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Cite as: 2000 SC 424, 2000 GWD 12-408, [2000] Eu LR 531, [2001] ECC 6, [2000] IRLR 569, 2000 SLT 744, [2000] ScotCS 70

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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

Lord Caplan

Lord Milligan

Lord Cameron of Lochbroom

083/6/1998

OPINION OF THE COURT

delivered by LORD CAPLAN

APPEAL

From the Sheriffdom of Dumfries & Galloway at Hamilton

in the cause

DOUGLAS KING (A.P.)

Pursuer and Appellant;

against

T. TUNNOCK LIMITED

Defenders and Respondents:

_______

Act: O'Neill, Q.C.; Drummond Miller (Harper Macleod, Glasgow) (Pursuer and Appellant)

Alt: Connal, Solicitor; McGrigor Donald (Defenders and Respondents)

16 March 2000

[1] The pursuer and appellant, Douglas King, was employed as a commercial agent by the defenders and respondents, T. Tunnock Limited, for many years. He sues for compensation for damage he alleges he has suffered as the result of the termination of his agency agreement by the defenders. The respondents were manufacturers of cakes and biscuits. The appellant's father for many years had been an agent for the respondents, selling their produce at wholesale prices to retail outlets. The appellant was born in February 1945 and in 1962 he took over his father's business as agent for the respondents. Thereafter, as was the case with his father before him, his business consisted exclusively of selling the respondents' products. Generally the retail customers paid cash to the appellant for the goods they purchased. However, other customers paid by cheque and a limited number of customers were allowed monthly credit and paid their accounts direct to the respondents. The appellant was paid by the respondents a commission on his sales at a rate which varied from 7% to 11.25% on the cash value of such sales. On 14 July 1994 the respondents closed their bakery section and as a result the contractual relationship between the parties was terminated on that date.

[2] No payment has been made by the respondents to the pursuer in lieu of notice. Nor have the respondents paid him any indemnity or compensation in consequence of the termination and collapse of his agency. There was no written agreement governing that agency.

[3] The pursuer maintains that he was an agent within the meaning of the Commercial Agents (Council Directive) Regulations 1993 which came into force on 1 January 1994. These Regulations were enacted to comply with the Directive of the Council of the European Communities 86/653 of September 11 1986. The appellant contends that in terms of Regulation 15(2)(c) of the Regulations he was entitled to three months notice of termination of his agreement and no such notice having been given to him he was entitled to payment in lieu thereof. Further he contends that in terms of Regulation 17(6) and (7) of the Regulations he was entitled to compensation from the respondents upon the termination of his agency contract.

[4] Since the appellant's said claims were not satisfied he raised the present proceedings in the Sheriff Court at Hamilton. He claimed the sum of £165,230 in respect of the failure to give notice and compensation. A proof was held on 23 October 1995 and 21 February 1996. The respondents had contended before the sheriff that the pursuer was not a commercial agent within the meaning of the said Regulations with the result that the Regulations had no application to him. In any event, reading paragraphs 6 and 7 of Regulation 17 together the respondents, having closed their bakery for a commercial reason, would not have continued to enjoy substantial benefit from the appellant's activities had the agency contract continued to operate. Nor had he incurred costs and expenses that he hoped to amortise. Thus he had no entitlement to compensation. The sheriff, by interlocutor dated 8 March 1996, held that the pursuer was a commercial agent and awarded him the sum of £4,762 in lieu of notice with interest at the rate of 8% per annum from 14 July 1994. However, he held that the pursuer was not entitled to compensation under Regulation 17(6) or (7). It should be noted that the sheriff observes that he required to decide the case without the benefit of any authorities. He accordingly seems to have decided matters without reference to such authority on the relevant European law as is available. The pursuer appealed to the sheriff principal on the issue of compensation. The defenders, for their part, cross-appealed maintaining that the sheriff had erred in finding that the pursuer was a commercial agent. However, they did not persist in the cross-appeal and it is indeed now not disputed that the pursuer was in fact such an agent, and that his agency was terminated by the defenders on 14 July 1994. In his interlocutor dated 24 December 1997 the sheriff principal sustained the view of the sheriff on the compensation question. He held in effect that it is a prerequisite to a claim for compensation that the agent should lose the opportunity to earn commission while at the same time the principal continues to receive substantial benefit as a result of the agent's past activities. The present appeal by the appellants is against the sheriff principal's said interlocutor which, it is contended, is based on the erroneous premise that the pursuer has not established that he has suffered loss entitling him to Regulation 17 compensation.

[5] Counsel for the appellant submitted that the appellant's claim is founded on the said 1986 Directive which was given effect to in the Regulations of 1993. It was intended that the Regulations would achieve compliance by the United Kingdom with the Directive. Indeed the wording of the Regulations is largely expressed in terms taken from the Directive (or which at least have an equivalent meaning). It also should be noted that, whereas it is the Directive which governs the situation, the language employed for the text in each of the Member States has equal validity with the other languages in which the text is expressed. A preliminary reference to the European Court of Justice could be made on a question of law and the European judges would form a view based on community law. Sanctions exist were a court of a Member State to refuse to apply community law. We were referred to various Articles in the Treaty of Rome as amended by the Treaty of Maastricht (for example Article 57(1), (2), Article 100 and Article 117). The objectives of these provisions had been the encouragement of self-employed enterprise throughout the whole community and the encouragement by means of Directives of the approximation of laws of the Member States such as directly affect the functioning or establishment of the common market. The emphasis was in the co-ordination of laws, particularly as affecting self-employed persons. It is also a community purpose to promote and improve standards of living for workers, as well as to harmonise these standards.

