Member Article

In recent years many automotive brands and manufacturers have been reviewing their sales and distribution channels often considering moving to agency arrangements (in whole or in part). Traditionally one of the main disadvantages of appointing agents was an agent’s entitlement to potentially significant mandatory payments on termination in certain circumstances but that could be about to change.

Background

The Commercial Agents (Council Directive) Regulations 1993 (CAR) implement the Commercial Agents Directive (86/653/EEC) (Directive). 

The Directive sought to protect and improve the position of commercial agents and to harmonise laws governing relations between commercial agents and their principals. The Government opposed the Directive when it was introduced. 

CAR represented a fundamental change in approach for agency in Great Britain when it came into force on 1 January 1994. 

Following Brexit, whilst CAR has to date continued to have effect as retained EU law (now assimilated law), there has been significant uncertainty concerning the future of CAR.

For example, in September 2022, the Government introduced a bill intended to revoke all EU-derived subordinate legislation and retained direct EU legislation (including CAR).

Whilst the Government stepped back from this position and CAR was saved from revocation at the end of 2023, subsequent legislation conferred extensive powers on the Government to restate, reproduce, revoke, replace and update certain retained EU law (now assimilated law) (including CAR).

Consultation on the future of CAR

With a focus on economic growth, the recent consultation on the future of CAR launched by the Department for Business and Trade takes the view that CAR imposes a burden on business and is inconsistent with the UK’s broader legislative framework (where in most cases the parties should in principle have the freedom to agree contractual terms between themselves in business-to-business arrangements).

The consultation therefore proposes:

• To bring forward legislation to prevent CAR applying to new agency arrangements after the effective date of such amending legislation and to return to the previous position before CAR was implemented (where parties were mostly free to individually negotiate contractual terms within the context of agency and the common law principles developed by the English courts with limited statutory intervention).
• That the provisions of CAR continue to apply to existing agency arrangements entered into before the effective date of such amending legislation until they naturally end.

The consultation was originally meant to close on 11 July 2024 but has recently been extended and currently closes at 11.55pm on 1 August 2024.

The Department for Business and Trade will publish a summary of all responses received including details of the organisations that responded. The consultation also explains that an options assessment will be submitted to the Government’s independent advisory body, the Regulatory Policy Committee, for independent scrutiny in accordance with new Better Regulation framework guidance.

Brief overview of CAR

Where CAR applies it automatically includes binding obligations into arrangements between a business (principal) and its commercial agents.

Some of these obligations can be excluded in carefully drafted contracts. However, many of these obligations cannot be excluded either at all, or to the detriment of an agent (for example certain obligations relating to commission and an agent’s entitlement to potentially significant mandatory payments on termination in certain circumstances).

A commercial agent for the purposes of CAR is a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of its principal or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of its principal. This may have wider application than may be initially apparent as, for example, under CAR it is not always clear what may constitute “goods” and “negotiate” has been interpreted widely (for example to deal with, manage or conduct) and so may be a low threshold.

CAR may apply to introducers, marketing agents, purchasing agents and sales agents.

CAR may apply to agency arrangements whether oral or in writing and whether for an indefinite, fixed or temporary period (for example, where CAR applies, agents appointed for a trial or probationary period will be protected by CAR for that period).

What should you do now if you appoint agents or other intermediaries?

Whilst the impact of the recent general election remains to be seen, Brexit received little mention in campaigning and much may depend on the results of the consultation, how positively respondents viewed the proposals, how well the proposals fit with the new Government’s agenda for sustained economic growth and what any “reset” of relations with the EU may look like.

In practice, following a change in Government, it may be some time before we get greater clarity on the future of CAR.

Whilst there is clearly significant uncertainty at present (for example whether these proposals will be adopted at all, in whole or in part, what exactly amending legislation may provide, likely timescale for implementation of any changes etc.), if these proposals are implemented, and CAR no longer applies to new agency arrangements, this would represent a fundamental change in approach for agency in Great Britain which could have a significant impact on businesses, business decisions and strategies moving forward.

Despite the current uncertainty, given this potential fundamental change careful consideration now may, for example, help mitigate mandatory payments due to agents under CAR on termination and enable you to more easily ringfence potential risk and migrate in the future to agency arrangements that may not be subject to CAR or such mandatory payments.

With this in mind, set out below are some examples of preliminary considerations and actions to be considered in the short term as appropriate and where possible (although as CAR and/or competition law considerations may restrict or impact what may be possible you should carefully consider CAR and competition law requirements before taking any action).

Are you in the early stages of considering whether new agency arrangements could work for you?

If you are considering entering into new agency arrangements before there is greater clarity on the future of CAR then these agency arrangements may remain subject to CAR, and mandatory payments may therefore be due to your agents under CAR on termination.

Delay – if you are able to delay until there is greater clarity you may be able to enter into arrangements where CAR does not apply, and no mandatory payments may be due under CAR on termination. However, as it may be some time before we get any clarity, this approach may not be practical and may result in lost revenue in the interim.

Interim arrangements – it may be useful to consider restricting the scope of new arrangements in the short term until there is greater clarity on the future of CAR. For example, to try and preserve flexibility, shorter initial periods, shorter fixed term contracts, shorter notice periods, pilot arrangements with limited vehicle models and/or territories, non-exclusive appointments etc. 

Depending on where you are in this process many of the considerations identified below for implementing new agency arrangements may also be relevant. 

Are you in the process of implementing new agency arrangements?

Longer term arrangements – if you need to move forward with potentially significant medium or longer term agency arrangements before there is greater clarity it may be useful to consider fully assessing and costing the potential implications of CAR and factoring this into your business case.

