Agency Agreements, Brexit and UK/EU Competition
An “agent” has the power to create, change or terminate the legal relations of another party (the “principal”). The agent’s authority can be broad or narrowly defined depending on the nature of the agent’s appointment and the way in which it is documented. The law of agency in England and Wales is traditionally based on common law with some influences from EU legislation.
Agency can arise in a variety of circumstances, for example, directors are usually agents of their companies and individuals often appoint family members to act as their agents in relation to health and welfare matters or financial affairs.
This article focuses on the use of agency in commercial situations whereby one party “the principal” appoints another party “the agent” to perform certain actions on its behalf.
Types of Agency Relationship
A disclosed principal arrangement is the ‘usual’ form of agency. Under this model, the principal engages the agent to act on its behalf and when the third party (customer, supplier etc.) enters into a contract, it will do so with the principal directly. This relationship does not prevent the principal from being unidentified (meaning the third party knows the principal exists but not who they are), although it is likely that the principal will become identifiable at the point of contracting.
The key factor in a disclosed principal arrangement is that the third party is made aware that the agent is not contracting in its own name.
When the principal is disclosed, the standard position is that the agent will not be liable to the third party under contract (providing that the agent has acted within the scope of its authority): it is the principal who must sue or be sued in the event of breach by either party.
An undisclosed principal arrangement is one in which the third party enters into a direct contract with the agent. The third party will be unaware of the existence of the principal and that the agent is acting on the principal’s behalf. Consequently in the event of breach, the third party may bring a claim against the agent.
If the principal reveals his existence to the third party at any time, the third party can treat the contract as having been formed between it and the principal. The third party then has a choice of whether to take action against either the principal or agent, which is known as ‘election’. This is subject to any express obligations agreed between the principal and agent.
Even in the absence of an express agency agreement, every principal (whether disclosed or undisclosed) gives an implied indemnity to their agents against losses incurred by those agents acting within the scope of their actual authority.
A principal may still sue the third party for breach despite being undisclosed, however it will become disclosed as a result of doing so. If the principal becomes disclosed for the purposes of bringing a claim, the third party will have the same defences available to it as it would have had against the agent.
Advantages and disadvantages of appointing an agent
There are a number of advantages of appointing an agent. It can enable the principal to expand its business without the significant further investment of setting up another office or employing and training staff. The appointment of commercial agents can be particularly attractive to businesses looking to expand their operations into foreign territories. Undisclosed agency arrangements can also allow the principal to remain anonymous.
The main disadvantage of appointing an agent is the loss of control. The principal may be exposed to unexpected liability if the agent acts beyond the scope of its authority and the principal could even find itself civilly or criminally liable as a result of the actions of the agent.
Advantages and disadvantages of acting as an agent
Being an agent has a number of financial advantages. Agents will usually receive payment from the principal and can benefit from the principal’s well-established goodwill and business relationships rather than having to start a business from scratch (which can involve high start-up costs and increased risk of failure).
Being an agent is usually low risk. The main risk for the agent is that they may liable on a transaction instead of, or in addition to, the principal, by, for example, accidentally exceeding or misrepresenting its authority. However, the agent should be able to control these risks, by making sure that it has a complete understanding of the scope of its authority and by ensuring that such authority is well documented.
Competition law concerns in agency agreements are rare. The reason being Article 101 of the Treaty of the Functioning of the European Union (the main part of EU legislation relating to competition) applies to agreements between undertakings. Under EU competition law, the agent will often be treated as part of the same undertaking as the principal meaning competition law issues will not arise. However, if the agent bears a significant financial or commercial risk in relation to their agency activities they will be treated as independent of the principal – whether or not the agency acts for one or multiple principals is immaterial.
To the extent the agency and principal are not treated as being the same undertaking, under EU competition rules, most agency agreements will benefit from an exemption afforded to vertical agreements (often referred to as the “vertical agreements block exemption”) which creates a general presumption of legality for vertical agreements, provided that the principal’s market share is below 30% and that the agreements do not contain specified hard core restrictions.
In an agency context, there are a number of hard core restrictions:
- If the agent is banned or disincentivised from splitting its commission with customers.
- If the agent is prevented from responding to unsolicited orders which come from outside the customer category or territory to which the agent has been appointed.
- If the agent is prevented from making active sales into customer categories or territories which have not been exclusively allocated to another agent or reserved for the principal.
- If there is a non-compete restriction placed on the agent that lasts for longer than 5 years.
- If there are restrictions on what the agent can do after termination of the agreement (other than in limited circumstances).
Whilst the UK common law principals of agency will be unaffected by Brexit, the main piece of legislation affecting commercial agency is the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (the “Regulations”) which implement the EU’s Commercial Agents Directive (86/653/EC). The Regulations give “commercial agents” (a narrower definition than the common law definition) stronger rights than those implied by the common law. A commercial agent is an individual/partnership/company which has continuing authority (i.e. not a single transaction) to negotiate or negotiate and conclude the sale or purchase of goods (not services) in the name of, and on behalf of, a principal – note that case law suggests this means undisclosed principals may not come under the Regulations.
The main rights the Regulations afford agents are:
- rights to minimum periods of notice to terminate (1 month for the 1st year of the agreement, 2 months for the 2nd year and 3 months for the 3rd and subsequent years).
- a right to compensation or an indemnity on termination of the agency. The principal is effectively paying the agent for the increase in goodwill the agent may have generated for the principal during the agreement. This cannot be contracted out of, although the parties can expressly agree whether the agent will be entitled to compensation or indemnity (with the compensation rule applying if the agreement is silent).
In accordance with European Withdrawal Act 2018 and subject to the final Brexit deal that is agreed, the Regulations will remain in force immediately after Brexit. Some regard the Regulations as giving agents too much protection so a future UK government could look at withdrawing or modifying the Regulations. There is now a substantial amount of EU and UK case law contributing to the interpretation of the Regulations but it is unclear how future EU case law will affect UK agents.
After Brexit, for agents confined to the UK, the UK authorities and regulators will enforce competition rules within the UK which are similar to those which apply in the EU. EU competition rules will continue to apply to agreements of UK businesses that have an effect within the EEA. Therefore, Brexit will initially have little impact on competition rules which apply to agents, although the laws will likely diverge over time.