[6] The main submissions presented to us revolved round the construction to be given to the 1993 Regulations and the effect on this construction of the 1986 Directive so that it is necessary that we should now discuss the terms of these documents. Firstly, it has to be noted that the relevant Directive is headed "On the co-ordination of the laws of the Member States relating to self-employed commercial agents". Moreover, in the preamble the Directive makes it perfectly plain that it is considered by the Council of the European Communities that the differences in national laws concerning commercial representation are detrimental to the protection afforded to commercial agents vis-a-vis their principals, and also inhibit substantially the conclusion and operation of commercial representation contracts where the principal and commercial agent are established in different Member States. The preamble proceeds to declare that trading goods between Member States should be carried on under conditions which are similar to those of a single market. Regulation 2(1) defines commercial agents and it is not disputed now that the appellant was a commercial agent within the meaning of these Regulations, and that the respondents were his principals. But we note that the definition speaks of the commercial agent as a "self employed intermediary who has continuing authority to negotiate and conclude transactions for the sale or the purchase of goods on behalf of another person". Regulation 3 imposes certain duties on the commercial agent. In particular the agent must act in good faith and make proper efforts to carry out his work. Regulation 4 deals with the duties of the principal towards his agent and that includes notification to the agent by the principal if the latter anticipates a significant downturn in the volume of transactions affecting the agent. Article 5 effectively prohibits waiver by the parties of Regulations 3 and 4. Part III of the Regulations, embracing Regulations 6 to 12 inclusive, deals with the matter of remuneration. Regulation 6 provides that the agent is entitled to customary remuneration on a reasonable basis if there is no agreement as to remuneration. Under Regulation 7(1) the agent is entitled to remuneration during the period covered by the agency contract where the transaction has been concluded as a result of his action or, where a transaction is concluded with a third party previously acquired as a customer, for such kind of transactions. Regulation 8 is significant because the agent is entitled to commission on commercial transactions concluded, even after the agency is terminated, if (a) the transaction is mainly attributable to his efforts during the period covered by the contract and if the transaction was entered into within a reasonable period after that contract terminated or (b) if the transaction was concluded with a third party previously acquired by the agent as a customer for transactions of the same kind. Part IV of the Regulations deals with the conclusion and termination of the agency contract and therefore is central to the present appeal. Regulation 13(1) provides that the commercial agent and principal shall each be entitled to receive from the other a signed written contract if this is requested. In the present case neither party seems to have taken up the right to a written contractual document. Regulation 14 provides that an agency, for a fixed period which continues to be performed by both parties after that period has lapsed, shall be deemed to be converted into an agency contract with an indefinite period. Regulation 15(1) is important for the appellant's claim in respect of the non receipt of notice. It provides that where an agency contract is concluded for an indefinite period either party may terminate it by notice. Periods of notice are prescribed and, in the case of the pursuer, the appropriate period would be three months. Howev

[7] Regulation 17 regulates entitlement of a commercial agent to indemnity or compensation on the termination of his agency contract. It is in the following terms:

"17(1) This Regulation has effect for the purpose of ensuring that the commercial agent is, after termination of the agency contract, indemnified in accordance with paragraphs (3) to (5) below or compensated for damage in accordance with paragraphs (6) and (7) below.

(2) Except where the agency contract otherwise provides the commercial agent shall be entitled to be compensated rather than indemnified.

(3) Subject to paragraph (9) and to Regulation 18 below the commercial agent shall be entitled to an indemnity if and to the extent that -

(a) he has brought the principal new customers or has significantly

increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers; and

(b) the payment of this indemnity is equitable having regard to all the

circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers.

(4) The amount of the indemnity shall not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent's average annual remuneration over the preceding five years and if the contract goes back less than five years indemnity shall be calculated on the average for the period in question.

(5) The grant of an indemnity as mentioned above shall not prevent the commercial agent from seeking damages.

(6) Subject to (9) and to Regulation 18 below the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal.

(7) For the purposes of these Regulations such damage shall be deemed to occur particularly when the termination takes place in either or both of the following circumstances, namely circumstances which -

(a) deprive the commercial agent of the commission which proper

performance of the agency contract would have procured for him while providing his principal with substantial benefits linked to the activities of the commercial agent; or

(b) have not enabled the commercial agent to amortise the costs and

expenses that he had incurred in the performance of the agency contract on the advice of his principal.

(8) Entitlement to the indemnity or compensation for damages provided for under paragraphs (2) to (7) above shall also arise where the agency contract is terminated as a result of the death of the commercial agent.

(9) The commercial agent shall lose his entitlement to the indemnity or compensation for damage in the instances provided for in paragraphs (2) to (8) above if within one year following termination of his agency contract he has not notified his principal that he intends pursuing his entitlement."

[8] Article 17(1) in the Directive provides as follows:

"Member States shall take the measures necessary to ensure that the commercial agent is, after termination of the agency contract, indemnified in accordance with paragraph 2 or compensated for damage in accordance with paragraph 3".

