The current UK Labour government has opted not to make any changes to the Commercial Agents Regulations[1](CARs) following a consultation commissioned by the previous Conservative government that revealed a "polarisation of views"[2].

In this update, we look at the reasons for the consultation and the Department for Business and Trade's (DBT) rationale for leaving the CARs in force without amendment.

What are the CARs and what do they mean for commercial agents and principals?

The CARs apply in relation to commercial agents who perform their activities in Great Britain. They stem from the UK's former membership of the EU and the UK's implementation in 1994 of a European directive which was originally intended to harmonise the relevant national laws of the EU member states.

The CARs impose various terms into arrangements between a principal (a business) and a "commercial agent". A "commercial agent" is not any agent – it is limited to a self-employed intermediary who has authority to negotiate or to negotiate the sale or purchase of goods on the principal's behalf.

Several of these terms cannot be contracted out of and are typically considered onerous by principals. This includes provisions relating to termination notice, commission and, probably most hotly debated, the commercial agent's right to compensation on termination in a broad range of circumstances. Although the CARs make it clear an agent is entitled to compensation on termination, it is not clear how much compensation will be payable.

This has led to a string of Court cases regarding the approach to calculating compensation amounts and creates difficulties for parties seeking to understand their precise exposure. That lack of certainty (which is exacerbated by different approaches being taken in different European jurisdictions) makes commercial agency unattractive to principals, and often leads to costly disputes on termination.

 

Background to the DBT's decision to consult on the Commercial Agents Regulation

The reasons given for the previous government's decision to consult on the CARs was to "ensure that they meet the needs of UK business following the UK leaving the European Union"[3]and to seek "views on ...[their] proposals to deregulate these regulations in order to ensure that they …help to reduce burdens on business"[4].

The DBT also highlighted that "deregulating the CARs will remove from our statute book regulations that do not fit easily into our legal framework, removing confusion for business and the courts in interpreting them"[5]. The DBT's proposals would not affect existing contracts under the CARs but would mean that the CARs would not apply to any new contracts.

Why were the Commercial Agents Regulations not deregulated?

The findings from the consultation generally showed that commercial agents value the CARs, particularly the protections given when ending contracts. Other factors cited included the protection the CARs provide against larger companies and that, without the CARs, it might make it harder for those agents to negotiate with principals.

In contrast, some principals thought that the CARs were bureaucratic, particularly when it comes to negotiating the agent's rights on compensation on termination. Other criticism from principals includes that they are weighted in favour of the commercial agent and can prevent the contracts of underperforming agents from being terminated.

Some responses stated that the CARs provide a level playing field when operating in the EU whilst others said that they were redundant because since Brexit, the UK is no longer in the EU.[6]

The DBT ultimately concluded that the CARs will remain in force without amendment. It is interesting that the DBT cite in their rationale that CARs " work well for…" and "provide protections to" "commercial agents" and particularly when negotiating with larger businesses. The DBT did recognise that some principals took issue with the impact on their ability to "negotiate freely" but the DBT ultimately concluded that there was not enough evidence to justify the proposed changes to the regulations.[7]

Conclusion

The government's decision not to deregulate appears to favour the views of commercial agents.

It is interesting that there were only 86 responses and 70% of those were commercial agents. Only seven respondents were principals.[8]

In our view the low level of responses from principals is in part because there will be fewer principals than agents, but also it shows the unpopularity of commercial agency as a route to market. In our experience, well advised principals often tend to avoid commercial agency and choose other routes to market such as distribution or selling direct. There may also have been an expectation by principals that the CARs were going to be repealed as part of the previous government's post-Brexit promise of removing onerous EU regulations.

In the UK legal system, which largely allows businesses freedom to contract with each other as they see fit, it does seem anomalous that the output of this consultation is that we still have a set of regulations which can override the contract.

The ambiguities in the drafting of the CARs make the model unattractive for many as they make them ripe for dispute - particularly the calculation of any compensation amount that would be payable on termination.

And so, avoiding using a commercial agency model, where possible, is a trend that is likely to continue.

For those seeking advice on how to draft contracts without falling into the scope of the CARs, a deeper understanding of the consequences of the CARs applying, or advice on the potential impact of exiting a commercial agency arrangement, please contact David Lowe, Rachel Pennell or a member of our team.

Footnotes

1 Commercial Agents (Council Directive) Regulations 1993

2 Consultation response: deregulating the Commercial Agents (Council Directive) Regulations 1993

3 Smarter regulation: deregulating the commercial agents regulations

4 Smarter regulation: deregulating the commercial agents regulations

5 Smarter regulation: deregulating the commercial agents regulations

6 Consultation response: deregulating the Commercial Agents (Council Directive) Regulations 1993

7 Consultation response: deregulating the Commercial Agents (Council Directive) Regulations 1993

8 Consultation response: deregulating the Commercial Agents (Council Directive) Regulations 1993