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IN THE SUPREME COURT OF JUDICATURE QBENF 1998/0301/1

(HIS HONOUR JUDGE RAYMOND JACK QC )

Royal Courts of Justice

Strand

London WC2

Friday 18 June 1999

B e f o r e:

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(Transcript of the Handed Down Judgment of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR J ALGAZY (Instructed by Messrs Pannone Partners, Manchester, M£ 2BD) appeared on behalf of the Appellant

MR R STEAD (Instructed by Veale Wasborough, Bristol, BS1 5DS) appeared on behalf of the Respondent

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(As approved by the Court )

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©Crown Copyright

Friday 18 June 1999

JUDGMENT

LORD JUSTICE WALLER : This is an appeal from a judgment of His Honour Judge Jack QC given on 9th February 1998. The judgment related to a counterclaim brought by the appellants (Pacflex). The respondents (AMB) had already obtained judgment in part in relation to goods sold by AMB to Pacflex, and at the trial Pacflex did not contest that AMB were entitled to judgment for the remainder of the price subject to their counterclaim. By the counterclaim Pacflex contended that the trading carried on between them and AMB which had led to the price being due for goods supplied by AMB, had been carried on under a commercial agency contract within the Commercial Agent (Council Directive) Regulations 1993 which, so Pacflex contended, entitled them to compensation under Regulation 17 of those Regulations.

The Regulations, as their title indicates, implemented Council Directive 86/653/EEC seeking to harmonise the laws of member states in relation to commercial agents. The Regulations we are told went through various drafts, but ultimately effectively adopted the Council Directive and the language of that Directive subject to one exception to which I will turn in a moment. The object of the Directive and the Regulations was to provide a scheme to protect commercial agents from unscrupulous principals by providing for compensation at the termination of commercial agency contracts whether the termination was rightful or wrongful.

The first and key issue decided by the judge and the first and key issue for this court, is whether Pacflex were commercial agents within the definition of commercial agents as set out in the Regulations and the Directive. Only if they can bring themselves within the definition would any of the other points arise

The exception to which I have just referred has given rise to a second, albeit not as fully argued, point in the case involving the way in which the Regulations were disapplied so far as the United Kingdom was concerned. By Article 2(2) of the Directive it was contemplated that “where the activities as commercial agents are considered secondary by the law of that member state”, the member state should have the right to provide that the Directive should not apply. The United Kingdom took advantage of that provision, and by an almost impenetrable piece of drafting sought by Regulation 2(3) and (4) together with a Schedule to exercise that right.

The definition of commercial agent is in the following terms :-

"“commercial agent” means a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal."

There are then certain exclusions in sub-paragraphs (i) to (iii), but they are irrelevant to the issues arising in this case. The wording follows that of Article 1(2) of the Directive with minor changes which effect no change of meaning.

The contention of AMB is that a person A can only be a commercial agent if A is a party to a contract with B under which either:

(i) A has the authority to negotiate a sale or purchase of goods on behalf of B with C, which B ultimately concludes with C, or

(ii) A has the authority to negotiate and conclude, and does negotiate and conclude the sale or purchase of goods in the name of B.

Pacflex’s submission is that the definition allows for a situation in which a person A negotiates the sale by A of goods manufactured by B, and supplied to A by B. It is submitted that it can be said that loosely in such a situation A is negotiating on behalf of B. This case does not concern the purchasing of goods, and thus I do not pause for long to consider precisely what the submission would be in the context of the negotiating of a purchase. But if A buys goods manufactured by B, for sale to C, I have to say that it seems to me difficult to discern even loosely whether A could be said to be negotiating on behalf of C or negotiating on behalf of B. Mr Algazy would say it would depend on the facts, and to those I now turn.

The judge found as facts the following.

(1) There was an understanding between AMB and Pacflex commencing in 1989 that, if, in due course, customers were found by Pacflex for AMB’s products in England AMB would supply those products. There was initially no agreement as to the basis on which this would occur, and there was nothing sufficiently definite to amount to a legally binding agreement.

(2) All trading was in fact done on the basis of a sale to Pacflex and a re-sale to the end-users.

(3) AMB were prepared to do business with Pacflex (as confirmed by a letter dated 31st January 1992), either on the basis that contracts would be arranged between end-users and AMB, and Pacflex would receive commission, or on the basis that Pacflex would purchase from AMB, and re-sell to end-users at prices fixed to reflect what the market would bear. Pacflex chose the latter alternative because they appreciated that they could add a mark-up which was better than commission.

