An update on the Legal Position
It seems reasonable that an agent should not engage in activities that compete against his own principal.
But ‘reasonable’ and ‘legal’ can be very different things. What are the respective legal rights where an agent is competing ?
A recent case has clarified the position.
Background
In 2004 the Diamond Sofa Company appointed a UK agent (Rosetti). The agent acted for other principals selling similar products.
In 2008 Diamond terminated the agency. Rosetti brought a claim for compensation under the Commercial Agents Regulations.
Diamond put forward two defences:
- Any competing ‘agent’ should fall outside the Regulations entirely
- Competition was a fundamental breach by that agent (ie no compensation)
These are interesting and topical issues for this industry.
Court Decision
On the first issue, the Regulations do impose duties on agents. They include looking after the principal’s interests. That duty seems irreconcilable with competition.
So can a competitive situation be a true (protected) commercial agency ?
The Court concluded that either situation – single or multiple principal - can be protected. If the person is a commercial agent, they can rely on the Regulations.
Regulation 2 defines a commercial agent. It says nothing about competition -
…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
The real issue in Rosetti was the second one: Is competition per se a fundamental breach, justifying termination ?
The answer from the Court was – not always.
It will depend on the contract terms. There will be some situations where competition is legally allowed. A principal cannot just say ‘You are competing so I can bring the agency to an end without compensation.’
They must be able to show that there was a specific contractual prohibition. The repercussions of this analysis are far reaching.
Practical Tips
Principals often appoint agents rather casually. This is ill advised.
Standing by while your own agent competes would be a bitter pill to have to take. Much better to pre-empt the situation by taking advice very early in the relationship.
The bottom line is that the Regulations are designed to protect agents. Unless principals redress the balance contractually, they must face the consequences. That can be hard once agents are in place.
All principals should ask themselves –
- Is there an Agency Agreement ?
- If so, it should prohibit competition.
- Can prohibition be implied from the parties’ conduct ?
- How difficult would that case be in practice ?
Michael Morse
Godloves
