreting and applying the Commercial Agents (Council Directive) Regulations 1993 in the UK.

The main research aim of the dissertation is to examine whether or not there are now clear and workable guidelines in place for the measure of compensatory payments under the Commercial Agents (Council Directive) Regulations 1993. In seeking to establish the answer to this question, secondary research aims will be addressed. These include: highlighting the strengths and weaknesses of the Regulations themselves; examining the clarity of the courts’ approach; exploring inconsistencies between case law; and, noting any potential for further difficulty in the future application of the Regulations.

The research methodology adopted throughout this dissertation is that of critical literature review and critical case review. Thus, a combined analysis of primary (case law) materials and secondary (academic commentary) materials will be utilised.

The dissertation is divided into four main chapters. Chapter One deals with the common law rules on the termination of agency and the rights of the agent against the principal under the common law. Chapter Two then goes on to detail the Commercial Agents (Council Directive) Regulations 1993 and to identify any weaknesses or areas of uncertainty which are apparent from the text of the Regulations. Chapter Three evaluates the courts’ approach to the interpretation of the Regulations in regard to the compensatory rules. The consistency and adequacy of the courts’ interpretation will be analysed. Finally, Chapter Four considers whether any areas of difficulty in relation to the compensatory rules in the Regulations remain in light of recent case law and whether any reforms are necessary.

Chapter One: The Comparable UK Common Law Relating to Agents – Termination of Agency and the Rights of Agents not Falling within the Commercial Agents (Council Directive) Regulations 1993

This chapter seeks to identify the common law position of agents upon termination of the agency agreement in order to put into context the remedies provided by the Commercial Agents (Council Directive) Regulations 1993.

The agency relationship between P and A under English law may be terminated in several ways. As the relationship between P and A depends on consent, withdrawal of consent by either party will terminate the relationship and thus terminate the agent’s authority to bind the principal. [7] There are also circumstances under which the agent’s authority may be terminated by the operation of the law. Termination gives rise to a set of particular problems in relation to the rights of the agent as against the principal to financial remedy. It is for this reason that termination should be considered prior to the effects of termination on the rights of the agent.

As noted, an agency agreement may be terminated by mutual consent. An agreement between the parties to terminate the agency has the effect of terminating the agent’s authority and will also render the contract discharged, so that there will be no liability on either side for breach of contract. However, if one party unilaterally seeks to terminate the relationship, matters may be more complicated. Although the authority of the agent is terminated in these circumstances, the termination may amount to a breach of contract which may give rise to liability for breach of contract at common law. [8]

Some agency relationships may, as a matter of contract, be specified to last a particular length of time. Where this is the case, any termination before expiry of the term will amount to a repudiatory breach of contract, unless it is justified by a prior breach on the part of the other party. [9] However, in the absence of an early termination, the agency agreement terminates on the expiry of the period. [10] Where there is no express termination date for the agency agreement, it may be possible to imply an automatic expiration date through, for example, trade custom. [11] In Danby v Coutt & Co [12] the principal had appointed two agents before going abroad and although the agreement did not specify the duration it was found that, as the agreement referenced the fact that the principal was going abroad, it could be implied that the agreement was only to be effective whilst the principal was abroad, and not on his return. Alternatively, where no express or implied expiry date is found, it is possible for the agency agreement to be terminated by reasonable notice. If the contract provides for a notice period, that will be the notice required. If no notice period is specified then it must b ‘reasonable’ and will depend on the circumstances of the case. [13] In Martin Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [14] the agent was a sole agent and agreed to spend time and money promoting the principal’s products and not to sell competing products. It was held that 12 months’ notice was reasonable.

Where the agent is appointed on a commission basis to perform a single task, and is therefore a special agent rather than a general one, such as an estate agent, the contract is interpreted as a unilateral one from which the principal is entitled to withdraw at any stage prior to the performance of the specific task. [15]

Termination will also occur where the principal’s business ceases to exist. In Rhodes v Forwood [16] it was found that the sale of the principal’s business terminated the agency agreement. However, in Turner v Goldsmith [17] it was held that the failure to reinstate a business where the principal was obliged to provide a level of work to the agent over a specified period of time amounted to a breach of contract. As a general rule, the law will operate to terminate the agency agreement where frustration occurs, where one of the party dies or becomes insane, or where the principal becomes bankrupt. [18]

