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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 110
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CA22/08
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OPINION OF LORD
MENZIES
in the cause
SCOTTISH POWER
ENERGY RETAIL LIMITED
Pursuers;
against
TASKFORCE CONTRACTS
LIMITED
Defenders:
________________
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Pursuers; McIlvride;
Anderson Fyfe, LLP
Defenders: Weir;
McClure Naismith
5 August 2008
Introduction
[1] The pursuers carry on business as
suppliers of mains natural gas and electricity.
In 1999 they entered into an agreement with the defenders that,
with effect from 22 March 1999, the defenders would act as
agents for the pursuers in seeking out and obtaining domestic customers for the
gas and electricity supplied by the pursuers.
This relationship of principal and agent continued, with certain
variations to the contract. In about
February 2005, the pursuers appointed the defenders to represent them in
attempting to secure customers for mains natural gas and electricity branded as
"Sainsbury's Energy". In March and
April 2006, the parties agreed to vary further the terms of the
contract. The whole terms of the
contract between the parties, as varied, were contained in a letter from the
pursuers to the defenders dated 22 March 2006 with schedule annexed ("the
letter of appointment") and the defenders' written acceptance thereof, which
was signed on 21 and 26 April 2006.
[2] From 1999
the defenders provided services under the contract by carrying out doorstep
canvassing of potential domestic customers and marketing the energy sold by the
pursuers at exhibitions arranged by them.
From about February 2005, after the defenders were appointed to
represent the pursuers in attempting to secure customers for "Sainsbury's
Energy", the defenders also visited stores operated by Sainsbury's
supermarkets. In terms of an agreement
entered into between Sainsbury's and the pursuers ("the Sainsbury's Energy
Agreement"), the pursuers, or those acting on their behalf, were entitled to
carry out canvassing and promotional activities in certain Sainsbury's
supermarkets in order to seek domestic customers for mains natural gas and
electricity branded "Sainsbury's Energy".
On about 26 March 2006, Sainsbury's gave notice to the pursuers
that the Sainsbury's Energy Agreement would terminate on 31 August 2006. On about
29 March 2006 the pursuers advised the defenders of the termination and
gave notice to the defenders that their requirement to perform exhibition
activities in relation to Sainsbury's Energy would terminate on 31 August 2006. Thereafter
the pursuers advised the defenders that with effect from 1 September 2006 the defenders' sales agents
were required to concentrate their activities on doorstep canvassing of
potential domestic customers. The
defenders indicated that they did not intend to continue fulfilling their
obligations under the contract after 31 August
2006
unless the pursuers entered into an arrangement with another supermarket chain
on similar terms to the Sainsbury's Energy Agreement. The defenders averred in their written
pleadings that Sainsbury's Energy formed around 92% of the defenders'
business. The pursuers repeatedly
directed the defenders to put in hand arrangements for the proper fulfilment of
their obligations under the contract from 1 September. On 30 August
2006,
the defenders wrote to the pursuers confirming that their contract would be
coming to an end on 31 August. On 4 September 2006 the pursuers wrote to the
defenders requiring them to remedy their breach of contract by recommencing the
performance of their duties within 14 days. The defenders failed to do so, and by letter
dated 26 September, the pursuers wrote to the defenders rescinding the
contract.
[3] In
this action, the pursuers seek declarator that (i) the defenders are in
material breach of the contract and (ii) the pursuers have validly rescinded
the contract, and for damages for breach of contract. The defenders have counterclaimed seeking
declarator inter alia that
Regulation 17 of the Commercial Agents (Council Directive)
Regulations 1993 ("the Regulations") et
separatim Clause 3.8.1 of the Agency Contract apply where a principal
terminates any element of a commercial agency contract, such as the Agency
Contract. They also seek declarator that
the pursuers' purported rescission on 26 September 2006, even if
effective, had no extinguishing effect upon any entitlement on the part of the
defenders to an indemnity under Regulation 17 of the Regulations et separatim Clause 3.8.1 of the
Agency Contract which had, on 31 August 2006, accrued to the defenders in
respect of the in-store element of the Agency Contract.
[4] The
dispute between the parties therefore relates to the proper construction of the
terms of the contract, and of Regulation 17 of the Regulations. The matter came before me for debate on the
pursuers' fourth plea-in-law in the principal action and their first
plea-in-law in answer to the counterclaim, and on the defenders' first
pleas-in-law in both the principal action and the counterclaim.