Paragraph 3, which sets out the provisions relating to compensation are as follows:

"3. The commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with the principal.

Such damage shall be deemed to occur particularly when the termination takes place in circumstances:-

- Depriving the commercial agent of the commission which proper

performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the commercial agent's activities.

- and/or which have not enabled the commercial agent to amortise the

costs and expenses that he has incurred for the performance of the agency contract on the principal's advice."

[9] Thus, unlike the Regulation 17, the Directive does not place the overall right to compensation, and the provision about deemed damage, in separate paragraphs. Both Directive and Regulations provide that compensation or indemnity will be payable if the contract is terminated by the death of the agent. Regulation 18 as now amended provides for the exclusion of payment of indemnity or compensation as follows:

"The indemnity or compensation referred to in Regulation 17 above shall not be payable to the commercial agent where -

(a) the principal has terminated the agency contract because of default

attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to Regulation 16 above; or

(b) the commercial agent has himself terminated the agency contract,

unless such termination is justified -

(i) by circumstances attributable to the principal, or

(ii) on ground of the age, infirmity or illness of the commercial

agent in consequence of which he cannot reasonably be required to continue his activities; or

rights and duties under the agency contract to another person."

[10] Regulation 19 provides that a party may not derogate from Regulations 17 and 18 to the detriment of the commercial agency before the contract expires. The Directive makes provisions which are clearly the source of the Regulations 18 and 19.

[11] The Directive allows for alternative remedies for termination of contract. One option is indemnity and the other is compensation. The Germans have opted for a system based on the indemnity rules. The French, on the other hand, have followed the compensation provisions. However, the United Kingdom has given parties a choice of either indemnity or compensation. We were informed that the genesis of the indemnity system was German law and practice. The compensation option, on the other hand, is said to be derived from French law and practice.

[12] It was contended to us that the French system was based on compensation for the prejudice suffered by an agent when his contract is terminated. Indeed the French version of the Directive does not refer to damage but rather to "prejudice". The loss, payable upon damage to the agency relationship having occurred, is not payable on the basis of anticipated future economic loss but rather on the basis of the loss to the agent of the value of the agency as at the date of termination. In France the established practice is to give two years loss of average past commission as compensation and this figure is calculated on gross commission without deductions. Moreover, the two years rule is not absolute and represents more a benchmark than an inflexible rule. Thus the French judge will make adjustments to the two years compensation if particular circumstances of the case require it. In respect of its character as a statutory payment to an employed person it was contended that the compensation payment was in character more like a redundancy payment than a payment of damages. On the other hand receipt of indemnification, as distinct from compensation, will not prevent the agent from seeking damages (Regulation 17(5) of the Regulations and Article 17(2)(c) of the Directive).

[13] The point was also made by senior counsel for the appellant that Article 17(4) of the Directive was important because it provided that compensation will be payable if the agency contract is terminated as a result of the agent's death. Moreover the right to compensation is to survive if the age, infirmity, or illness, of the agent, renders it unsuitable for him to continue his agency (see Regulation 18 and Article 18). This shows, it was submitted, that compensation is to be calculated on the basis of the historical position rather than what is to happen in the future. The provision was inconsistent with any concept of damages under Scots law.

[14] In terms of Article 17(6) of the Directive the Commission was to submit to the Council within eight years following the date of notification of the Directive a report on the implementation of Article 17 and shall, if necessary, submit proposals for amendment. This report was prepared and presented by the Commission on 23 July 1996.

[15] Senior counsel for the appellant referred us to the conjoined cases Brasserie du Pecheur S.A. v. Germany, R. v. Secretary of State for Transport, ex parte Factortame Limited (No. 3) (1996) E.C.R. 1-1029. In that litigation questions arose as to the computation of damages where this was based on loss which had occurred upon breaches of European law by Member States. The court held that the reparation for loss or damage caused to individuals as a result of breaches of community law must be commensurate with the loss or damage sustained so as to ensure effective protection of rights. In the absence of relevant community provision, it is for the domestic system of each Member State to set the criteria for determining the extent of the reparation. However, these criteria must not be less favourable than those applying to similar criteria claims based on domestic law, and must not in practice make it impossible, or excessively difficult, to obtain reparation. It was contended by the appellant's senior counsel that the applicability of these views was confined to actions for reparation for damages and not to cases like the present case where the intention of the Directive was to create a harmonised code of statutory compensation.

[16] We were also referred to Wagamama Limited v. City Centre Restaurants plc and Another Fleet Street Reports (1995) 713. In this case, which touched upon community trademark law, it was argued that the governing Directive and consequent United Kingdom Act were based on Benelux law so that they should be construed so as to introduce into domestic law the relevant concepts of Benelux trademark law. This contention was rejected. Laddie J. said, at page 728:

"It would not be right for an English court to follow the route adopted by the courts of anther Member State if it is firmly of a different view simply because the other court expressed a view first. The scope of European legislation is too important to be decided on a first past the post basis".

However, the support for paying regard to Benelux law was dependent on the scrutiny of confidential Council minutes which is not the position in the present case.

