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Commercial Agents: Diamonds are not forever

So said Popplewell J in the opening line of his judgment in the recent case of W Nagel (a firm) and Pluczenik Diamond Company NV[1].  The judgment is an important one for companies involved in the sale and purchase of commodities, in that it appears to be the first case to consider the scope of the exemption under the Commercial Agents (Council Directive) Regulations 1993 (Regulations) for commercial agents who operate on commodity exchanges.  However, some aspects of the judgment are of broader application to agency relationships, and will be of interest to all businesses that appoint or operate as agents in the UK.   

Background

The case involved a claim by Willie Nagel (WN), a diamond broker, against his client, Pluczenik Diamond Company (one of the world’s leading diamantaires), for termination of an agency relationship involving the purchase by Pluczenik of rough diamonds from De Beers.

WN was appointed by Pluczenik as its broker in the 1960s, and continued to act as Pluczenik’s agent in relation to the purchase of rough diamonds at De Beers ‘sights’ (one of the main channels by which De Beers sold rough diamonds into the wholesale market) in the UK up until 2013.  In 2013 De Beers moved its global sight from London to Botswana, prompting Pluczenik to terminate its relationship with WN.

WN claimed that he was a ‘commercial agent’ under the Regulations, and therefore entitled, under Regulation 17, to compensation on termination of the agency relationship.  Pluczenik disputed the claim on the grounds that the Regulations did not apply. 

Did the Regulations apply?

Regulation 2(1) defines a commercial agent as “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 …."

Pluczenik claimed that the Regulations did not apply on two grounds: first, it argued that WN did not have authority to negotiate on its behalf and did not, therefore, satisfy the requirements of Regulation 2(1), and second, it relied on an exemption in Regulation 2(2)(b) which provides that the Regulations do not apply to “commercial agents when they operate on commodity exchanges or in the commodity market”.

Authority to negotiate

On the first of these two grounds, the Court found that, because the purpose of the Regulations is to give agents a share of the goodwill they generate in a principal’s business, the key question in determining whether a person is a commercial agent under the Regulations is whether the scope of his retainer includes the development of goodwill in the principal’s business.  This is a more relevant consideration than whether an agent actually participates in discussions on price or commercial terms.

In the Court’s view, WN had developed strong relationships with senior executives at De Beers, and had used these relationships to promote Pluczenik’s interests, fostering a relationship of trust and confidence between Pluczenik and De Beers, which contributed to the success of Pluczenik’s business.  WN therefore had authority to negotiate within the meaning of Regulation 2(1).

Interestingly, and somewhat surprisingly, the Court also considered that administrative functions such as invoicing, payment, packaging and transport helped maintain Pluczenik’s goodwill with De Beers, and that this was also relevant to the decision that WN was a commercial agent within the meaning of Regulation 2(1).  This potentially has implications for businesses that appoint third parties to provide logistics and shipping services.

Commodities exemption

In determining whether there is a sale on a commodity exchange or commodity market (so that Regulation 2(2)(b) applies), the Court’s view was that the focus should be on the manner and place of sale as well as the nature of the goods sold. 

In the Court’s view, the concept of a commodity sale generally (though not always) focusses on generic goods in bulk, which are indistinguishable in origin or features from other goods of the same type, and that “where generic goods are bought by description, that is a pointer towards their being bought as commodities, but the opportunity to inspect [the goods before purchase] is not fatal to their being so”.

The court held that sales of diamonds in boxes at the De Beers sights were sales on the commodity market on the grounds that: (i) it was a wholesale market in a single class of unprocessed minerals, (ii) the boxes were sold by category and description and at a fixed price, and contained a standardised selection of stones by category, (iii) the boxes were largely traded unopened and sight unseen, and (iv) the proportion of the world’s rough diamonds sold at De Beers sights (while varying over time) was always a very substantial proportion. 

On that basis, WN was not protected by the Regulations.

The Court specifically rejected the argument by Pluczenik that, in order to be a commodity, the goods in question had to be the subject of futures and options trading.