The Relevant
Contractual Terms
[5] The
letter of appointment (No. 6/1 of process) dated 22 March
2006
provided inter alia as follows:
"2.1 Your appointment as an agent for the
purposes set out in this letter shall commence on the Commencement Date" (which
was defined as 22 March 1999) "and, unless that appointment is terminated
by us in accordance with Clause 7, shall continue in force until
terminated by either party giving to the other not less than six months'
prior written notice to that effect (as they shall be entitled to do). ...
2.2 Termination of your appointment as an
agent for the purposes set out in this letter will be without prejudice to the
rights of the parties accrued at the date of such termination.
3.1 During the continuance of your
appointment as an agent for the purposes set out in this letter you shall:
3.1.1(a) use all reasonable
endeavours to obtain prospective domestic customers for mains natural gas
and/or electricity ...
(b) devote such time as is necessary or
appropriate in order to properly fulfil your obligations as an agent for the
purposes set out in this letter, and
(c) achieve the Minimum Performance Targets and
the Sainsbury's Minimum Performance Targets ...
3.1.10 act in accordance with,
fulfil and comply with all the provisions of the SLS applicable to you and
observe all other directions and instructions (including any instruction to
commence or cease (i) making unsolicited visits to domestic customers or
potential domestic customers or (ii) performing exhibition activities)
given to you by us in relation to the marketing, promotion and sale of mains
natural gas and/or electricity ...
3.8 Upon termination of your appointment as
an agent for the purposes set out in this letter for any reason, if and to the
extent that the Commercial Agents Regulations apply to that appointment, you
shall:
3.8.1 subject to Clauses 3.9 and 3.10,
have the right to be indemnified by us as provided in Regulation 17 of the
Commercial Agents Regulations in respect of such termination, provided that
none of the grounds for excluding payment of indemnity or compensation under Regulation 17
of the Commercial Agents Regulations contained in Regulation 18 of the
Commercial Agents Regulations apply; and
3.8.2 have no right to any compensation as
provided in Regulation 17 of the Commercial Agents Regulations in respect
of such termination ...
7.1 Notwithstanding the provisions of
Clause 2 we shall be entitled to terminate your appointment as an agent
for the purposes set out in this letter immediately at any time by giving
notice in writing to you to that effect upon the occurrence of any of the
following events:
7.1.1 without prejudice to the provisions of
Clauses 7.1.2, 7.1.3 and 7.3.2, if you commit any material breach of
any of the terms of this letter (including any breach of the whole or part of
the provisions of Clauses 3.1.1 to 3.1.3 (inclusive), 3.1.5
to 3.1.14 (inclusive), 3.3, 3.4 and/or 3.6) ...
7.1.3 without prejudice to the provisions of
Clauses 7.1.1, 7.1.2 and 7.3.2, if you commit any breach of any of
the terms of this letter, provided that where in our view such breach is capable
of being remedied the breach is not remedied to our satisfaction within
14 days after service of written notice by us on you requiring the same to
be remedied ...
7.3 Notwithstanding the provisions of
Clause 2 we shall be entitled to terminate your appointment in respect of
the performance of exhibition activities in Sainsbury's Stores in relation to
"Sainsbury's Energy" branded mains natural gas and electricity immediately at
any time by giving notice in writing to you to that effect if:
7.3.1 our agreement with Sainsbury's relative to
our marketing, promotion and sale of "Sainsbury's Energy" branded mains natural
gas and/or electricity in Sainsbury's Stores terminates or if notice of
termination thereof is given; and/or
7.3.2 without prejudice to the provisions of
Clauses 7.1.1 and 7.1.3, in our view you do not at any time achieve
any or all of the Sainsbury's Minimum Performance Targets."
The Commercial
Agents (Council Directive) Regulations 1993
[6] The
1993 Regulations reflect the Council Directive EU: Directive 86/653/EEC of 18 December 1986 on the co-ordination of the
laws of the Member States relating to self-employed commercial agents. The relevant regulations (as amended) for
present purposes are as follows:
"4.― Duties of a principal to his commercial agent
(1) In his relations with his commercial agent a principal must
act dutifully and in good faith.
(2) In particular, a principal must―
(a) provide his commercial agent with the necessary documentation
relating to the goods concerned;
(b) obtain for his commercial agent the information necessary for
the performance of the agency contract, and in particular notify his commercial
agent within a reasonable period once he anticipates that the volume of
commercial transactions will be significantly lower than that which the
commercial agent could normally have expected.
(3) A principal shall, in addition, inform his commercial agent
within a reasonable period of his acceptance or refusal of, and of any
non-execution by him of, a commercial transaction which the commercial agent
has procured for him.
17.― Entitlement of commercial agent to indemnity or
compensation on termination of agency contract
(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 the 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 paragraph (9) and to regulation 18
below, the commercial agent shall be entitled to compensation of the damage he
suffers as a result of the termination of his relations with his principal.
