Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd & Ors  EWHC 507 (Ch)
On 6 March 2019, the High Court issued a decision on the treatment of compensation under the Commercial Agents Regulations 1993 (the "Regulations"). Agents and principals should take note of the decision – of particular significance is the Court's confirmation that an award of compensation under the Regulations does not necessarily mean that the victim of a contractual breach (such as premature termination of a three year fixed term contract) ought to receive additional common law damages for that breach. The decision also offers a useful indication of how courts are likely to rule in this area due to the in-depth consideration of the relevant case law.
Green Deal Marketing Southern Limited ("GD") brought a claim against Economy Energy Trading Ltd & Others ("EE") for breach of contract and for compensation under the Regulations. EE are in the business of selling gas and energy to domestic customers. Between May 2015 and January 2017, GD had been engaged as an agent of EE to encourage households to switch to EE's gas and energy.
Initially the parties operated under a written agreement but GD argued that from June 2016 the relationship was governed by a new written contract (referred to as "the Heads of Terms").
On 31 January 2017, the commercial relationship between EE and GD was summarily terminated by EE on the grounds of serious breaches of contract by GD involving mis-selling on a large scale by their field agents. GD interpreted the actions of EE as a repudiatory breach of the contract and brought a claim for damages in common law and compensation under the Regulations.
The Court held that the Heads of Terms constituted a binding agreement and so went on to consider whether GD's breaches were repudiatory and, if they were, whether EE had affirmed the contract despite the breaches. The Court found that the breaches caused by GD were not repudiatory. It therefore held that EE had not been entitled to terminate the contract and so had themselves committed a repudiatory breach. Before assessing damages for the breach of contract, however, the Court considered whether GD (as an agent) was entitled to compensation under the Regulations.
Whether the Regulations applied
Under section 17 of the Regulations, an agent is entitled to be "compensated for the damage he suffers as a result of the termination of his relations with his principal" where the termination takes place in circumstances which:
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
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.
The Court looked at a number of factors under the Regulations to determine if they applied in this case. The Court held that the Regulations did apply. One of the points considered was the meaning of "negotiate" under Regulation 1(2). In general, whether a commercial agent falls under the remit of the Regulations will often depend on the agent's ability to "negotiate" the sale or purchase of goods on behalf of the principal. The Court relied on PJ Pipe and Valve Co Ltd v Audco India Ltd to determine that "negotiate" in this context simply means "to deal with, manage or conduct" and so the fact that the agent had no part in any resulting sale of gas or electricity was inconsequential.
The Court further looked at whether electricity constituted "goods" for the purposes of the Regulations (EE having conceded that gas would constitute "goods"). EE's argument was that the sale of electricity – if deemed to not be "goods" – was the larger part of the business and would mean that the agent's activities should be considered "secondary" under the Regulations. The Court disagreed with EE, finding that electricity did constitute "goods" and further added (obiter) that even if they had not been considered "goods" this would not necessarily make the agent's activities "secondary". The Court then considered whether the activities of GD were nevertheless "secondary" but determined that on the facts the activities of GD fell well within the definition of a commercial agent under the Regulations.
The principal also relied on its defence on default by the agent in an attempt to justify termination after termination occurred. Regulation 18(a) provides a defence where the principal terminates "because of" default attributable to the Agent justifying an immediate termination. The Court decided a default of which the principal is unaware is unlikely to satisfy the causal requirement of the words "because of".
Assessment of compensation due to an agent following termination
After concluding that the Regulations applied, the Court addressed the level of compensation due following the approach to the quantification of compensation set out in Lonsdale v Howard & Hallam Limited. The Court's analysis of two key points is worth mentioning.
The Court noted that the underlying theory is that an agent has a share in the goodwill in the principal's business which they helped to create. Therefore the agent is entitled to compensation for the loss of their interest in the goodwill on termination of the agency agreement. In this case, EE argued that GD had not suffered any damage as it had received all of the commission to which it was owed. However, following the underlying theory with regards to goodwill, the Court stated that as EE retains the goodwill of the business that GD helped to create, in respect of its share of the goodwill GD should receive compensation for the income stream it would have received by way of commission if the agency had continued. A detailed analysis of the conflicting expert valuations by the Judge acts as a useful practical guide to dealing with valuations in similar cases.
The Court considered the relevance of the principal's ability to terminate the agency in accordance with the terms of the contract as the Heads of Terms in this case were for a fixed three-year term (subject to a serious breach). In determining the relevance of the limited term, the Court discussed Alan Ramsay Sales and Marketing Ltd v Typhoo Tea Ltd, Page v Combined Shipping and Trading Co Ltd and Software Incubator Ltd v Computer Associates Ltd. The Court concluded that although the relevance of termination rights is limited it is, however, real, and the fact that the contract is not perpetual is relevant to a realistic valuation.
Damages for breach of contract
GD submitted that compensation under the Regulations is a different remedy from common-law damages and the Court agreed with this position in principle, as statutory compensation is available even where there has been no breach of contract. However, the Court confirmed that this does not mean that a victim of a contractual breach will automatically be entitled to receive additional common law damages. The Court stated that additional damages should not be awarded if this produced a result contrary to the general common law rule against double recovery. On the facts of the case, the Court followed the decision in Vick v Vogle-Gapes that an award of compensation and an award of damages in this instance would result in two compensations for the same loss and so refused the claim for damages.
Whether the Regulations apply and what compensation is due will depend on the facts of each case, but this decision provides a useful review of the case law in the area of commercial agency and some of the main issues that arise. It is worth noting that the decision also includes a detailed and lengthy discussion on the expert evidence given for valuation. Although this article has not commented on the Court's approach to this evidence, this section is valuable for considering the risks of terminating an agency relationship and would be worth looking at in detail in this event. Overall, as well as providing further clarification of the scope of the Regulations and where they will apply, the decision provides useful direction on the assessment of compensation due to an agent following termination and the entitlement to common law damages.
For more information on this topic, please contact Gordon Drakes or your usual contact within Fieldfisher's Brand Development Team.
With thanks to Rachel Bowley who co-authored this update.