Secondary Activities

The Court also considered, briefly, the application of Regulation 2(3), which excludes from the Regulations agents whose activities are ‘secondary’.  This part of the judgment, although brief, is noteworthy in that it is one of the few cases in which an English Court has considered this exclusion.

The Court concluded that, if an activity which the agent is engaged to perform falls within the Regulations, but is secondary to another activity which the agent is engaged to perform which falls outside the Regulations, then the agent should not be regarded as a commercial agent. 

This is a useful, albeit brief, judicial clarification of what is an unclear and convoluted part of the Regulations.

How much notice of termination must be given?

Although the Court did not need to consider the issue (as it concluded that Pluczenik had no grounds to terminate the agency relationship), it nevertheless gave its views on the key factors to be taken into account in determining what constitutes ‘reasonable notice of termination’ of an agency agreement where the Regulations do not apply[2] and no notice period is specified in the agency agreement. 

These factors include: (i) custom and practice in the relevant market, (ii) the length (and formality) of the relationship, (iii) the agent’s ability to make adjustments for loss of the agency, (iv) the notice period required had the Regulations applied, and (v) the nature of the agent’s obligations. 

Weighing up each of these factors in the present case, the court concluded that a minimum of 3 months notice (or two ‘sights’ if longer) was reasonable in the circumstances.

Compensation

Finally, the Court considered how an agent’s compensation for wrongful termination of an agency relationship should be calculated where the Regulations do not apply.  The Court concluded that damages are to be calculated in the same manner as a claim for compensation under Regulation 17[3] (even if the Regulations do not apply) with the important exception that any costs saved by the agent as a result of the termination of the agency should be taken into account when assessing a claim for damages under common law.

Conclusion

As noted above, although this case is of particular relevance to businesses operating on commodity exchanges and in the commodities market, it is of broader application to other businesses which use or operate as agencies.

Businesses operating on commodity exchanges and in the commodities market should review their existing agreements with brokers and agents to assess whether the Regulations are likely to apply.  Where they are likely to apply, businesses should consider taking steps to minimise their financial exposure on termination of these arrangements, including consideration as to whether it is better to agree with their agents that, where the Regulations apply, any payments on termination will be calculated on an ‘indemnity’ basis (where payments are capped at 1 year), rather than on a ‘compensation’ basis (where no cap applies).  Companies should bear in mind that, where an agreement is silent on which of the two alternatives apply, the uncapped compensation alternative applies by default.

In light of the Court’s view that purely administrative functions such as invoicing, packaging and transport can contribute to the goodwill between a principal and his customers, businesses who outsource any of these functions to third parties should likewise review their agreements with those third parties to assess the likelihood of the Regulations applying (particularly where the third party also contributes to goodwill in other ways) and the need to take steps (as outlined in the preceding paragraph) to minimise their financial exposure on termination.

Where an agent’s activities include activities that fall within the Regulations, and those activities are secondary in nature to other activities which are not caught by the Regulations, agents and principals should consider whether it is in their interests to include both sets of activity in the same agreement.  (The judgment in this case would appear to suggest that it is in a principal’s interest to cover both activities in the same agreement.)

The decision is also a reminder of the importance of ensuring that the key terms of an agency relationship, particularly one that is not governed by the Regulations, are agreed between the parties and properly documented.  These include termination notice periods, the grounds upon which the agreement can be terminated, and the basis of calculation of commission payments, including the extent to which an agent is entitled to commission on sales or purchases that are concluded after termination of the relationship where the agent has played a role, pre-termination, in those sales or purchases.

For further information on this article or agency or distribution agreements generally, please contact Paul O’Hare.

 

[2] Where the Regulations apply, an agent is entitled to one month’s notice per year of the agency agreement, up to a maximum of three months.

[3] According to the House of Lords decision in Lonsdale v Howard & Hallam Ltd [2007] 1 WLR 2055, compensation under Regulation 17 should be calculated by reference to what a hypothetical purchaser would pay for the agent’s business (assuming the agency had continued and not been terminated).

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PaulĀ O'Hare