(7) For the purpose 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 whilst providing
his principal with substantial benefits linked to the activities of the
commercial agent; or
(b) have not enabled the commercial agent to amortize 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 damage as
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.
18. Ground for
excluding payment of indemnity or compensation under regulation 17
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 grounds of the age, infirmity or illness of the commercial
agent in consequence of which he cannot reasonably be required to continue his
activities; or
(c) the commercial agent, with the agreement of his principal,
assigns his rights and duties under the agency contract to another person."
Submissions
for the Pursuers
[7] Counsel for the pursuers submitted that
the fact of the pursuers having instructed the defenders to cease exhibition
activities at Sainsbury's stores was not an event capable of giving rise by
itself to an entitlement on the part of the defenders to an indemnity in terms
of Regulation 17 or Clause 3.8.1 of the parties' contract. In giving notice to the defenders on about
29 March 2006 that their requirement to perform exhibition activities in
relation to "Sainsbury's Energy" would terminate on 31 August 2006 the pursuers
were acting within the framework of Clause 3.1.10 of the contract. The defenders were not contending that their
agency was terminated on 31 August 2006, nor did they contend that
the pursuers' instruction to cease Sainsbury's activities amounted to a
repudiation which was accepted by the defenders, thereby bringing the contract
of agency to an end. What the defenders
were contending was that even if the contract was validly rescinded by the
pursuers on 26 September 2006, the defenders nonetheless
had a right to an indemnity, which right had accrued to them before 31 August 2006. However, it
was clear from the terms of Clause 3.1.10 that the parties had always
contemplated that the activities which the defenders might require to carry out
as agents for the pursuers might be varied substantially from time to time
during the currency of the agreement.
Such variation does not give rise to an entitlement to indemnity; in terms of Clause 3.8, the defenders'
right to be indemnified by the pursuers as provided in Regulation 17 arose
only upon termination of their appointment as an agent for the purposes set out
in the letter.
[8] The
provisions for termination of the defenders' appointment as an agent for the
purposes set out in the letter were contained in Clause 7. However, it would be wrong to place too much
emphasis on the use of the word "terminate" in clause 7.3; properly construed, this clause merely
emphasised that the pursuers were entitled to instruct the defenders to cease
carrying out their exhibition activities in Sainsbury's Stores. This merely spelt out in greater detail the
parties' rights and obligations regarding one aspect of the agents'
activities - it would be wrong to construe this as a separate, severable
termination which created a right in the defenders to indemnity when they ceased
their exhibition activities in Sainsbury's Stores.
[9] Counsel
for the pursuers advanced five propositions in law in support of his position,
as follows:
(i) He conceded that domestic legislation
such as the Regulations which implemented an EU Directive required to be given
a purposive interpretation, and that the Directive to which these Regulations
sought to give effect was designed to protect commercial agents.
(ii) However, the purpose of
Articles 17-19 of the Directive (which are effectively replicated in
Regulations 17-19) was to protect a commercial agent after termination of
the contract of agency - that is to say, after termination of the agent's
relationship with his principal. This
falls to be contrasted with other provisions of the Directive which are
designed to protect the agent during the currency of the agency
relationship; Articles 17-19 of the
Directive are designed to protect the agent after termination of that
relationship.
(iii) The rights and remedies of parties under
a commercial agency contract continue to be regulated by existing domestic law,
in so far as that law is not displaced by the Regulations. In other words, the Directive and the
Regulations have not effected a wholesale substitution of EU law for domestic
law.
(iv) The pursuers' instructions to the
defenders to cease or terminate their Sainsbury's activities amounted to a
contractually valid variation of the defenders' duties under the contract, and
did not terminate the contract.
(v) The terms of the parties' contract
entitling the pursuers to vary the defenders' activities in this way do not
derogate from the provisions of the Regulations or the Directive.
[10] It was
clear from Regulation 4(2)(b) of the Regulations (and Article 4(2)(b)
of the Directive) that it was anticipated that there might be fluctuations in
the volume of commercial transactions, but a significant reduction in the
volume of transactions would not give rise to a right to indemnity, nor would
the loss of an individual client or one of several areas of activity. A right to indemnity or compensation under
Regulation 17 only arose on termination of the agent's relationship with
his principal; this was clear from the
terms of Regulation 17(6). The
Regulations do not recognise the concept of "partial termination" of a
contract - the right to indemnity arises only on termination of the
relationship between agent and principal.