[17] The sheriff in his supplementary Note had referred to Page v. Combined Shipping and Trading Company Limited (1997) 3 All ER 656. This case, before the Court of Appeal, concerned an application for a Mareva injunction (equivalent to our arrestment on the dependence) in a case for compensation arising from termination of a commercial agent's agreement. The Court of Appeal held that it was arguable that compensation under Regulation 17 should be based on the commission which the agent would have earned if the contract had continued to be performed in the normal manner. Since it was also arguable that the proper performance of the contract would not have allowed the defendant (the principal) to reduce trading to nil the pursuer had suffered damage and might be entitled to compensation under Regulation 17(6). Staughton L.J. (page 660) agreed that it was significant to look at the preamble to the Directive which shows the purposes of the Directive and its Regulations. His Lordship went on to observe that the purposes of the relevant Directive, including the harmonisation of the law of Member States and a second purpose (derived from motives of social policy) were to afford the agents protection against their principals. He proceeded:

"These reasons seem to me to point fairly strongly to an intention to depart from the domestic legal provisions of the various countries in the community, or at any rate some of them, to achieve a regime which is new to some and will be the same for all".

Senior counsel for the appellant urged us to follow the general views of the court which we have referred to, but to regard any views on the possible procedure for computing compensation as being provisional only, given the nature of the proceedings. Other cases cited to us in support of the view that the court must pay regard to the overall purposes of Directives were Barbara Bellone v. Yokohama Sp. A. (1998) E.C.R. 1-2191 and Kantogeorgas v. Kartonpak A.E. (1996) E.C.R. 1 6643.

[18] We were referred to the Commission's report presented on 23 July 1996 to the European Council in compliance with Article 17(6) of the Directive. This states:

"Article 17 represents a compromise between Member States. It was therefore agreed that Member States should have the choice between the indemnity system and the compensation system and the Commission would undertake to report to Council on the practical consequences of the different solutions".

The somewhat tentative nature of the arrangements in the Directive is borne out by Article 17(6). At page 5 of the report it is stated:

"The compensation payment was based on French law which was dated from 1958 and whose aim was to compensate the agent for the loss he suffered as a result of the termination of the agency contract. As for the indemnity system in Germany, a body of case law has developed in France concerning the right and levels of compensation. Various judgments of the French courts have justified the payment of compensation on the ground that it represents the cost of purchasing the agency to the agent's successor or on the ground that it represents the time it takes for the agent to re-constitute the client base which he has been forcefully deprived of. By judicial custom the level of compensation is fixed as the global sum of the last two years commission or the sum of two years commission calculated over the average of last three years of the agency contract which conforms with commercial practice. However the courts retain a discretion to award a different level of compensation where the principal brings evidence that the agent's loss was in fact less, for example, because of the short duration of the contract or where, for example, the agent's loss is greater because of the agent's age or his length of service.

Indemnity is calculated on all remuneration, not just commission. It is based on the gross figure. No distinction is made between old and new customers and it includes special commission. There is no practice to reduce for professional cost. Finally, outstanding commissions must also be included in the calculation. The indemnity represents that part of the market loss to the agent and his loss is fixed at that moment. Accordingly, future occurrences are not taken into account, such as the principal ceasing to trade, the agent continuing to work with the same clients or developments in the market place. Similarly the agent is not required to mitigate his loss".

We ought to observe that although there is a reference to "indemnity" in the last paragraph we have quoted clearly this is intended to refer to "compensation", since the whole passage we have been considering falls under the heading "The Compensation System".

[19] The report further comments that, whereas the French and Germans apply the compensation or indemnity provisions open to them, according to their respective established principles of jurisprudence, the United Kingdom has shown some uncertainty about the establishment of levels of compensation and generally has suggested a hesitancy to depart from common law principles.

[20] We were also referred to the report by the Select Committee of the House of Commons on Self-employed Commercial Agents which was dated 30 October 1996. That report acknowledges that the main purpose of the 1986 Directive was to harmonise the law of Member States, to facilitate cross-border commercial operation contracts and to strengthen the position of commercial agents in relation to their principals. The Government view was that since neither option in the Directive is a familiar concept under the United Kingdom law there would be difficulty until the position in the United Kingdom is resolved.

[21] We were referred by the appellant's senior counsel to Lister v. Forth Dry Dock and Engineering Company Limited (1989) SC (HL) 96. The House of Lords there held that the courts of the United Kingdom were under a duty to follow the practice of the European Court of Justice by giving a purposive construction to Directives and Regulations issued for the purpose of complying with Directives.

[22] We were also referred briefly to Roy v. Pearlman 1999 SC 459. It was there argued, in the Outer House, unsuccessfully, that the general rules of domestic law should be excluded when considering the question of commercial agency.

[23] Senior counsel for the appellant explained that "particularly" in Regulation 17(7) meant "especially out of a number of others". Moreover, in the Directive (unlike the Regulations) the forerunner of Regulation 17(6) and 17(7) is not stated in separate Articles, but in the same Article, namely Article 17(3). In a case where construction is ultimately governed by the European Court of Justice the law of a Community State is not a matter of fact but a matter of submission. The authority of the submission can of course be backed up by references. We were referred to a number of authorities said to illustrate how the compensation provisions relating to commercial agents have been dealt with under French law. We were also referred to a recent article from "The Company Lawyer" vol. 20 No. 5 which was said to deal clearly with the rights of commercial agents under the French legal system (written by Miss Saintier LLM).

