Author: Tom Bolam
Tom Bolam, Senior Associate, Fladgate LLP (firstname.lastname@example.org)
A commercial agent is a self-employed intermediary with continuing authority to negotiate the sale or purchase of goods on behalf of another person. Commercial agents have special protection in law under the Commercial Agents (Council Directive) Regulations 1993 (the Regulations). Most significantly, the Regulations provide that if a principal terminates a commercial agency, the usual position is that the commercial agent is entitled to compensation. In England, compensation is calculated by reference to the price that a hypothetical purchaser would pay to take an assignment of the agency had the principal not terminated the agreement.
The law on commercial agent compensation is sufficiently clear that the vast majority of cases settle before they go to court. Well advised parties will generally be able to ascertain the likely compensation amount that a court would award and early settlements are common. The case of Pluczenik Diamond Company NV v W Nagel (a firm) was a rare case where the parties were unable to agree a settlement, principally because the parties could not agree if the Regulations applied.
At first instance Nagel – a commercial agent which purchased rough diamonds from De Beers on behalf of its principal, Pluczenik – persuaded the Court that it fell within the definition of a commercial agent under the Regulations. Despite this, the Court held that the Regulations did not apply because of a special exception in the Regulations which excludes commercial agencies where the agent operates on a commodity exchange or commodity market.
At first instance the Court held that the De Beers rough diamond market was a commodity exchange/ market and so the Regulations did not apply to Nagel’s former agency. As such, Nagel was not entitled to compensation for termination.
Nevertheless, at first instance Nagel won significant damages from Pluczenik for breach of contract. Nagel established that it had a binding agreement with Pluczenik that it would not terminate its agency so long as Pluczenik purchased diamonds from De Beers. The court held that Pluczenik had breached this agreement and was entitled to damages for breach of contract.
Both Nagel and Pluczenik appealed the judgment.
Pluczenik appealed on the basis that the court had been wrong to find that there had been a binding agreement that it would engage Nagel as its agent so long as it purchased diamonds from De Beers. Pluczenik also appealed the way in which the Court had calculated Nagel’s damages of US$3.3 million.
Nagel appealed the Court’s decision that the Regulations did not apply because it operated on a commodity exchange or market.
The Court of Appeal upheld the judgment at first instance although it found that Pluczenik was right to criticise the judge for assessing Nagel’s damages for breach of contract on the same basis as a compensation calculation under the Regulations (i.e. assessing what a hypothetical purchaser would have been prepared to pay for the agency had it continue). However, rather than finding that the damages award of US$3.3 million was too high, the Court of Appeal commented that the judge at first instance had been overly generous to Pluczenik.
When assessing compensation under the Regulations, the usual approach of the courts is to establish the profit that the former agent could generate in a year and then applying a multiplier to reflect the fact that a hypothetical purchaser will usually be prepared to pay a multiple of single year’s profit to acquire a business (i.e. because they would expect to generate profits for many years after taking over the agency). The Court of Appeal agreed with the judge at first instance that there was an agreement between Pluczenik and Nagel that the agency would continue for as long as Pluczenik operated on the De Beers market.
The Court of Appeal commented that the loss suffered by Nagel for Pluczenik’s wrongful early termination of the agency was likely to be higher than the amount that a hypothetical purchaser would be prepared to pay for an assignment of that agency. In a claim for damages for breach of contract (as opposed to a claim for compensation under the Regulations) it was necessary to assess how long Nagel would have continued to earn profits from the agency had Pluczenik not terminated. The damages award should have reflected this lost profit amount, which would inevitably be higher than the price that a hypothetical purchaser would have been prepared to pay to take an assignment of the agency. This was because a hypothetical purchaser would not be prepared to pay a price equivalent to the total estimated future profits of the agency. The hypothetical purchaser would wish to make a profit from the agency and so would only pay a price lower than its total estimated future profits so that it could recoup its investment and earn profit.
The Court of Appeal commented that if the judge at first instance had adopted the correct approach to the calculation of damages, Nagel may well have achieved a damages amount of two or three times the figure that the trial judge had awarded. Unfortunately for Nagel, and fortunately for Pluczenik, Nagel did not appeal on this point and so the Court of Appeal did not revise the damages award upwards.
The Court of Appeal also considered whether the trial judge was correct to find that Nagel’s agency fell outside the scope of the Regulations on the basis of the commodity exchange/market exception. At first instance, the judge found that the way in which De Beers sold diamonds was a type of commodity market or exchange and so the agency fell within the exclusion in the Regulations. The Court of Appeal found that the trial judge had erred on this point and gave helpful guidance on when the commodity market/exception will apply.
The Court of Appeal said that an essential feature of a commodity exchange/market is that the commodities traded on the exchange or market can be freely bought or sold by the participants on an exchange/market in accordance with a set of rules. The De Beers model did not correspond to that description since it represented a sale by a single seller (De Beers) to a range of potential purchasers and so was more akin to a shop where goods are sold on a wholesale basis to trade buyers. Accordingly, the Court of Appeal found that the trial judge had been wrong to find that the commodity market/exchange exception applied to Nagel’s agency. The agency was one to which the Regulations applied.
This interpretation of a commodity exchange/market was consistent with the purpose of the EU Directive which the Regulations implemented. The purpose of awarding compensation to a commercial agent on termination of their agency is, in essence, to reward the agent for the goodwill they have generated for their principal. The idea is that the principal will continue to benefit from that goodwill following termination and so the former agent should be compensated. On commodity exchanges or commodity markets the Court of Appeal said that, “Considerations of customer or supplier loyalty and goodwill are of little or no significance. Indeed, the rules of an exchange are usually intended to promote this by providing confidence that any contract made between members of the exchange will be honoured”.
When a commercial agent is dealing on such an exchange, it made sense that they would not be entitled to compensation for the termination of their agency since they have not, in all likelihood, generated any goodwill for their principal. The Court of Appeal found that Nagel had undoubtedly generated goodwill for Pluczenik and so to exclude a commercial agency of this type from the scope of the Regulations would undermine their very purpose. Accordingly, the Court of Appeal found that the judge at first instance had defined a commodity market or commodity exchange too widely and that Nagel’s agency had been one to which the Regulations applied.
The Court of Appeal’s clarification on the meaning of ‘commodity market’ or ‘commodity exchange’ in the Regulations is extremely helpful and good news for commercial agents. The judgment at first instance had potentially serious implications for many commercial agents dealing with commodity products. The Court of Appeal’s judgment provides clear guidance on when the commodity market/exception applies and makes clear that the scope of the exception is very limited.
For legal updates and news, please visit Fladgate’s Dispute Resolution Hub.