(4) At no time was any contract made under which Pacflex were obliged to act as agents for AMB or under which Pacflex were bound to act as distributor of AMB’s goods. It follows that it had not been finally agreed what duties Pacflex owed in relation to making efforts to sell AMB’s goods; what rights it had to sell competing goods; or how, if Pacflex were to act on a commission basis, contracts would be made direct with AMB; would for example Pacflex have had authority to make contracts in the name of AMB if it had chosen the commission basis?

(5) Pacflex did not carry any AMB goods in stock, and AMB did deliver goods agreed by Pacflex to be sold to end-users direct to those end-users.

Thus it will be seen that at no stage was any agreement formalised. It will further be seen that at all times on the judge’s finding, albeit AMB might have been prepared to deal on an agency basis with Pacflex charging commission, Pacflex in fact chose to deal on a sale and re-sale basis charging a mark-up not dictated by AMB, but a mark-up chosen by them.

I have quoted the definition of commercial agent the essence of which seems to be

a. A person having continuing authority;

b. To negotiate a sale on behalf of another (the principal);

or

c. To negotiate and conclude the sale in the name of the principal .

There are other Regulations which assist a little.

Regulations 3 to 5 deal with the duties and obligations of a commercial agent, and the principal. They contemplate an “agency contract” both by implication from the nature of the obligations specified and expressly (see, for example, Regulation 4(2)(b)). The obligations specified sit comfortably in the context of an agent negotiating in the interest of a principal and uncomfortably in the context of someone fixing a selling price for himself and in his own interest, in particular a selling price which he might not want to pass on to his supplier up the chain.

Regulation 6 deals with remuneration. It contemplates as a possibility that remuneration might be otherwise than by commission (see regulation 6(3)); but by regulations 7 to 12 which deal in detail with the position of an agent who is remunerated by commission, it is demonstrated that by far the commonest form of remuneration for an agent is a commission arrangement. There is no hint that by the term remuneration was contemplated a “mark-up” negotiated with end-users on a re-ale by the “agent” of goods bought from the “principal”. As it seems to me it would be an unnatural use of the word “remuneration” if it were used to describe “mark-up”.

Mr Algazy accepted as suggested in Bowstead and Reynolds on Agency 16th Edition Paragraph 11-012 that it was “clear that the Directive and Regulations refer to “an agent” ; that “a distributor of goods, though often described as an “agent”, buys for re-sale and, unlike an agent, takes a financial risk”; and that thus distributors are not commercial agents within the definition in the Regulations. He sought however to argue that the determining factor as to whether a contract was one of commercial agency was as suggested on page 121 of the Guidance Notes on the Commercial Agents Regulations 1993 issued by the Department of Trade whether the “agent is required to keep, as his own property, a considerable stock of the products”. That suggestion in the Guidance Notes is in the section dealing with the question whether an agent’s activities are primary or secondary, and I have to say that I am not clear on what basis it is made. It would furthermore be an uncertain definition. For example, how much stock is considerable?

In my view the question whether a person is a commercial agent can be more straightforwardly stated by reference to the words used in the definition, and was rightly answered by the judge. If a person buys or sells himself as principal he is outside the ambit of the Regulations. That is so because in negotiating that sale or purchase he is acting on his own behalf and not on behalf of another. All the Regulations point in the direction of the words “on behalf of” meaning what an English court would naturally construe them as meaning. The other person on whose behalf the intermediary has authority to negotiate the sale or purchase of goods is called the “principal”; the duties are consistent with true agency and not with a buying and re-selling; “remuneration” is quite inconsistent with “mark-up”, particularly “mark-up” within the total discretion of the re-seller.

Accordingly, as it seems to me, Pacflex never in fact acted as an agent negotiating on behalf of another at all. Equally important there was never in place a contract between Pacflex and AMB under which Pacflex had the continuing authority to do anything on behalf of AMB. The only argument for there being some form of contract in existence would have to be implied from a course of conduct, and since the Regulations only came into force on 1st January 1994 the question would relate to the contract to be implied at that moment in time. On any view such a contract could not go beyond a contract under which AMB agreed to supply goods manufactured by them, if Pacflex entered into a contract with an end-user to sell them to the end-user. Such a contract could not be said to provide “a continuing authority” to Pacflex to “negotiate the sale of goods” on behalf of AMB.