In support of this proposition, counsel referred me to Ingmar GB Ltd v Eaton Leonard Technologies Inc (Case C-381/98) in which the court
observed (at paragraph 21) that
"The purpose of
Articles 17-19 of the Directive, in particular, is to protect the
commercial agent after termination of the contract. ...
Article 17 requires Member States to put in place a mechanism for
providing reparation to the commercial agent after termination of the
contract ..."
Counsel also referred me to Roy v MR Pearlman Ltd 1999 S.C. 459 as support for the
proposition that Regulations made in furtherance of a Directive do not, at
least in ordinary circumstances, wholly displace the rules of domestic law in
the relative field. In the present case,
the Regulations and Directive provide for indemnity on termination of the
relationship of principal and agent, but they do not provide for regulation of
variation of terms under a contract - that is a matter for the parties
themselves to regulate. There was no
inconsistency between Clause 3 of the present contract and the provisions
of the Directive. I was also referred to
Bell Electric Ltd v Aweco
Appliance Systems GmbH & Co [2002] EWHC 872 (Q.B.), [2002]
EuLR 443, particularly at paragraphs 50-53, from which counsel
concluded that one could not divide up a commercial agency contract into
sections, each of which might result in compensation or indemnity when varied
or brought to an end.
[11] I was
also referred to Tony Vick v Vogle-Gapes Ltd [2006]
EWHC 1579 (QB), and particularly the reasoning at paragraph [95]
thereof, which counsel submitted was well founded and supported his
position. Neither the Regulations nor
the Directive prohibit parties from entering into contractual provisions such
as those in Vick or those contained
in Clause 3.1.10 of the present contract.
[12] Applying
these principles to the facts which the defenders offer to prove in their
defences to the principal action and in their counterclaim, counsel submitted
that the defenders' contention that an accrued right of indemnity has resulted
without there having been a determination of their relationship with their
principal is misconceived. The defenders'
contention was that, as a result of the pursuers' direction or instruction
which took effect on 31 August 2006 the defenders required to
cease their Sainsbury's Stores exhibition activity, which they aver
provided 92% of their turnover at that time. They maintain that this is detrimental to
them as commercial agents, and the Regulations were designed to protect them as
commercial agents. Their argument is
that in order to protect them, the provisions in the Regulations must be
construed in such a way as to include a situation which does not involve
termination of the agency relationship.
Counsel for the pursuers submitted that even if the cessation of the
defenders' Sainsbury's activities was detrimental to the defenders, this was
something within the parties' contemplation when they entered into the
contract, and they made provision for it;
the Regulations do not prevent parties from contracting on this
basis. Moreover, the other provisions of
the Regulations provide adequate protection for commercial agents without the
need to distort the meaning of the word "termination". Any contractual claim available to the
defenders under Clause 3.8.1 stands or falls with their entitlement under
Regulation 17. I was finally
referred to Lonsdale v Howard & Hallam Ltd [2007]
UKHL 32, [2007] 1 W.L.R. 2055.
Submissions
for the Defenders
[13] Counsel for the defenders
submitted that in order to answer the questions raised in paragraphs 2
and 5 of the pursuers' further note of argument (No. 24 of process)
and the defenders' note of argument (No. 18 of process), it was necessary
to look to the Regulations, the Directive and the parties' contract, all
against a background of facts averred and admitted. The pursuers have admitted (in Answer 2
to the counterclaim) that by letter dated 29 March 2006, they gave notice
to the defenders of the termination of the in-store sales element (as defined
in the counterclaim) of the defenders' duties under the Agency Contract, and
that on 31 August 2006 the in-store element of the Agency Contract was
terminated by reason of the pursuers' termination thereof. The pursuers have also admitted that they
have continued to derive a substantial benefit from the contracts with
Sainsbury's energy customers entered into on their behalf by the defenders, and
that the termination of the defenders' exhibition activities at Sainsbury's
Stores has deprived them of the opportunity to generate further commission from
such activities. There was therefore an
admitted termination by the pursuers, after they had given notice to the
defenders, in circumstances in which they continued to derive benefit from the
defenders' work on their behalf.
[14] Looking
to the terms of the contract, there were passages in which the language of
variation was used (eg the definition of "Sainsbury's Energy Services Territory" and "Sainsbury's Minimum
Performance Targets" at page 4 of the letter of appointment) and other
passages in which the language of termination was used (eg Clauses 3.8
and 7.3). It was important to note
that Clause 7.3 fell into the latter category, and related to termination
of the defenders' appointment in respect of the performance of exhibition
activities in Sainsbury's Stores. This
language was used advisedly - this was clearly a commercial agency
agreement between two commercial entities who were aware of the Regulations and
the Directive. The result is that a
portion of this contract is capable of being terminated, and on this being
done, the defenders' right to indemnity in respect of that portion arises. This must have been within the contemplation
of the parties, as this is what they agreed.
