Commercial Agents: English courts restrict parties’ freedom to contract

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International exporters beware! 

The English High Court has recently gone further than ever in restricting a party's right to contract on the issues of choice of law and jurisdiction.  The case of Accentuate Limited v Asigra Inc. will have a significant impact on certain international exporters using commercial agents in the European Union.  An agreement between the parties that non-EU law should apply to the agency contract  and to make the contract subject to arbitration in a non-EU jurisdiction, will be invalid in many circumstances and an EU agent will be free to bring a claim under the Regulations in the courts of its home country. This clearly applies to companies operating within, or exporting to, any EU country.

Financial Impact:

Compensation under the Regulations
The Commercial Agents (Council Directive) 1993 Regulations ("the Regulations") have been enacted to give effect to EU law in the UK.  Amongst other things, the Regulations entitle a commercial agent (which has been defined very widely) to be compensated or indemnified by its principal upon termination of the agency relationship. Regulation 19 does not allow the parties to derogate from this provision.

This is a very wide reaching provision and even entitles the agent to compensation on a fixed term agency contract coming to the end of its natural term.  If there is no written contract in which the parties opt for an indemnity rather than compensation, compensation is payable as a matter of right. 

The compensation can be substantial and 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 to six times the annual commissions. 

Cobbetts LLP has recently dealt with a case where the agency provided $100 million turnover for the principal with annual commissions of $5 million.  The agency agreement was terminated and the valuation of the agency was in the region of $17 million.  Such a claim can clearly have a significant impact on the financial position of the principal.  This can exacerbate where the principal uses a large number of agents.

The Approach of the English Courts
The last case relating to choice of law that was of particular interest to international lawyers and international exporters using agents was Ingmar GB Limited v Eaton Leonard Technologies Limited.  In this case, the European Court of Justice held that an American exporter using an English sales agent could not contract out of the Regulations.  In Ingmar, the parties had agreed a contract subject to the law of the state of California.  The European Court held that this choice of law clause was invalid and that the parties could not contract out of the compensation provisions in the Regulations.  The Ingmar Case did not deal with the issue of jurisdiction and left a potential lacuna.

The Accentuate Case
The recent decision in Accentuate goes further than the Ingmar case and deals with the issue of jurisdiction clauses.  In Accentuate, a Canadian exporter of software products had a written contract with its English agent agreeing that Ontario Law applied and agreeing that any dispute be determined by arbitration in Toronto, Ontario. 

Notwithstanding the arbitration clause, the agent was able to successfully pursue a claim for compensation under the Regulations in the English Courts.  The reason for this approach by the English Courts was that it held that the arbitration clause was an attempt by the principal to contract out of the protection provided to the agent by the Regulations.

The potential effect of Accentuate is somewhat surprising given that various applicable authorities require a tribunal, wherever in the world it may be sitting, to apply mandatory provisions (such as those contained in the Regulations), alongside the chosen law. The specific facts of Accentuate clarify the question on jurisdiction but leave other questions unanswered.  An issue left unclear by this case is whether an arbitration clause which makes it clear in the contract that the Regulations will be applied by the arbitrator, remains valid. 

The Practical Implications
We are receiving an increased number of cases from international exporters that are surprised by the impact of the Regulations and the associated financial consequences. This is especially so in circumstances where they believe they have expressly and effectively contracted out of such provisions.

Our experience is that a large number of international exporters have not put adequate protection in place at the time of entering into an agency contract or when dealing with the termination of it.  Taking a pro-active approach and seeking specialist advice on this issue can save substantial sums in the medium and long term.

Cobbetts LLP has specialist teams advising on the impact of the Regulations.  We take a pro-active and commercial approach to dispute avoidance and there are a number of options that can be considered in advance of any dispute to limit liability and the prospect of claims.  In the event a dispute arises, our Commercial Agents Dispute Resolution Team is on hand to protect your position.

For a more detailed analysis of the case discussed here please download the PDF attachment above...

For further information please contact Andrew Leach, Partner

andrew.leach@cobbetts.com

Tel: 0845 404 2564 / +44 161 833 3333

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This content is for information purposes only and should not be relied upon as a substitute for legal advice. Copyright 2010 Cobbetts LLP – All rights reserved – March 2010