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Introduction to agency

An agent is a legal person who acts on behalf of another, often negotiating and concluding contracts on behalf of that other. Agency, which describes the relationships created by the use of an agent, is much more common than you might first think. In the commercial world, one bank might act as an agent for several others in a syndicated loan agreement; the master of a vessel acts as an agent for all of the owners of cargo on a ship; insurance brokers are agents for the assured (not insurance companies in the commercial world) and auctioneers act as agents for owners of goods. On a more local level, estate agents act as agents for landlords and directors act as agents for their companies, as the legal person (the company) has no ability to communicate.

Key concepts

The parties

The person who the agent acts on behalf of is known as the principal. The relationship between the agent and the principal is often called the internal relationship. The person with whom the agent negotiates or concludes contracts with (on behalf of the principal) is known as the third party. The relationship between the principal and agent on one hand, and the third party on the other, is known as the external relationship.

Authority

Agency is created by agreement. It is usually (but not always) non-gratuitous, so there is a contract in place. This agreement will confer authority on the agent; this limits the scenarios in which the agent is permitted to act on the principal’s behalf. Authority may be revoked at any time, irrespective of contractual any obligations (although the principal may be liable for damages upon premature termination).

Types of agency

There are three types of agency: disclosed agency, unnamed agency and undisclosed agency. Disclosed agency is the simplest type of agency, where the third party knows that the agent he is dealing with is acting on behalf of the principal. Unnamed agency occurs where the third party knows that the person he is dealing with is an agent, but the identity of the principal is unknown. Usually, the identity of a contracting party is not considered to be a material issue in English law. Undisclosed agency occurs where the ‘agent’ appears to be acting on his own behalf, when in fact he is acting on behalf of an agent. This is an unusual type of agency, and will be discussed later, as usually, once a contract has been concluded by an agent, the agent ‘disappears’; obligations are only imposed by the contract concluded between the principal and third party.

Common law and commercial agents

Finally, there are two types of agents: agents at common law and commercial agents. Historically, only the former type existed. A common law agent is governed only by the common law and his agreement. The common law is very much focused on protecting principals, not agents, therefore, with directive 86/653/EEC, the European Union required national legislatures to implement laws protecting agents if their activities fulfilled a certain criteria. The subsequent legislation enacted in the UK was the Commercial Agents (Council Directive) Regulations 1993. This legislation created the commercial agent. If a common law agent’s activities fall within the definition of a ‘commercial agent’ within the CA(CD)R 1993, a variety of rights and obligations are imposed on both the agent and the principal, which mainly protect the agent. An agent is therefore either a common law agent, or a common law and commercial agent; the terms are not mutually exclusive. The regulations’ objective is to view agency as a joint enterprise where both the agent and principal contribute good will to the principal’s ambitions, as opposed to there being a master/servant relationship.

Commercial Agents (Council Directive) Regulations 1993

The first question when dealing with any situation involving agency is: can the agent be classed as a commercial agent? As a principal, this means the conferral of a significant number of obligations on yourself, and the CA(CD)R 1993 cannot be contracted out of (although some obligations can be derogated from). The obligations and rights conferred by the regulations will be discussed in more detail on a proceeding page. The definition of a commercial agent, according to regulation 2 is:

[A] self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal.

To answer the first question, a dissection of this definition is required. But from the outset, it should be noted that as this is delegated legislation with its source as EU law, the normal definitions of words used, as defined in English law, cannot be applied; only inferences can be made where there is no relevant EU law.

Self-employed

‘Self-employed’ prevents the regulations being applicable to those in actual employment, where employment law protects employees instead. Ready Mixed Concrete v Minister of Pensions and National Insurance [1968] laid out three conditions which point to employment (not self-employment): a wage or remuneration; control of activities (by the employer) and other provisions which are consistent with employment. An agent will still receive remuneration, but will usually control what he does in order to attain objectives set by his principal. In Smith v Reliance Water Controls [2003], the Court of Appeal admitted that the distinction can be hard to draw, but found that even with a sham motive, the details of a new agreement can turn an employee into a commercial agent and entitle that agent to remuneration in accordance with the regulations.

Continuing authority

The logic behind these words is that an agent must be authorised to conclude more than one transaction to qualify for protection under the regulations. In Poseidon Chartering BV v Marianne Zeeschip VOF [2006, ECJ], the European Court of Justice considered that authorisation to conclude one contract, then conclude subsequent renewals of that single contract, was enough to constitute continuing authority.

Sale or purchase of goods

There are two implications to this requirement. Firstly, an agent who sells services, as opposed to goods, cannot be a commercial agent, as was taken for granted in Crane v Sky In-Home Service [2007]. According to St Albans City and District Council v International Computers Ltd [1996], software may be classed as goods as long as it is supplied on a physical disk. Secondly, if there is to be no retention of the goods, goods have not been purchased or sold. In Mercedes-Benz Financial Services v HMRC [2014], it was said that finance leases can therefore not constitute sales of goods. In the law of distribution rights, licences can be re-sold as goods, according to Usedsoft v Oracle [2012, ECJ].

Negotiate or negotiate and conclude

This requirement imposes an apparently low burden on the agent: in PJ Pipe and Valve co v Audco India [2005], the agent was authorised only to introduce third parties to the principal. This was enough to trigger the protections provided by the regulations.

On behalf of and in the name of

If an agent concludes contracts on his own behalf, the protection of the regulations is not triggered, according to Sagal v Atelier Bunz [2009], where the agent communicated with third parties using his own name. Similarly, if a principle remains undisclosed such that third parties believe that the agent is trading on his own behalf, the business of the principal is not being developed and the agent will not be protected by the regulations, according to AMB Imballaggi Plastici v Pacflex [1999].

Sub-agents

A sub-agent is the agent of an agent, and is only permitted by common law where authorised. According to Light v Ty Europe [2003], a sub agent (even where authorised) may not be a commercial agent.

Secondary activities

The directive responsible for the regulations allowed Member States to exclude the applicability of the regulations to secondary activities. The UK wished to exclude secondary activities, therefore it had to define them. The Schedule to the regulations defines secondary activities as those not falling within the primary purpose of the agency agreement. The ‘primary purpose’, according to paragraph 2 of the Schedule, is the sale or purchase of goods of a particular kind, where each transaction is negotiated commercially and will likely lead to subsequent transactions. Crane v Sky In-Home Service [2007] is a good illustration of the application of the Schedule. The Schedule has been criticised due to its poor drafting: the regulations are aimed at looking at the agent’s activities, whereas the Schedule compares the agent’s activities to those of the principal. The Department of Trade and Industry’s explanatory notes arguably mislead readers into thinking that a comparison with the principal’s activities is not required, when they themselves drafted the Schedule.

Final exceptions

The regulations also do not apply to directors, partners, insolvency practitioners, unpaid agents, commodity agents and certain agents of the Crown.

Summary

The Commercial Agents (Council Directive) Regulations 1993 are important to agents as they usually allow for greater remuneration upon termination; this is one of the obligations imposed upon the principal of a commercial agent. However, they certainly do add complexity to the law of agency.

Next: Agents’ authority

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