There is no dispute between the parties that there was a termination,
and the only way in which this could be effected was by the contractual mechanism
of Clause 7.3.
[15] Nothing
in the Directive or the Regulations prohibited a partial termination of an
Agency Contract. This is what
Clause 7.3 of the present contract contemplated, and in that respect, it
was not contrary to the Regulations or the Directive. Some light is shed on the purpose of the
Directive by the explanatory memorandum to the proposal for a Council Directive
presented to the council by the commission on 17 December 1976 (Bull EC Supp 1/77);
the Opinion of the Economic and Social Committee (OJEC No. C59,
8.3.78 at page 32, paragraph 1.2);
the resolution of the European Parliament of 9 October
1978
at paragraph 17 (OJEC No. C239/20); the Department of Trade and Industry guidance
notes on the Regulations; and the report
on the application of Article 17 of the Directive presented by the
commission to the council on 23 July 1996.
[16] Neither
the Directive nor the Regulations provide any definition of what constitutes
termination in order to create a right to indemnity. In this situation, the Court must adopt a
purposive construction, by implying the words necessary to achieve the result
intended by the Directive and the Regulations (Litster v Forth Dry Dock and
Engineering Co 1989 SC (HL) 96, and particularly the speeches of
Lord Keith of Kinkell at page 101 and Lord Templeton at
pages 104/5). This was the approach
adopted by Lord McEwan when construing the Directive and Regulations in Frape v Emreco International Ltd 2002 SLT 371 in which, having
reviewed the authorities, he concluded that he had to give a wide purposive
meaning to the word "termination". I was
also referred to the observations of Staughton LJ in Page v Combined Shipping and Trading Co Ltd [1997]
3 All ER 656 at 660, in which he observed that the preamble to
the Directive indicated at least two purposes -
"the first is harmonisation
of the law of Member States of the community so that people compete - in
the popular cliché of today - on a level playing field ... the second
objective is one which appears to be a motive of social policy, that commercial
agents are a down-trodden race, and need and should be afforded protection
against their principals."
[17] I was
also referred to Centrosteel Srl v Adipol GmbH [2000]
3 CMLR 711, particularly at paragraphs 35 and 38 of the
Advocate General's opinion and paragraphs [16] and [17] of the
judgment of the European Court of Justice.
[18] Counsel
for the defenders summarised his position as follows:
(i) One of the purposes of the letter of
appointment was to create an agency relationship between the parties whereby
the defenders solicited customers for the pursuers by in-store activities in
Sainsbury's Stores.
(ii) The language of the letter of
appointment indicates that parties had agreed that the defenders' appointment
in respect of in-store activities in Sainsbury's was capable of being
terminated separately from the other elements of the overall agency
relationship (see Clause 7.3).
(iii) The pursuers have admitted that on 31 August 2006 the Sainsbury's in-store sales element of the
relationship was terminated by reason of the pursuers' termination thereof.
(iv) Consequent upon that termination was the
loss of a significant and defined element of the defenders' business in terms
of the letter of appointment.
(v) Leaving aside any complications about
partial termination, it is impossible to avoid the conclusion that indemnity
would be payable to the defenders on termination of their contract.
(vi) The purpose of the indemnity is to award
to the agents a share in the goodwill built up by their efforts on the
termination of the agency relationship - otherwise, the whole goodwill
would remain with the principal and the agent would receive nothing. (Any concerns about the fact that the Sainsbury's
contribution of about 92% to the defenders' turnover was of relatively
recent and short lived duration are met by the method of calculation of
indemnity set out in Regulations 17(4)).
(vii) The court should interpret the Regulations
in line with the purpose and intent of the Directive, ie putting the protection
of the agent at the forefront of the purpose.
[19] With
all of these factors in mind, and in light of the authorities cited, counsel
submitted that the proper construction of the word "termination" where it
occurs in Regulation 17 is habile to include the termination of a
separable part of an agency relationship which the parties have agreed may be
brought to an end by the principal on the occurrence of certain events.
[20] Finally,
counsel for the defenders addressed the question of what it was that the
Directive and the Regulations envisaged being terminated before a right to
indemnity was created.
