No NIC. No pension schemes. No ties. Using sales agents is a lot less hassle than employing sales representatives. Yes, but only if principals and agents stick to the rules. STEPHEN SIDKIN, a commercial law partner at City law firm Fox Williams, maps out the new obligations on both sides. THIS ARTICLE IS EXCLUSIVE TO THE WEBSITE.

Agents of change

In every litter there is a runt. At every ball there is a Cinderella. Invariably in every law there are provisions which tend to be overlooked or forgotten about. In this respect the Commercial Agents Regulations are no different. Although ten cases concerning the Regulations have reached the Courts since 1994, none of them have concerned the provisions which deal with an agent competing against his principal.

In part this can be attributed to the fact that the other provisions of the Regulations have had such a seismic affect on English agency law. To move from a situation where a lawfully terminated agent was entitled to nothing by way of compensation to one where he could receive an unlimited amount of compensation has, in some instances, been almost too much for principals to bear. But principals who overlook the provisions of the Regulations concerned with non-competition, do so at their peril.

It has always been open to a principal to include a non-compete provision in an agency contract. In doing so the most important consideration was whether such a provision might be void and unenforceable as a result of infringing the common law doctrine of restraint of trade. This doctrine provides that a provision restraining trade (such as a non-compete restriction) will only be enforceable to the extent that it is reasonable. Reasonableness is to be judged by reference to the geographical extent of the restriction, its duration and extent.

Although it is fairly easy to determine the legality of restrictions which are either extremely harsh or extremely lenient, the position of how to treat a moderate non-compete provision can be one which is hard to call. Generally with regard to this doctrine, the law remains in a state of flux. All that can be said with any certainty is that the narrower the restriction, the greater the chance of enforceability. But many is the time that a client has gleefully informed his solicitor about how he managed to negotiate down a seemingly draconian restriction from, for example, five years to two years. With much irony the solicitor has pointed out that had the agent not negotiated the restriction down, it would almost certainly have been void as being contrary to the doctrine of restraint of trade!

Into this situation has come the Regulations. Unlike all the other provisions of the Regulations, it is the case that the non-compete provisions are actually secondary to the common law. Accordingly although a non-compete provision may comply with the Regulations, it may still be unlawful if it is contrary to the doctrine.

But where this is not the case the Regulations provide that a non-compete restriction will be valid only if and to the extent that:

* it is in writing; and

* it relates to the geographical area or the group of customers and the geographical area for which the agent is responsible; and

* to the kind of goods covered by the agency contract; and

* the restriction does not continue for more than two years following termination of the agency contract.

If the non-compete restriction fails any of these tests it will be void even if it would otherwise be valid so far as the doctrine of restraint of trade is concerned.

These provisions relate only to non-compete restrictions that apply after the agency contract has come to an end. The situation in respect of restrictions that apply during the contract is both more simplistic but at the same time potentially more dangerous for the principal.

The Regulations impose on an agent the obligation to act dutifully and in good faith. Broadly this corresponds with the long existing common law requirement that an agent has a fiduciary duty to act in good faith towards his principal. In fact the Regulations set out particular requirements of this obligation. The fact that these requirements do not expressly include a non-compete restriction is of no consequence. This is because there is every reason to believe that an agent who competes against his principal will be said to be in breach of his obligation to act dutifully and in good faith under the Regulations.

In this situation the only need is for the principal to ensure that the restriction does not infringe the doctrine of restraint to trade. This is important given that in most situations a terminated agent will be able to claim compensation or an indemnity from his principal. One of the few situations in which the principal will be able to avoid such a claim is where the agent was in breach of a non-compete restriction. But if it should turn out that the restriction itself was invalid, the agent will clearly be able to claim compensation or an indemnity, the amounts of which can be very large.

To add insult to injury, it can be expected that the terminated agent will have other heads of claim. For example, a principal relying on a non-compete restriction is likely to have summarily terminated the agency contract. But if the principal did so wrongly, the agent will be able to claim damages for failure to give proper notice. Arguably the damages are an amount equivalent to the commission which the agent would have earned had proper notice been given. In some cases proper notice can be three months and thirty days.

The wrongly terminated agent will also be able to claim post-termination commission. This is commission which is payable to an agent on transactions concluded after termination of the agency contract subject to two requirements being satisfied. The first is that the order giving rise to the transaction was mainly attributable to his efforts whilst he was an agent. Second, that the transaction was entered into within a reasonable period of time after termination of the agency contract.

In addition the principal will be liable for commission on orders received and accepted by the principal before termination of the agency contract.

Somewhat controversially the agent will also be able to claim so-called back commission. This commission arises where for a reason for which the principal was to blame, the contract between the principal and the customer is not executed and, as a result, the agent does not receive commission. If the reason for non-execution of the contract with the customer was one for which the principal is to blame, the agent will be entitled to claim back commission.

Given the exposure which principals face under the Regulations when dealing with agents, it is unsurprising that some principals have considered using independent contractors. In doing so they hope to break free of the obligations which the Regulations place on them. This result cannot be denied. However, as with so many things, every benefit has a price. In the case of an independent contractor it will be that the third party (principal) engaging the contractor will not have the benefit of being owed a fiduciary duty.

Accordingly, and in the absence of non-compete provisions in the contractor’s contract, the contractor will be able to compete against his principal.

Such are the principles of competition.

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