After a period of uncertainty brought about by the 2024 change in government, the Department for Business and Trade has now published its response to its consultation to close the application of the Commercial Agents Regulations (Council Directive) Agency Regulations 1993 ("CARs") to new commercial agent agreements. The government has decided to keep the CARs in force, as the consultation feedback demonstrated that they effectively protect the interests of commercial agents.
How do the CARs work?
The CARs establish a legislative framework for the regulation of the relationship between commercial agents and principals. If the CARs apply, then the contract between the agent and principal is deemed to include a number of implied terms. The most significant of these terms (and the main concern for businesses contracting with commercial agents where the CARs apply) are those that apply on the expiry or termination of the contract. Parties to contracts are generally free to agree the commercial arrangements between them. Where a contract expires or terminates in circumstances where neither party is at fault, the relationship generally ends without one party being obliged to make a financial payment to the other. However, where the CARs apply, they provide that commercial agents are entitled to receive a financial payment from the principal on the expiry or termination of the contract with only limited exceptions. This is a right that the parties cannot contractually disapply. This payment financial payment takes the form of either compensation (which is the default position unless the parties agree to an indemnity payment) or an indemnity payment in respect of commission.
- Compensation payments: calculating compensation is a complex task and the amount of compensation does not have a financial limit. Courts have generally determined that the compensation should cover the value of arrangement at the point of expiry or termination. This value is seen as the future income stream that the agent would have generated if the contract had continued. The potentially uncapped liability here is unattractive commercially to principals, so the parties often elect that the indemnity payment option will apply instead.
- Indemnity payments: Under the indemnity option, the agent is entitled to an indemnity payment to compensate for the notional goodwill the principal has gained where the agent has successfully attracted new customers or significantly boosted the principal's business with existing customers. The indemnity amount is based on the extent of the agent's contribution to the goodwill that has been created by its contribution and is capped at a maximum of one year's commission, calculated by taking the agent's average annual renumeration over the last 5 years or the life of the contract. Because of this cap and the requirement for the agent to have grown the business, it is the more popular option for principals contracting with commercial agents.
What did the consultation cover?
The consultation, which was held last summer, looked at the option of deregulating the commercial agency relationship and, thereby, simplifying the UK's legislation framework for doing business. Notably, the consultation did not propose any amendments to the CARs for existing arrangements. The question for respondents was whether or not the CARs should cease to apply to future commercial agent contracts.
As the Government response notes (and as one would have expected), there was a polarisation of views between agents and principals. Given that 70% of the respondents were commercial agents, it is (perhaps) not that surprising that the vast majority of responses were overwhelmingly in favour of retaining the CARs.
What should principals be looking out for in their contracts with agents?
Awareness is key. As it looks as though the CARs are here to stay, principals should be aware that agency arrangements could fall within the CARs net. Broadly, if:
- the agent is a "commercial agent" (i.e. a self-employed intermediary who has continuing authority to negotiate and conclude the sale of purchase of goods on behalf of the principal);
- that agent is based in the UK or EEA; and
- the agent is marketing the sale or purchase of goods (not services);
then the CARs may apply.
Concluding remarks
There is no doubt that this announcement comes will come as a disappointment to many principals who were hoping that this consultation would result in the setting aside of the CARs. The change of government midway through the process was probably highly significant since many of the arguments for scrapping the CARs were driven by a de-regulation agenda.
If you need advice on your agency arrangements or want to talk about any of the issues covered in the article, please contact any of the contacts below or any other member of our commercial services team.