Regulation 17(1) referred to indemnification "after termination of
the Agency Contract", but he suggested that the concept of indemnity in these
circumstances has historical links to the German commercial code (amongst
others). In this regard I was referred
to the English translation in Pelzer
& Voigt "The German Commercial
Code" (5th edition)
at paragraph 89, which refers not to an "Agency Contract" but to "the
contractual relationship". This was
consistent with the approach of John Mitting QC sitting as a deputy judge
in Moore v Piretta PTA Ltd [1999]
1 All ER 174 in which he observed (at page 180b) that "the
phrase 'The Agency Contract' means simply "The Agency". The word 'contract' after "Agency" adds
nothing. Regulation 17(1) thus
construed therefore reads as follows:
'This Regulation has effect
for the purpose of ensuring that the commercial agent is, after termination of
the agency, indemnified,' etc."
[21] In
light of all of the above, Mr Weir invited me to repel the pursuers' first
plea-in-law in their answers to the counterclaim, and thereafter to put the
case out By Order to consider further procedure.
Response for
the Pursuers
[22] In response to the defenders' submissions,
Mr McIlvride made two points with regard to Regulation 17:
(i) It was not a legitimate approach to the
purposive interpretation of Regulations 17-19 to identify a broad social
context and to write into the Regulations rights and remedies not provided by
the Directive. The European Court of
Justice made it clear in Ingmar GB Ltd
(supra) that the purpose of the
Directive was to protect commercial agents on termination of the Agency
Contract - ie the termination of the Agency relationship between principal
and agent. It was necessary to identify
the specific purpose which Article 17 was intended to achieve; the European Court of Justice has explained
what Articles 17-19 (and Regulations 17-19) are intended to
achieve. It was not legitimate to regard
the broad purpose of the Directive as being the protection of commercial
agents, and so to read into the Regulations anything which might be favourable
to commercial agents. As the European
Court of Justice said in Centrosteel (supra), the court must look to the
wording and purpose of the Directive. To
give effect to the defenders' submissions would be to look beyond the purpose
and wording of the Directive.
(ii) In any event, if there is not a
termination of the agent/principal relationship, a partial termination does not
give rise to a right of indemnity.
Moreover, the defenders' submissions do not match what they seek in
conclusion 1(e) of the counterclaim and the supporting averments in
statement 6. The defenders'
position on averment is as follows:
"Properly construed,
Regulation 17 does not just apply to termination of the whole of a
commercial agency contract. It applies
to the termination, by a principal, of any element of a commercial agency
contract such as the Agency Contract."
[23] With
regard to the defenders' contractual claim, Clause 3.8 (and
particularly 3.8.1) of the letter of appointment makes it clear that the
defenders have a contractual entitlement to an indemnity where the agency
relationship is terminated, but only to the extent that the right of indemnity
arises from (and is in the same terms as) Regulation 17. Clause 7.3 does not amend or alter this
right. Although the word "termination"
is used in Clause 7.3, its meaning depends on its context. It refers to termination of certain
activities - it does not repeat the language used earlier regarding
termination of the agents' appointment for the purposes set out in the
agreement. In particular it does not
suggest that the Sainsbury's activities amount to a separate purpose for which
the agents have been appointed. Properly
construed, Clause 7.3 does not indicate that the parties intended that any
right to indemnity would arise under Clause 3.8 on the termination of the
Sainsbury's activities.
Discussion
[24] There is no dispute that the Directive and
the Regulations require to be given a purposive interpretation. There is also no dispute that the general
purposes of the Directive and the Regulations include (first) harmonisation of
the laws of Member States of the community with regard to commercial agency,
and (second) the redressing of a perceived imbalance between the bargaining
positions and interests of principals and commercial agents in favour of
commercial agents. However, the extent
to which an interpretation based on the second of these general purposes can be
taken must surely depend on the wording of the Directive and the Regulations,
and any relevant authorities which shed light on this matter. It would be wrong to regard the Directive and
the Regulations as a carte blanche in favour of anything which commercial
agents might seek to argue or from which they might benefit. The Directive and the Regulations must be
construed in light of commercial reality, and (of course) having regard to
their framework and the words used in them.
It is not enough simply to assert that their purpose is to favour
commercial agents, because this does not address the questions of how far and
in what circumstances do they favour the commercial agent. In seeking to answer these question, I
consider that all the material placed before me is relevant.
[25] Some
parts of the Directive and Regulations are clearly directed at the rights and
duties of the parties to a commercial agency contract during the subsistence of
that contract. For example,
Regulations 3-7 and 10-14 clearly fall within that category. Other parts of the Directive and Regulations
are directed towards termination and to the rights of the commercial agent
after the Agency Contract has been terminated;
Regulations 8 and 15-19 appear to me to fall into this
category. The purposes of these two
categories are not necessarily identical.