[24] In reply Mr. Connal, solicitor advocate for the respondents, asked us to sustain the judgments of the sheriff and the sheriff principal and thus to refuse the appeal. It was contended that in considering a termination case under the Regulations the court was not obliged to follow French law in respect of compensation nor German law in respect of indemnity. The court either had an unfettered discretion in fixing the amount of any loss or, as the appellant argues, they were bound to follow the French tariff system of loss. The latter option should be rejected as unsound and the court should exercise an unfettered discretion in relation to ascertainment of damage consequential to the termination.

[25] The pursuer's pleadings (and in particular Condescendence VI) focuses the pursuer's case on the provisions of Regulation 17(7)(a). The pursuer has failed to prove that had the agency contract continued as intended this would have provided for him a certain amount of commission while providing his principal with substantial benefits linked to the activity of the agent. In fact no benefits would have accrued to the respondents since they were discontinuing the relevant part of their business. If the pursuer was claiming a particular amount of loss, a proper basis for the loss claimed, and the principles on which the claim was advanced, should be set out in the pleadings.

[26] If the sheriff principal was wrong in holding that no loss had been proved then the amount of compensation awarded should be substantially less than the amount brought out by the sheriff in his hypothetical calculation (where he declares that had the pursuer been due the entitlement prescribed by Regulation 17(6), unaffected by the remainder of the Regulation, he would have awarded him £18,096). In the note appended to his interlocutor dated 24 December 1997 the sheriff principal stated that if the pursuer's claim to have suffered loss had been valid he would have assessed this loss on the basis of a two years gross figure for commission of £27,144 subject to deduction of the award made for severance without notice, that is to say £4,762, the benefits which the pursuer received during the two years forming the basis of the compensation, and finally his earnings of £50 per week from the date he commenced part-time employment. Beyond stating the basis of his calculation neither the sheriff principal nor the sheriff was able to quantify exactly what the total loss would have been, but in any event the respondents disputed that such an amount would have been due.

[27] If it had been the intention of the Directive to prescribe a fixed tariff of two years commission as a basis for compensation they could readily have done so. The sheriff and sheriff principal were correct to hold that the appellant had not provided material from which an appropriate level of loss could be calculated.

[28] The fact that a Directive had originated from proposals by a particular Member State did not mean that the precise expression of the law employed in that State would necessarily be adopted in the Directive. The respondents place significance on the observations of Laddie J. in Wagamana which were referred to with approval in Sabel B.V. v. Puma A.G., Rudolph Dassler Sport decided in the Court of Justice on 11 November 1997 (being case 251/95 and being a reference for a preliminary ruling). The case of Factortame was also discussed.

[29] The respondents made reference to Landcatch Limited v. International Oil Pollution Compensation Fund 1999 SLT 1208 where, at page 1218, the Lord Justice Clerk observes that the use of the words "damage and loss in an act without further explanation" points to an intention that these terms should be understood as coming fully armed with the concepts with which lawyers in this country are well familiar. In that case the relationship between United Kingdom legislation and an International Convention had to be considered. If it was proposed that established common law principles of assessing loss were to be departed from then this should be prescribed explicitly and clearly in the legislation.

[30] The parties in court would have been in a far better position to assess the influence, if any, of French law if expert statements had been negotiated and agreed prior to the proof in the case. It was contended that no regard should be made to the 1996 report issued by the Council of Europe since this was simply "a glorified public relations exercise".

[31] The solicitor advocate for the respondents contended that the so-called "two years rule" was not absolute, even in France, but only a rule of thumb. A variety of matters required to be considered before a precise figure for compensation can be calculated on any basis. Those would include the practices and conditions in a particular market and the type of goods sold by the agent. There is not enough information as to what would have happened to the pursuer's customers when the respondents reduced their bakery output. If compensation for business loss is claimed this necessitates a specific enquiry into the amount of loss and that in turn would have to include an enquiry into the reasons for the bakery closing.

[32] We should perhaps add that neither of the parties seemed eager that we should make a reference to the Court of Justice for a preliminary ruling. However, such a reference was said to represent their secondary position, in the case of each of them.

[33] In our view there can be little doubt as to the objectives of the 1986 Directive. The preamble to the Directive states its objectives very plainly. It is quite clear that the Directive is aimed at removing restrictions on the activities of commercial agents caused by the differing laws of the Member States. The aspiration is to harmonise the laws so that conditions for commercial agents throughout the European community are equivalent to those of a single market. A major aim is to remove inconsistencies in the laws of Member States as they relate to commercial agents. Moreover, the differences in the national laws are said to be detrimental to the protection available to commercial agents vis-a-vis their principals, particularly where principal and agent are established in different Member States. It must be noted that the requirement of protection is focused on the position of the agent and not on that of the principal who, presumably, will normally be in a stronger position and thus able to look after himself. The aspect of a Directive in protecting the agent is reinforced by a reference in the preamble to Article 117 of the European Community Treaty. This narrates that Member States agree upon the need to promote improved working conditions and an improved standard of living for workers.

[34] No matter what objectives underlie the legislation there can never be a guarantee that it will deliver the required results. However, in the present case if the national courts treating their country's application of the Directive under their own national regulations continue to produce divergent results then the whole objective of the Directive has failed.

