Commercial Matters April 2010

Commercial agents - the contract is key

The Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) governs the relationship between agents and their principals.  The need for a clear and tailored written agreement between them has become if anything, more important with the introduction of the Regulations which introduced a statutory right for agents to get compensation (or an “indemnity” if the contract specifies this) from the principal on termination of the contract. This arises even where the agent terminates the contract “on the grounds of age, infirmity or illness”.

 
The contract should specify whether compensation or indemnity will apply on termination. If it does not, compensation will be payable.

 
Indemnity payments are generally easier to work out in advance.  They are payable if the following conditions are satisfied:

• new customers had been brought to the principal by the agent; or

• the volume of business with existing customers had been significantly increased by the agent; and

• the principal continues to derive substantial benefits from such business; and

• the payment of an indemnity is equitable, having regard to all the circumstances and, in particular, the commission lost by the agent on contract termination.

 
Indemnity payments should not exceed one year of the agent’s average remuneration over the preceding five years (or over the whole duration of the contract, if the period is less than five years).

 
Compensation is assessed at the value of the agency business on the date of termination.  Depending on the sector and circumstances, this can be as high as three - six times the annual commissions.  Cobbetts LLP has recently dealt with a case where the agency provided USD 100 million turnover for the principal with annual commissions of USD 5 million.  The agency agreement was terminated and the valuation of the agency was in the region of USD 17 million and such a claim clearly has a significant impact on the financial position of the principal.

 
It is not permissible to contract out of or avoid the Regulations but there are some useful areas where a suitably drafted written agreement can be used to modify the impact of the Regulations. For instance the contract can be used to:

• agree longer minimum notice periods than those laid down in regulation 15;

• exclude a claim for commission in respect of transactions concluded after termination of the contract but derived from the efforts of the agent prior to termination.

 A tactic sometimes employed to circumvent the Regulations which will not succeed is to state that the governing law of the contract is that of a non-EU member state. In Ingmar GB Limited v Eaton Leonard Technologies Limited the European Court of Justice held that an American exporter using an English sales agent could not contract out of the Regulations, even though under the contract the parties had agreed the law of the state of California should apply. The European Court of Justice has confirmed that where the agent carries on activity in the EU the provisions of the directive will apply.

We can assist you as a principal or an agent in drawing up a suitable contract, or revising an existing one. Our team of experienced practitioners has prepared agency contracts for clients across the world. If a dispute has arisen in respect of an existing commercial agency contract, our specialist dispute resolution team will be able to assist. Further information on the Cobbetts LLP team can be found on the following link:

For more information, please visit this link

BSKYB v Electronic Data Systems - misrepresentations cost supplier dearly

Following a long running legal battle, judgment in BSkyB Limited (Sky) v HP Enterprise Services UK Limited (formerly  Electronic Data Systems Limited) (EDS) was handed down on 26 January 2010, with EDS held liable for deceit, misrepresentation and breach of contract.

In 2000, Sky awarded EDS a contract to design and implement a customer relationship management system following a competitive tender process. Sky claimed that EDS had acted deceitfully during the tender process by describing the system as "proven" when it was not, by overstating its capabilities in relation to resources and implementation methodologies, and by understating the amount of time and cost required to implement the system, leading Sky to select EDS in favour of other bidders.

Sky was successful in its argument that EDS’s misrepresentations in respect of the amount of time required to complete the project, were made fraudulently rather than negligently.

 
EDS was found to have made further negligent misrepresentations during the course of the project which induced Sky to agree to amend the contract, and was also found to be in breach of the contract having failed to use reasonable skill and care or conform to good industry practice. In particular, EDS had failed to capture Sky's requirements, adequately resource the project or properly document the design and development process.

The final amount of costs and damages is yet to be determined by the court. However, given that EDS's contractual cap on liability of £30 million is not effective against liability for fraud, it is anticipated that final damages may exceed £200 million. EDS has announced it plans to appeal the decision.

The judgment is a major victory for Sky, and forms one of the most significant commercial cases to come before the courts for many years. Suppliers should take great care about what is said and written in their tenders and sales proposals – and ensure that they can back up promises – whether in relation to cost, timescales, functionality of products or availability of suitable resources.