The Regulations governing the rights and obligations of the parties
during the subsistence of the Agency Contract envisage the situation in which
the volume of commercial transactions will be significantly lower than that
which the commercial agent could normally have expected (see
Regulation 4(2)(b)), and make provision for an obligation on the principal
to give notice to the agent of his anticipation of this trend. In such a situation, there is no obligation
on the principal to provide the agent with indemnity or compensation. The entitlement of the commercial agent to
indemnity or compensation arises only on termination of the Agency Contract.
[26] The
defenders argue that there may be a partial termination of the Agency Contract
which would give rise to a right to indemnity or compensation in terms of the
Directive and Regulations. They submit
that the word "termination" where it occurs in Regulation 17 is habile to
include termination of a separable part of an agency relationship which the
parties have agreed may be brought to an end by the principal on the occurrence
of certain events.
[27] Leaving
aside at present the point that this is not consistent with the terms of the
declarator which the defenders seek, I cannot find anything in the Directive or
the Regulations, or any of the authorities placed before me, which supports
this proposition. The point which the
defenders make is that, if this construction is not adopted, it would be open
to the principal to instruct the commercial agent to cease the great majority
of his activities on behalf of the principal (in the present case it is averred
that the Sainsbury's activities make up around 92% of the defenders'
turnover) yet keep the Agency Contract alive for the remaining minor balance,
thereby postponing indefinitely the obligation to pay indemnity or
compensation. There is perhaps some
force in this argument, but it is a situation which the commercial agent can
avoid by an appropriately designed contractual framework. For example, in the present situation, if the
defenders wished to obtain a right to indemnity on the termination of their Sainsbury's
activities, it would have been open to them to require the Sainsbury's
activities to be the subject of a separate commercial Agency Contract. In that situation, in the event that their
Sainsbury's activities were terminated by the principal, their right to
indemnity would arise consequent upon the termination of the Agency Contract
(or agency relationship).
[28] That is
not the situation in the present case.
Although the pursuers have instructed the defenders to cease their
Sainsbury's activities, and although those activities may have been lucrative
to the defenders and latterly comprised a large part of their turnover, the
Agency Contract was not terminated by the pursuers' letter to the defenders
dated 29 March 2006, nor by the requirement which took effect on 31 August
2006 that the defenders should cease their Sainsbury's activities. On the contrary, the remainder of the Agency
Contract still subsisted, and the defenders do not aver that the letter of 29 March 2006 or the cessation of Sainsbury's activities on 31 August 2006 amounted to a repudiation of the contract by the
pursuers. The defenders were simply put
back into the position that they were in before the Sainsbury's activities
began in about early 2005. (I pause
to observe that the letter dated 29 March 2006 was not a production nor
was it referred to brevitatis causa
in either party's pleadings, and neither party was able to provide it to me at
the debate. Neither party suggested that
its terms were material to the present decision.)
[29] The
declarator which the defenders seek in conclusion 1(e) of their
counterclaim goes beyond the submissions made on their behalf at debate. This branch of their conclusion seeks
declarator that:
"properly construed,
Regulation 17 of ... the Regulations et separatim Clause 3.8.1 of the Agency Contract apply where a
principal terminates any element of a commercial agency contract, such as the
Agency Contract".
It seems to me that this goes well beyond what may be
properly construed as "termination" in terms of Regulation 17. If this construction was indeed proper, it
would mean that a commercial agent who had many hundreds of customers or
activities which he pursued on behalf of his principal could seek indemnity
from the principal in the event that any one of these customers or activities
ceased on the principal's instructions.
I do not find any support for such a result in the Directive, the
Regulations or any of the authorities.
Indeed, it seems to me to fly in the face of commercial reality.
[30] I
consider that the right of a commercial agent to indemnity or compensation
under Regulation 17 arises only after termination of the Agency
Contract. It does not appear to me that
there is a significant distinction between the termination of an Agency Contract
and the termination of an agency relationship, at least in the circumstances of
the present case. The relationship
between principal and agent is one based on contract. If the contract is terminated, the
relationship (at least in terms of that contract) will be terminated. It might be thought that there is an element
of indulgence in semantics in this respect.
In the present case, it appears to me that the letter from the pursuers
to the defenders dated 29 March 2006, and the cessation of Sainsbury's
activities which took place on 31 August 2006, did not result in the
termination of the Agency Contract, nor did it result in the termination of the
relationship of principal and agent as between the pursuers and the defenders. The contract, and the relationship, still
subsisted with regard to the defenders' non Sainsbury's activities. For the purposes of Article 17 of the
Directive and Regulation 17 of the Regulations, I do not consider that there
has been any termination which gives rise to a right to indemnity in favour of
the defenders.
