MJ O'Connor Solicitors

Where an enterprise seeks to expand operations into a new territory and does not wish to invest in the required infrastructure to undertake the expansion directly it is faced with a choice of establishing either a network of franchisees or distributors or agents to act on its behalf. Where the legal relationship of agency is chosen the agent will act on behalf of his or her principal by concluding the terms of sales and purchases for contracts which are then entered into directly between the principal and the customer. Under EU law a harmonised regime applies to all commercial agency relationships within the EU, including provision for a statutory entitlement to compensation which is payable to the commercial agent upon the termination of the Agency. Sean Nolan, partner in M J O’Connor Solicitors, Waterford highlights commercial agents’ rights to compensation and reviews the recent High Court decision in Kenny v Ireland ROC Limited.

 

Council Directive 86/653/EC on the coordination of the laws of the Members States relating to self employed commercial agents (“the Directive”) required Member States to give effect to the Directive within the EU and thereby provide a uniform set of rights for commercial agents. The Government gave effect to the Directive under the European Communities (Commercial Agents) Regulations 1994 and 1997 (“the Regulations”). Article 1(2) of the Directive and Regulation 2(1) of the Regulations provide that a commercial agent means “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 such transactions on behalf of and in the name of the principal”. 

 

To be a “commercial agent” the person concerned must satisfy three criteria. The first two are that the agent be self employed and have a continuing authority to act on behalf of the principal for the sale or purchase of goods. (Neither the Directive nor the Regulations apply to those persons who only supply services, such as financial services). The third test i.e. whether the agent has authority to negotiate the sale or purchase of goods or to conclude transactions for the principal was recently considered in the Irish High Court. The third test is central to the nature of agency and is important in understanding the distinction between an agent and a distributor or franchisee.

 

In the High Court decision in Kenny v Ireland ROC Limited the agent was appointed as agent to run a service station in Ireland where he sold petrol and non-petrol products on behalf of the principal. The arrangement continued for several years until the principal validly terminated the Agency Agreement in accordance with the provisions of the Agency Agreement. The agent then claimed compensation for termination under the Regulations. The preliminary issue to be determined by the Court was whether the agent constituted a “commercial agent” of the principal for the purposes of the Directive and the Regulations. This turned on the meaning of the phrase “negotiate the sale or the purchase” and the phrase “negotiate and conclude such transactions”. The Court concluded that bargaining in the active sense is not required to qualify as “negotiation”. The proper approach is whether the person who may be said to be negotiating has to “deal with, manage or conduct” the sale or purchase concerned and in doing so to use some skill or consideration which must be brought to bear on the sale or purchase of the goods. The Court noted that the purchase and the sale of goods may be conducted in various ways. In some types of business it would not be unusual for a degree of bargaining to be undertaken prior to sale. In other cases the price will be relatively pre-determined. The Court concluded in this case that the agent was permitted to operate in a way as allowed for the exercise by the agent of a significant level of “skill or consideration” in relation to “dealing with managing or conducting” the purchase and sale of products on behalf of the principal. The Court was satisfied that the agent had “negotiated both the purchase and sale of goods” on behalf of the principal and accordingly the agent was at all material times a “commercial agent” within the meaning of the Directive and the Regulations and was therefore entitled to compensation under the Directive.

 

Upon the termination of the Agency Agreement a commercial agent will have an entitlement to compensation[1] under the terms of the Directive and the Regulations. Article 17(3) of the Directive provides as follows:-

 

 

 

 

The entitlement to compensation represents a departure to the general rule in Irish law that a commercial contract which is terminated in accordance with its terms does not give rise to a right of compensation for the counterparty. Although, the amount of compensation to which an agent is entitled under Article 17(3) has not as yet been considered by the Irish Courts[2], guidance can be drawn from a European Commission Report which indicated that the level of compensation should be equal to the sum of 2 years commission calculated on the basis of the average commission earned during the 3 years preceding the termination of the Agency. This approach is consistent with the compensation system developed under French law which underpins the compensation right provided for under the Irish Regulations. 

 

It should also be noted that there is no duty on a commercial agent to mitigate its losses. For example, the fact that a commercial agent acquires an agency with another principal after the termination of his Agency cannot be used as grounds for reducing the amount of compensation to which an Agent is entitled under Article 17(3).

 

Article 8 of the Directive also provides that a commercial agent is entitled to commission on commercial transactions concluded after termination of the Agency, principally where the transaction is attributable to the Agent’s pre termination efforts.

 

Under Article 17(5) of the Directive a commercial agent will lose his entitlement to compensation if within one year following termination of the Contract he has not notified the principal that he intends pursuing his entitlement under the Directive. 

 

Under Article 18 of the Directive no compensation will be payable (a) where a principal has terminated the Agency Contract because of default attributable to the commercial agent which would justify immediate termination of the Agency Agreement; (b) where the commercial agent has terminated the Agency Contract unless such termination is justified by circumstances attributable to the principal or on the grounds of age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably require to continue his activities or (c) where, with the agreement of the principal, the commercial agent assigns his rights and duties under the Agency Contract to another person.

 

Parties considering entering into a franchise, distribution or agency should have regard to the above entitlements which apply only if the appointee is a “commercial agent” within the Directive and the Regulations. The above rights to compensation do not apply where the appointee is a franchisee or distributor, in which case the parties’ entitlements will be governed solely by the terms of their contract.

For further information contact Sean Nolan at snolan@mjoc.ie