[35] The sheriff principal places emphasis on the advantages of harmonising the intrinsic provisions of the Regulations themselves. This, in our view, is an error. The Directive quite deliberately offers Member States an option in respect of the termination of agency contracts. Some countries have opted to go down the indemnity route, others the compensation route. The United Kingdom offers both routes. Now on any view indemnity and compensation, as set out by both Directive and Regulations, have different features. We are told in the report dated 23 July 1996, published by the Commission of the European Communities, that in practice indemnity and compensation can give rise to different practical results. Compensation generally has proved to be more favourable to the agent. This is not surprising given that each option is articulated in different and distinctive terms. However, there is nothing in the Directive to suggest that it was concerned about the harmonisation in practice of indemnity and compensation. If arriving at an internal harmony was the primary purpose of the Commission it would not have been difficult to provide a single system to deal with the case where an agent suffers loss on termination of the agency. However, this was not done. Just why a dual system was selected may not be entirely clear. However, it is certainly clear that the arrangements selected were partly tentative. The provision made for an early report, in Article 17(6), would seem to suggest this. Thus it would appear that the Directive provided for a dual system perhaps to discover which approach worked more effectively in practice. What the Directive was concerned about was not to bring the two approaches closer together, but rather to produce a situation where each Member State was offering compensation or indemnity in a manner consistent with what was done in other Member States.

[36] In the present case the appellant has chosen to base his claim on the compensation route (apart of course from the question of payment in lieu of notice under Regulation 15(2)).

[37] We consider that there is little merit in the respondents' pleading point. Certainly Article VI of the Condescendence contains a reference to deprivation of commission which is probably related to Regulation 17(7). However, Article V of the Condescendence makes clear that the pursuer is claiming compensation both under Regulation 17(7) and Regulation 17(6). Indeed the terms of the Regulations are set out in the pleadings. The sheriff's finding in law Nos. 6 is to the effect that the pursuer is not entitled to compensation in terms of both these Regulations.

[38] Looking therefore to the terms of Regulation 17(6) and Regulation 17(7) we must say that in the eyes of United Kingdom lawyers the draughtsmanship is at best somewhat clumsy. However, by construing these provisions within the context of the Regulations there is an obvious pattern. In doing so we take into account that Regulation 17(1) appears to envisage that paragraphs (6) and (7) should be read together for the purpose of giving compensation for damage. The governing principle is that expressed in Regulation 17(6). The agent is entitled to compensation for damage he suffers as a result of the termination of his relationship with the principal. The word "suffers" is in the present tense, which suggests that the point of time defining damage is the termination of the agency. Moreover, what is compensated is "the termination of his relations with his principal". The emphasis is not on his future loss but on the impact of the severance of his agency relationship with his principal. An agency generally has commercial value. This is acknowledged by the fact that under Regulation 18(c) the commercial agent may, with the agreement of his principal, assign his agency contract to another. If he does that he does not get compensation since he has an opportunity to cash in on the value of his agency (assuming it has value at all). He thus has suffered no damage through the loss of the agency. There are two aspects of the termination situation which must be considered. The first is the fact and circumstances of the termination (certain causes of termination excluding compensation). The word "damage" is used to connote the factor that mainly introduces the eligibility for compensation. However, it is important to keep in mind that the reference is to damage or iniura and not to "damages". Looking, therefore, at Regulation 17(6), if the agent's link with his principal is terminated and this causes him damage he is entitled to compensation. The question of course remains as to the level of compensation. In Article 17(3) of the Directive the link between the entitlement to compensation and the specific reference to circumstances deemed to be damage is even more immediate than it is in the Regulations.

[39] It should be noted that the examples of deemed loss set out specifically in Regulation 7, although bearing a superficial resemblance to the indemnity arrangements in Regulation 17(3), are in fact different. Regulation 17(3) provides that the commercial agent will be entitled to an indemnity "if and to the extent that" - then follow the specification of the qualifying cases. If the aim of Regulation 17(6) and (7) was to be that the agent will be entitled to compensation "if and to the extent" that certain circumstances were applicable, this would have been quite easy to say in plain terms. Moreover, the words "to the extent" is linked to paragraphs (a) and (b) of Regulation 17(3). This means that the concept of indemnity is linked to what actually happens and the relevant part of this linkage is what will happen commercially after termination of the agency. The payment of the indemnity is declared to be equitable and the equitable factor is a provision of new customers or business generated by the agent, when coupled with the principal continuing in fact to draw substantial benefits from such new customers or increased business. The loss of commission which in particular has to be taken into account is that lost by the commercial agent on the business transacted with such customers. It would be difficult to imagine a claim for indemnity being formulated without having a hard look at what was to be expected after termination of the agency. It may well be that the provisions covering indemnity can be more comfortably accepted by United Kingdom judges and lawyers than those covering compensation but that is not the point.

[40] Transferring attention to Regulation 17(6) the entitlement to compensation is not stated to be dependent on any particular type or extent of loss. The only requirement is damage through the termination of the agent's relation with his principal. Reference to the termination of the relationship with the principal is important. There is no equivalent provision regarding indemnity. Indemnity can arise if the agency is terminated and the principal continues to gain through the agent's efforts. Thus one has to pay regard particularly to commercial factors such as commission lost to quantify the indemnity. However, compensation is payable upon rupture of the relationship with the principal. At that point of time the value of the lost agency must be ascertained and there is simply no reference to the actual course of events to be expected after the termination. Indemnity hinges upon the principal continuing in business and exploiting the agent's connection. Unless Regulation 17(7) represents a restriction or qualification of 17(6) it is not necessary for the agent to project his actual prospective loss. All he needs to prove is that after termination he had lost the value of an agency asset which, prior to the termination, existed. The importance of the asset to the agent is emphasised by consideration of the definition of a commercial agent with his "continuing authority" (Regulation 2(1)) and the obligation of the principal to notify a downturn below that which the agent "could normally have expected" (Regulation 4(3)). If what is lost has little or no value then of course the level of compensation may be fixed at a low level, but that is a different matter.