[31] This
construction of "termination" in Regulation 17 appears to me to be
consistent with the authorities to which I was referred. In Ingmar
GB Ltd the European Court of Justice (5th chamber) observed
(at paragraph 21 of its judgment) that:
"the purpose of
Articles 17-19 of the Directive, in particular, is to protect the
commercial agent after termination of the contract. The regime established by the Directive for
that purpose is mandatory in nature.
Article 17 requires Member States to put in place a mechanism for
providing reparation to the commercial agent after termination of the
contract."
There is no suggestion of protection for the
commercial agent or reparation during the subsistence of the contract. It is consistent with the reasoning in Bell Electric Ltd (particularly at
paragraph 53) and it is also consistent with the reasoning in Tony Vick (particularly at
paragraphs 94 and 95).
[32] Lord McEwan
was dealing with a very different situations in Frape v Emreco International Ltd, in which there
was no suggestion that a contract still subsisted to any extent. That case involved a commercial agency
contract which provided that the agent's engagement ended when the agent was
65, or on 31 May 1997, whichever was
earlier. The agent turned 65 on 13 April 1997 and the principal ended his contract. The principal argued that the Directive did
not define "termination", but it meant being deprived of the proper performance
of a contractual obligation: the agent's
contract had expired through time and there was not "termination". Lord McEwan held that "termination" had
to be interpreted in a purposive way and was habile to cover contracts expiring
through the effluxion of time. I agree
with his reasoning in the circumstances of that case, in which there was no
suggestion of a "partial" termination or of the Agency Contract subsisting to
any extent.
[33] The
defenders were unable to provide any authority for the proposition that the
words "after termination of the Agency Contract" actually meant after
termination or cessation of part of the Agency Contract, while the balance of
the contract still subsisted and the relationship of agent and principal also
continued. Even applying a purposive
interpretation of the Regulations and the Directive, I do not consider that the
interpretation urged on me by the defenders is sound. I am satisfied that the present case does not
fall within the terms of Regulation 17 or Article 17 of the
Directive, and that the defenders do not have a right to indemnity or
compensation under those provisions.
[34] There
remains the question of the proper construction of the contract itself. To a large extent, I agree with counsel for
the pursuers that this is academic, because it is clear from the terms of
Clause 3.8 that the contractual right to indemnity depends on a right to
indemnity in terms of Regulation 17 of the Regulations. There is no separate contractual right to
indemnity in the event (as I have held) that Regulation 17 does not
apply. Moreover, Clause 3.8 only
applies "upon termination of your appointment as an agent for the purposes set
out in this letter". There is no
suggestion that the defenders' appointment as an agent for the purposes set out
in the letter of appointment was terminated.
In order to terminate the defenders' appointment as an agent for the
purposes set out in the letter, the pursuers would have required to use the
mechanisms provided by Clause 7.1 of the Contract. It does not appear that this is what they
did. They appear to have used the
mechanism provided in Clause 7.3, which does not enable them to terminate
the defenders' appointment as an agent for the purposes set out in the letter,
but only entitles them to terminate the defenders' appointment in respect of
the performance of exhibition activities in Sainsbury's Stores in relation to
"Sainsbury's Energy" branded mains natural gas and electricity. The use of the word "terminate" in this
context might give rise to some
confusion at first reading, and is perhaps unfortunate. However, I agree with counsel for the
pursuers that when the whole letter of appointment is read, the use of the word
"terminate" in Clause 7.3 in the context of the whole letter must be read
as spelling out in greater detail than is provided in Clause 3.1.10 that
the pursuers are entitled to instruct the defenders to cease entirely their
Sainsbury's activities. I do not
consider that Clause 7.3 can properly be construed as constituting a
separate and severable Agency Contract or relationship which, if brought to an
end, would give rise to a right to indemnity or compensation. In any event, it does not amount to termination
of the defenders' appointment as an agent for the purposes set out in the
letter, and so it does not give rise to a contractual right to indemnity in
terms of Clause 3.8.
[35] In
these circumstances, I consider that the arguments advanced in
paragraphs 2 and 5 of the further note of arguments for the pursuers
(No. 24 of process) are well founded, and that the defenders are not
entitled to indemnity in terms of Regulation 17 of the Regulations. Both parties made detailed motions as to the
consequences in the event that they were successful, but I understood that both
parties were agreed that this matter should be put out By Order to enable the
detailed consequences to be discussed shortly after the issuing of this
Opinion. Accordingly, this case will be
put out By Order as soon as reasonably practicable after the issuing of this
Opinion.