There are also circumstances in which the authority of the agent is irrevocable. Firstly, the Powers of Attorney Act 1971 provides that where the power of attorney is stated as irrevocable and is given to secure the interest of the agent it will be irrevocable whilst the interest remains. Secondly, where the authority is given to the agent and is coupled with an interest, which must exist independently of the agency agreement, [19] the agency will be irrevocable for as long as the interest exists. Thus, in Re Hannan’s Empress Gold Mining and Development Co, Ex p. Carmichael’s [20] Carmichael agreed to buy any shares of a company, which had been promoted by Phillips to buy a mine from him, which were not sold to members of the public. Carmichael granted Phillips the authority to apply for the unsold shares on his behalf. Carmichael was then bound to buy 980 shares and sought to revoke the authority of Philips to purchase them on his behalf. It was held that since the authority was designed to protect an interest of the agent it was irrevocable as the interest was that if the shares were not sold then the agent would not be able to use the company to buy the mine.

In terms of the rights of the agent as against the principal on termination of the agency agreement under the common law, this will depend on the terms of the agreement and the circumstances of the termination. The rights of the agent under common law depends on the construction of the contract and the application of general rules of contract law. [21]

As the termination of the agency does not affect any rights which have been accrued prior to the termination, the agent may be entitled to commission if any has been earned and remains unpaid. However, there is no automatic right, at common law, to remuneration under an agency agreement, and it is perfectly possible under the common law to enter into a gratuitous agency relationship under which no remuneration is to be paid. [22] Thus, at common law an agent will only have the right to remuneration where there is an express or implied term to that effect in the agency agreement. In Way v Latilla [23] the House of Lords held that as the agreement was one of employment and that it was understood that the work was not to be gratuitous, there was an implied contractual right to a reasonable level of remuneration. In contrast, in Kofi Sunkersette Obu Appellant v A Strauss & Co [24] there was an express term stating that additional remuneration was to be paid at the discretion of the principal and it was held that the agent was not entitled as a matter of law to receive any ‘reasonable sum’ as it was a matter for the discretion of the principal.

Furthermore, the commission payable to an agent under the common law will strictly follow the terms of the agency agreement. In Toulmin v Millar [25] the agent was instructed to find a tenant for a property. The agent in fact found a purchaser who purchased the house. The agent was not owed any commission because he had performed the action that was to give rise to commission (finding a tenant). Similarly, in Luxor (Eastbourne) Ltd v Cooper [26] the agent was to be paid commission upon completion of a sale. As this was an express provision, where the principal decided not to proceed with the sale, the agent was not entitled to the commission despite his having found a buyer willing to purchase.

Thus, under the common law, an agent will be entitled to commission in line with the contractual terms of the agency agreement, and if any payable commission remains unpaid at the time of the termination, he will be entitled to this. Furthermore, under the common law the principal must indemnify the agent for losses and liabilities which are reasonably incurred during the agency period [27] .

In the absence of any right to further commission or an indemnity, the agent will only be entitled to a further payment from the principal in line with contractual rules. So, where the agency relationship is properly terminated, no further payment will be made. Where, alternatively, the termination arises from a repudiatory breach of contract on the part of the principal, the agent may be entitled to damages. In law, a repudiatory breach by a principal gives the agent the choice whether to accept the repudiation, and therefore treat the contract as terminated, or not to accept it, in which case the contract theoretically remains in force. However, an agent is unlikely to be able to refuse to accept repudiation as he will generally be unable to perform the contract without the co-operation of the principal. As the agency relationship is one of personal service, the court will not generally order specific performance [28] or make an injunction ordering the relationship to continue. [29] The agent is therefore only able to claim against the principal for damages for breach of contract. In doing this, he will have to show that he has mitigated his loss. Damages may be claimed on the basis of the commission the agent would have earned had the contract been performed, for example during a proper notice period, subject to mitigation.

Thus, under the common law, the agent is not able, as of a right, to claim a compensatory payment at the termination of the agency relationship. Where the principal has terminated the relationship in breach of contract, the agent may be entitled to damages representing the amount of commission he would have earned during the notice period (which if not specified will be the period deemed reasonable), though this will be subject to mitigation. As will be seen in subsequent chapters, the Commercial Agents (Council Directive) Regulations 1993 have sought to provide a compensatory payment to agents on termination regardless of whether the principal is in breach of contract. [30]