[41] Under Regulation 17(7) damage is deemed to occur "particularly" when termination takes place in various defined circumstances. Now the sheriff and the sheriff principal construe 17(7) as meaning in effect that damage will be deemed to occur "only when the specified circumstances apply" or at least "in particular" when these circumstances apply. It must be observed that if the intention had been to provide compensation that compensation should be paid when 17(7)(a) or (b) apply then it would have been much easier to say that rather than to employ the circuitous draughtsmanship occurring in 17(6) and 17(7). In any event the deemed damage is said to occur not "only" in certain circumstances but "particularly" in certain circumstances. The meaning of the word "particularly" received careful consideration in the debate before us. We agree with the view that "particularly" is used in its normal meaning of "especially noted" or "more than others". It has to be observed that in the French text the word used is "notamment" which is defined as meaning "notably" or "among others". Why two special situations should be expressly directed is not clear. It may be that the Directive was seeking to say that in these particular circumstances there can be no doubt that damage will have been suffered. The agent is safe from having to demonstrate that he has suffered damage when these particular situations arise.

[42] However, once one were to accept that 17(7) does not set out the exclusive circumstances giving rise to compensation, the only guidance that is left as to what other circumstances might give rise to compensation are the governing provisions of 17(6). If it can be shown that damage has been done to the agency relationship then compensation will arise and the remaining question is the level of that compensation. We do not claim that the import of Regulation 17(7), when it is viewed in isolation, is without difficulty but the matter becomes much clearer if the whole of the Regulations are considered. Firstly there is no particular equitable requirement to link compensation to what the principal gains from the termination. Exploitation of the agent by the principal would generally be prevented by Regulation 8, which gives the agent a right to commission on sales to his own customers even after the agency has ended. Regulation 17 obviously acknowledges that compensation can be payable to an agent even over and above what he will gain from commission from sales gained by the principal, with the agent's customers, after the agency ends.

[43] Regulation 18 is curious because the heading to the Regulation refers to "grounds for excluding payment of indemnity or compensation under Regulation 17". The terms of the Regulation thereafter relate to "the compensation referred to in Regulation 17". The Regulation itself distinctly differentiates between "compensation" and "indemnity". Be that as it may the agent who has given up his agency because of age, infirmity or illness remains eligible for compensation. Under Regulation 17(8) the agent who dies is likewise entitled to compensation. These arrangements suggest that the entitlement is not limited to a situation where the agent's future earnings are critical to his entitlement. The vital difference between indemnity provisions and the compensation provisions is that indemnity requires that the principal should continue his business. If the principal does not continue in business after the termination the requirements of Regulation 17(3) cannot be satisfied. In the case of compensation there is no prerequisite to entitlement that the principal continues in business. Thus compensation may arise where, (as in this case), the principal shuts down the relevant part of his business, or say ceases to trade because the company goes into receivership. We can thus conclude that in so far as entitlement to compensation is concerned the Directive is not troubled with what happens after the date of termination. It is the value of the rupture of the agency relationship that is the source and justification of compensation.

[44] We were given material on the view taken by French law of the compensation provisions in the Directive. In our view the information required to inform the court of the aspects of the legal system of a foreign Member State will vary according to the circumstances in each case. Certainly, as a welcome and practical procedure, the suggestion of the respondents' solicitor advocate, that it might often be useful to present the court with an agreed statement from a suitable expert as to what is the relevant foreign law, has obvious merit. However, in the present case certain aspects of the situation under French law are not difficult. It seems clear from the material produced that the French courts will regard compensation as being reparation for the loss of the value of the terminated agency agreement. The agent gets a reward for the value of the agency he has built up and which he suddenly loses. We were referred to Dalloz Repertoire Droit Commercial (2nd edition 1996) section 3 where, at paragraph 87, referring to the calculation of compensation for a commercial agent whose agency has been terminated, the author (as translated) says:

"The compensation or indemnity due on termination of the contract is customarily calculated either on the last two years of the proper or normal performance of the contract or on the last three years (taking the annual average of the commissions in these years and multiplying them by two). In order to reach the total commission courts and tribunals take into account: the commissions due to the agent (and not simply the commission paid) so that the principal may not minimise the compensation by retaining commission properly due without distinguishing among the origin of the customer base".

The author then cites certain other matters that are not taken into account and continues in relation to the calculation of compensation:

"Without taking into account events subsequent to the termination of the contract; what is lost is part of the market on the day the contract ended - the damage to the agent as suffered at that moment (accordingly the cessation of business by the principal is of little relevance). The mode of fixing the compensatory indemnity is reparation for damage and prejudice suffered (by the agent) is therefore based on the commissions earned during the last years of the proper performance of the contract. This is, effectively, the only certain element without any element of supposition for measuring the incorporeal value lost by the agent. Similarly it is the same element which is taken into account in the case of transfers of the agencies between agents".