Accordingly on the first and key issue I would dismiss the appeal.

This point does not arise for decision, and indeed did not strictly arise for decision before the judge. However I am quite bewildered as to what is the proper construction of the Regulations and the Schedule. I feel that it must have been the intention of those who drafted the regulations to provide for the solution favoured by the judge. But I am doubtful whether, as a matter of construction, it can safely be assumed the judge is right. I would therefore like to emphasise the difficulties highlighted by the judge on this aspect of these regulations in the hope that consideration can be given to clarifying the same.

Article 2(2) of the Directive provided:-

"2. Each of the Member States shall have the right to provide that the Directive shall not apply to those persons whose activities as commercial agents are considered secondary by the law of that Member State."

By Regulation 2(3) and (4) it was provided as follows:-

"2(3) The provisions of the Schedule to these Regulations have effect for the purpose of determining the persons whose activities as commercial agents are to be considered secondary.

(4) These Regulations shall not apply to the persons referred to in paragraph (3) above."

The judge describes the Schedule accurately in this way:-

"Paragraphs 1 and 2 of the Schedule state:

1. The activities of a person as commercial agent are to be considered secondary where it may reasonably be taken that the primary purpose of the arrangement with his principal is other than as set out in paragraph 2 below.

2. An arrangement falls within this paragraph if -

(a) the business of the principal is the sale, or as the case may be purchase, of goods of a particular kind; and

(b) the goods concerned are such that -

(i) the transactions are normally individually negotiated and concluded on a commercial basis, and

(ii) procuring a transaction on one occasion is likely to lead to further transactions in those goods with that customer on future occasions, or to transactions in those goods with other customers in the same geographical area or among the same group of customers, and that accordingly it is in the commercial interests of the principal in developing the market in those goods to appoint a representative to such customers with a view to the representative devoting effort, skill and expenditure from his own resources to that end.

Paragraph 3 sets out five indications that an arrangement falls within paragraph 2, its absence being an indication to the contrary. They are:

‘(a) the principal is the manufacturer, importer or distributor of the goods;

(b) the goods are specifically identified with the principal in the market in question rather than, or to a greater extent than, with any other person;

(c) the agent devotes substantially the whole of his time to representative activities (whether for one principal or for a number of principals whose interests are not conflicting);

(d) the goods are not normally available in the market in question other than by means of the agent;

(e) the arrangement is described as one of commercial agency.’

Paragraph 4 lists three indications that an arrangement does not fall within paragraph 2:

‘(a) promotional material is supplied direct to potential customers;

(b) persons are granted agencies without reference to existing agents in a particular area or in relation to a particular group;

(c) customers normally select the goods for themselves and merely place their orders through the agent.’

Lastly paragraph 5 provides:

‘5. The activities of the following categories of persons are presumed, unless the contrary is established, not to fall within paragraph 2 above -

Mail order catalogue agents for consumer goods.

Consumer credit agents.’"

The difficulties are as follows.

1. Article 2(3) of the Directive seems to allow a member state to disapply the Directive where the activities of the agent as agent are secondary, as compared with the rest of the agent’s business.

2. The Schedule then seems to contemplate an assessment not of the activities of the agent as “a commercial agent” as compared with his other business, but an assessment of the agent’s arrangement with a principal. That this was probably unintentional is confirmed by the Guidance Notes issued by the Department of Trade and Industry which include this paragraph in relation to the Schedule:-

"The comparison to be made is between the agent’s activities as a commercial agent and his other activities and not the relationship with the principal."

3. Paragraph 1 of the Schedule refers to a primary purpose “other than as set out in paragraph 2.” But paragraph 2 does not set out a purpose: it describes aspects of the arrangement with a particular principal.

4. Paragraphs 3 and 4 suggest pointers are being supplied as to whether an arrangement is within paragraph 2, but provide no assistance as to what is being compared with what for the purpose of deciding what might be secondary as compared with what might be primary, nor any assistance as to whether other factors are excluded.