Termination – it may be useful to consider how best to structure termination provisions to try and preserve flexibility.

Review templates – it may be useful to consider reviewing standard or template agency agreements to see if these currently go further than is required under CAR (for example if these either include or do not exclude binding obligations which can be excluded under CAR), to what extent these embed CAR requirements as contractual provisions that will continue to apply even if CAR is scrapped or if there are other additional protections or changes that may help to navigate, manage and/or mitigate the current uncertainty.   

Depending on where you are in this process many of the considerations identified above for considering new agency arrangements may also be relevant.

Do you have existing agency arrangements?

Audit – if CAR already applies there may be little you can do to change this at this stage although it may be useful to consider auditing existing arrangements to identify in advance potential considerations (for example scope of current portfolio, duration, extensions, upcoming renewals, terminations, commissions payable, planned or potential changes in the current portfolio, reorganisations, restructuring, consolidations, corporate acquisitions etc.).

Review templates – it may be useful to review standard or template agency agreements and consider agreeing certain variations to existing arrangements to try and preserve flexibility. 

New vehicles – it may be useful to consider how best to address models not currently in scope and whether it may be possible to delay introducing these into your existing arrangements until there is greater clarity on the future of CAR.

Renewals – for any upcoming renewals, many of the considerations identified above for new agency arrangements may also be relevant. For example, it may be useful to consider shorter extensions, fixed term extensions, not extending the scope of goods or territories etc.

Terminations – whilst the consultation currently proposes that the provisions of CAR continue to apply to existing agency arrangements, the consultation has specifically asked whether respondents agree with this approach. When CAR came into force it applied to all existing agency arrangements (for example where an arrangement was entered into before 1994 it was, from 1 January 1994, governed by CAR). It is therefore possible that CAR may be scrapped for all agency arrangements. It may be useful to consider legal advice before terminating existing arrangements.

Are you looking to roll out agency arrangements in different countries?

Great Britain – if these proposals are implemented, and CAR no longer applies to new agency arrangements, agency models adopted in Great Britain may not be appropriate (in whole or in part) outside Great Britain and vice versa and, for example, more tailored templates and local legal advice may be needed. 

Northern Ireland – CAR applies to the activities of commercial agents in Great Britain and the Government’s latest proposals cover Great Britain only. Separate (but similar) regulations apply in Northern Ireland, and it will be for the Northern Ireland Executive to decide if and how to reform such regulations.

Territorial and jurisdictional scope of CAR – whilst these considerations can often be complex, CAR may apply in certain circumstances even where English law is not the governing law, or the activities of the agent are not in Great Britain. If, for example, CAR continues to apply to existing agency arrangements different considerations and outcomes may arise depending on whether an agent is an existing agent or a new agent. 

EEA member states – the Directive currently extends to the EEA. Whilst the Directive sought to harmonise laws governing relations between commercial agents and their principals this has been of limited success and important differences may exist (for example in relation to an agent’s entitlement to mandatory payments on termination, the treatment of services etc.). This is particularly relevant given the  complexities of how agreements with English governing law can be interpreted by EEA member states and in particular whether their laws might nevertheless apply.

Other countries – increasingly rights to mandatory payments for agents on termination arise in many other countries.

It may therefore be useful to consider legal advice on how best to structure cross border arrangements (for example having separate templates, entering into separate arrangements for each country, how best to address potential differences in local law etc.).

Are you looking to implement a global or regional agency model (developed outside the UK) in the UK?

Global and regional headquarters often identify the UK (and Ireland) as a single region when in fact there are 5 separate countries (England, Wales, Scotland, Northern Ireland and the Republic of Ireland) which may have different applicable local laws.

In addition, for example, certain agency and distribution concepts enshrined in civil codes across Europe have no equivalent under English law.

Many of the considerations identified above for agency arrangements in different countries may also be relevant.

Currently careful consideration is often therefore required when implementing global and regional agency model’s in the UK (and Ireland) and it may therefore be useful to consider legal advice on how best to implement (and adapt as appropriate) these arrangements so that they work in the relevant countries. If these proposals are implemented, and CAR no longer applies to new agency arrangements, additional work, and legal advice, is likely to be required.

Are you looking at agency arrangements for services?

Whilst CAR applies to goods, not services, it is not always clear what may constitute goods for these purposes (for example software has been found to be “goods” in certain circumstances). Whilst the Directive also applies to goods, not services, member states may have extended this to apply to both goods and services. 

The application of CAR to a supply of both goods and services (for example aftersales and the supply and fitting of spare or replacement parts) is uncertain. 

It may be useful to consider legal advice on whether CAR applies and how best to structure such arrangements (for example separate commission payments, separate arrangements for goods and services, separate templates, separate arrangements for each country etc.).

Have you previously discounted agency as a possible route to market?

Currently whether CAR applies can often be a significant factor in determining if a principal chooses to appoint an agent, distributor, reseller, franchisee or other intermediary.

Depending on your reasons for discounting agency, it may be useful to monitor the situation and consider legal advice, when appropriate, on which models may best support your current requirements (for example given the proposals on the future of CAR, on developments in competition law and the competition law concept of non-genuine agency – any changes to CAR will not impact how competition law applies and careful strategic consideration needs to be given to how competition law will impact on the arrangements, including the relative pros and cons of genuine and non-genuine agency models).

Have you not yet thought about agency as a possible route to market?

It may be useful to monitor the situation and consider legal advice, when appropriate, on which models may best support your current requirements.

Are you currently reviewing your arrangements with distributors and other intermediaries?

It may be useful to consider including certain amendments to try and preserve flexibility until there is greater clarity on the future of CAR (for example to assist future migration to agency if and when that becomes relevant).

 

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