[45] In respect of the report of the European Commission dated 23 July 1996 we find acknowledgement that the compensation system was based on French law, and that judgments of the French court have justified payment of compensation on the ground that it represents the cost of purchasing the agency to the agent's successor or the time it takes to reconstitute the client base which the agent has forcibly been deprived of. The report also confirms what the other authorities set forth, namely that compensation in France is customarily paid on the basis of two years purchase of gross commission, although the court always has an ultimate discretion to deviate from that standard.

[46] The report of the Select Committee of the House of Commons on European Legislation dated 30 October 1996 equally has no apparent difficulty in declaring that the relevant French system on which Article 17(3) is based compensates the agent for that part of the market lost to him at the time of the termination. Thus future circumstances are not taken into account and the agent is not required to mitigate his loss.

[47] Within the limited area of law we have been referring to we have no difficulty in being persuaded as to the approach of the French law. The respondents led no material of their own nor did they seriously dispute such aspects of French law as were presented to us. Of course none of this law was placed before the sheriff or sheriff principal.

[48] It is obvious, in our view, that on the basis of their own terms Regulation 17(6) and Regulation 17(7) provide for a different basis of making compensation than our traditional common law approach. However, as stated, the Regulation does fit in well with the French approach to such compensation. The legislation provides for valuation at the date of termination rather than requiring an explanation of the future prospects for the agency. During the currency of the agency the agent has owned a valuable asset and what he chooses or omits to do after he has lost that asset has no bearing on the value of what he has lost. If he had assigned the agency he would normally have received some compensation for that assignation observing that he could do so only with the principal's agreement and been free thereafter to do as he chose. Thus the French conclusion that mitigation of loss by the agent is not a factor when compensation is approached as we have described, is in our view persuasive. The implication would be (and in our view we consider this to be inevitable) that in the present case the post-termination activities of the pursuer and any sums of sickness benefit he received have no application to the measure of his loss. The Directive and Regulations, as presented, seem to harmonise with the French approach and given their terms, and the general objective of achieving harmonisation, we see no justification for construing the Regulations as being radically different from the French approach.

[49] The matter of fixing an appropriate level of compensation remains. It seems that even in France the two year rule is only a benchmark and can be varied at the discretion of the judge. However, this does not mean that we are precluded from considering what will happen in France for the rulings of a judicial system applying the same legislation (intended indeed to operate in the same way between the relevant systems) must be entitled to some respect. There are also practical considerations. The French law obviously considers that there is some merit in finding a clear and practical basis for determining a fair level of loss. We equally consider that given the particular type of loss we are dealing with a broad approach is both inevitable and a practical requirement of the law. This approach is emphasised when we consider that they are seeking an overview of the commercial situation where one of the dominant aims is to protect the agent.

[50] In the present case the sum of two years gross past commission was found by the sheriff to amount to £27,144. The pursuer had operated the agency since 1962. His father had worked the agency for many years before him, so that when looked at along with the annual commissions which were generated by the agency, it is likely that the pursuer's business enjoyed considerable good-will. In cases under the Regulations being considered the determination of a reasonable level of compensation is an issue not free from difficulty. Certainly the value to the pursuer of his lost agency is not given much evidential support in this case. That may be because, as is obvious, before the sheriff the appellant approached the calculation of loss from quite a different perspective from that which has ultimately been adopted on his behalf. Thus we are of the view that there may well be cases where compensation for loss for the damage to an agent caused by termination of an agency contract will raise narrower issues which would, for example, require some evidence of the valuation of agencies in the particular local market. There seems to be support in the legislation for the suggestion that the value to an agent of the agency relationship is an important factor. Thus if the agent assigns away his agency there will be no compensation payable to him, presumably on the basis that the assignee will already have been compensated before he parts with his agency.

[51] It makes sense that the earning potential must be a factor in any evaluation of an agency's worth to the agent and this matter is also taken into account under French law. In this case given that the agency generated a certain degree of commission for the agent this particular agency must have been very valuable for an agency of its type. The pursuer had served his customers for many years and that it is likely that the earlier family connection, through his father, cemented his relationship with some customers. Given his age, he could have hoped to continue the agency for a number of years. In these circumstances we consider it likely that the pursuer would have expected and required a relatively high level of compensation to surrender his successful and long-established agency. The compensation would, of course, require to be tied to the commission he was earning. Thus this is a case where we can conclude, even on the limited information that is available that the agent would have expected to receive a capital sum representing at least the total for the last two years of his earnings to be paid before he would voluntarily have given up his agency. We are reassured that under French law compensation of two years commission would be regarded as a standard compensation for loss of an agency, so that it is difficult to believe that in the present case such compensation could be other than reasonable.

[52] We shall not deduct the payment in lieu of notice from the pursuer's loss because he is entitled to this in addition to compensation, and our evaluation of the loss of the agency is made without reference to the fact that he would be entitled to the statutory notice. We shall allow the appeal to the effect of altering the sheriff's interlocutor so that we find the defenders liable to the pursuer for an additional sum of £27,144 with interest thereon at the rate of 8% from 14 July 1994.

[53] We would like to record out thanks to the parties' representatives for their careful and helpful submissions in a matter which is novel but has clear implications for future cases.