On the Regulations as drafted I have to say, contrary to the obviously sensible conclusion of the judge, there seems to me to be much force in the argument that if an agent has an arrangement with a principal which falls within paragraph 2 of the Schedule using the indications under paragraph 3 and 4 purely for the purpose of making that assessment, then it must be taken that that business is not secondary. I would have thought that the Directive did not intend the United Kingdom to be able to pass Regulations with that objective and it would seem to me clear from the Guidance Notes that it was not intended to do so. The right answer must be to clarify the matter as soon as possible.

LORD JUSTICE JUDGE: I agree with both judgments.

LORD JUSTICE PETER GIBSON : The primary issue in this appeal is a short point on the application of the definition of “commercial agent” in the Commercial Agents Regulations 1993 to the facts of the case. Mr. Algazy for Pacflex was at pains to point out the alien nature of the concept of a commercial agent for English law and the novel consequences which flow once a commercial agency is found to have arisen, and he urged us to look to the purposive or teleological interpretation of the Regulations and of the Directive which they were implementing and not to try to import common law notions of what constitutes an agent or an agency into that interpretation.

It is of course correct that in construing English regulations implementing a European Directive the court must be on its guard against giving a construction to the provisions of the regulations which defeats the purpose of the Directive or which is inconsistent with how the Directive would be understood in other member states. But Mr. Algazy was not able to show us any case or textbook suggesting that the definition of “commercial agent” in Article 1(2) of the Directive and imported virtually verbatim into Reg. 2(1) of the Regulations had some special meaning in another member state which it would not have when interpreted by an English court in accordance with English notions of the language used. Nor, in drawing our attention to the recitals to the Directive, did he suggest any particular purpose which might be defeated by the way the judge applied the definition of “commercial agent” to the facts.

Mr. Algazy only relied on the first part of the definition. For Pacflex to come within it, it must show that it was a self-employed intermediary which had continuing authority to negotiate the sale or purchase of goods on behalf of AMB. The plain implication of the language of the Directive and of the Regulations is that if the sale or purchase of goods is negotiated by the intermediary in its own interest rather than on behalf of the principal, the intermediary is not a commercial agent. The paradigm example of an intermediary so negotiating is as a distributor purchasing goods from the manufacturer but reselling the goods for a profit on the mark-up.

Mr Algazy relied on 6 facts said not to be in contention which, he claimed, showed Pacflex to be the commercial agent of AMB.

1. Between 1990 and 1993 AMB products were sold in the UK via Pacflex exclusively.

2. Both the “straight commission” method and the “mark-up” method of sale were available and interchangeable throughout the parties’ trading history.

3. There was little or no difference in terms of the activity of Pacflex whichever method of payment was used, save for invoicing and VAT payment.

4. Aside from possibly some early transactions on a “straight commission” basis, the parties’ trading was done on a “mark-up” basis.

5. At no time did Pacflex ever manufacture goods using AMB products; the entirety of the relationship with AMB consists of Pacflex selling AMB products to end users.

6. Pacflex did not hold any stock of AMB products.

When pressed Mr. Algazy conceded that in view of the judge’s unchallenged findings the first 11 words should be deleted from the 4th fact. The high point of his argument was the letter dated 31 January 1992 from Mr. Marin of AMB to Mr. Skinner of Pacflex (which contemplated that transactions between AMB and Pacflex might be either on an agency basis with Pacflex receiving 5% commission on invoices issued by AMB or on a resale basis with Pacflex invoicing the end-purchaser and setting its own mark-up) coupled with the answers given by the witnesses in oral evidence that both methods of doing business were available throughout the trading history of the parties. But set against that is the crucial fact that the transactions between the parties were always on the basis that Pacflex purchased from AMB and sold to the end-purchaser, adding a mark-up well in excess of 5%. Indeed it tried to conceal from AMB the extent of the mark-up.

In these circumstances it seems to me plain that Pacflex were never acting as the commercial agent of AMB, on whose behalf it never purported to negotiate, nor did it have a contract or other authority to negotiate a sale on AMB’s behalf, still less did it have authority to do so which could be called continuing. In my judgment for these as well as the reasons given by Waller L.J. the judge was entirely correct in the conclusions which he reached on this issue.

The second issue, whether Pacflex’s activities as commercial agents are secondary, therefore does not arise. But I would associate myself both with the reservations expressed by Waller L.J. about the views expressed by the judge on this point and with Waller L.J.’s call for early clarification of the unhappily worded Schedule to the Regulations.