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Jonathon wants to appoint an agent to sell the Jones & Family Footwear (JFF) products to customers on the company's behalf. Agency is the situation where one person (the agent) is authorized to act on behalf of another person (the principal), to create a legal relationship with a third party.
Agency agreements, under paragraph 12 of the Guidelines on Vertical Restraints, cover the situation in which an agent is vested with the power to negotiate and/or conclude contracts on behalf of the principal in the agent's name or in the name of the principal, for the purchase of goods or services by the principal, or sale of goods or services supplied by the principal. An agency agreement is designed from the point of view of the principal and the customers will have no legal relationship with the agent.
Advantages and Disadvantages of appointing an Agent
Jonathon might wish to appoint agents for the sale of company's products for several reasons. However, he should be aware of the advantages and disadvantages offered by an agent.
Agents have good local market knowledge, and appointing an agent allows the principals to have better control of the product in the market, and over the terms of sale and marketing, and keeps their association with the customers. Agents know the market and they can help the principals with local rules as they usually have an established network of traders and a customer base, so the principal can save, by appointing an agent, costs and time. Finally, agents deal with the clients in helping to raise their export sales and can be useful for large items exports.
On the other hand, the agents might make the principal criminally liable, as the principal is responsible to customers to whom the agent sells the products. The agents act's binds the principal to agreements made by the agent. Principals can be considered as trading in a territory if they have agents there, who carry the credit risk on all transactions and they increase tax concerns. Also a principal owns to agent a lien as security for sums. In an agency agreement, the principals bear the financial risk and the cost of deliveries and they need to supply a range of clients, which can consequence in a quite intricate distribution process.
Jonathon is considering appointing an agent in UK, but to also cover France, Germany and Belgium. When appointing an agent, the principals have to think whether to list all their goods or only those which they believe they sell more successfully in the agent's territory. In the agency agreement it is important to define the territory. As many countries have their own laws in agency, an agent based in one country might not be able to work successfully in a different country and is better for Jonathon to have separate agents in each country.
Agency and Competition Law
If Jonathon wants to appoint an agent without infringing any EC Competition Provisions, he should be aware of the extent of responsibility he will pass to him. The definition of Commercial Agent is given in Regulation 2(1) of the Commercial Agents (Council Directive) Regulations 1993: "a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of the principal, or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of the principal".
Article 81(1) of the EC Treaty prohibits agreements between undertakings; decisions by associations of undertakings and concerted practices which may affect trade between Member States and which prevent restrict or distort competition. These agreements shall be void according to 81(2).
In Hofner and Elser v Matrocton is stated that: "The concept of an undertaking encompasses every entity engaged in economic activity regardless of the legal status of the entity and the way it is financed". If Jonathon appoints an agent it will be an agreement between economically independent undertakings because it will be an economic activity where he will offer his goods on the market by using agents on a concerted practice.
Section II of the Guidelines on Vertical Restraints deals with vertical agreements which fall outside Article 81(1). Vertical agreements are defined by Article 2(1) of the Block Exemption Regulation as "agreements or concerted practices among undertakings each operating, for the purposes of the agreement, at a different level of the production or distribution chain, under which the parties may purchase, sell or resell certain goods or services".
Articles 12-20 of the Guidelines set out criteria for the assessment of agency agreements. Article 81(1) does not apply to agreements of minor importance and to genuine agency agreements.
Paragraph 13 of the Guidelines states that in "genuine agency agreements, the obligations imposed on the agent as to the contracts negotiated and/or concluded on behalf of the principal do not fall within the scope of application of Article 81(1). The determining factor in assessing whether Article 81(1) is applicable is the financial or commercial risk borne by the agent in relation to the activities for which he has been appointed as an agent by the principal."
Financial and Commercial Risk
There are two types of financial or commercial risk. There are the risks that are directly related to contracts concluded and negotiated by the agent on behalf of the principal and there are those that are related to market-specific investments, risks that the agent undertakes in order to be appointed. The agreement is a genuine agency agreement falling outside Article 81(1) if the agent does not bear any of these two types of risk. It is important for Jonathon not to pass to the agent any financial or commercial risks if he doesn't want to infringe any EC competition provisions.
Paragraph 15 provides that the agreement falls outside article 81(1) where the agent bears no or only insignificant risks in relation to either of these matters : "In such a situation, the selling or purchasing function forms part of the principals activities, despite the fact that the agent is a separate undertaking". If the agent accepts such risks, is considered as an independent dealer, and the agreement is infringing article 81(1).
Paragraph 16 provides that "the question of risk must be assessed on a case by case basis". Where the property of the goods does not vest in the agent, or where the agent does not supply the contract services, Article 81(1) will not be applicable. Article 16 has a "non exhaustive" list (Article 17) of indications where an agent is not accepting those risks.
The application of the vertical guidelines has been considered on a number of cases such as Bundeskartellamt v. Volkswagen AG and VAG Leasing GmbH where it was held that agents could not be regarded as genuine agents if they form an integral part of its turnover as independent manufacturers of products. The dealers bore part of the financial risks of leasing vehicles and carrying out their sales and after sales business independently.
If Jonathon wants to appoint an agent, he has to consider the advantages and disadvantages of appointing an agent and is better to make a genuine agency agreement where Article 81(1) does not apply. Under Paragraph 18 of the Guidelines, where the agency is genuine, the agreement does not fall within the scope of Article 81(1) and all obligations on the agent will fall outside Article 81(1). Jonathon can define the scope of agent's activity without passing him any financial or commercial risk, which is the determining factor in assessing whether Article 81(1) is applicable.
Many contracts contain exclusion clauses, by which a party seek to exclude or limit, liability for breaches, or other liability arising by the contract. Section 55 of the Sale of Goods Act 1979 states that the parties are free to exclude the terms implied by the Act to a sale of goods contract, subject to the Unfair Contract Terms Act (UCTA) 1977.
The party wishing to rely on an exclusion clause has to prove that the clause was incorporated into the contract and covers the loss which has been suffered. In Scheps v Fine Art Logistic, Teare, J held there was no evidence that the plaintiff had knowledge of the terms of the defendant, and the defendant never gave a copy of the terms. Therefore, the terms were not incorporated into a contract as the party seeking to rely on.
A party whose terms are used can rely upon reasonable exclusion clauses if the contract is concluded on written standard terms of business, or with a consumer. Guidelines to the operation of the reasonableness test can be found in UCTA 1977 and from case law.
The requirement of reasonableness
Section 11(1) of the UCTA states that "the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made". The onus of proving that a term is reasonable is on the party seeking to benefit from that term.
The requirement of reasonableness applies to terms excluding liability for negligence. It also applies when the buyer is not a consumer if the exclusion clause relates to the implied conditions in sections 13-15 of the UCTA and to contracts where they are on one party's standard terms of business and to any term which has not been negotiated.
Under section 3 of the Misrepresentation Act 1967, an exclusion of liability for misrepresentation must satisfy the requirement of reasonableness. Section 8 of the UCTA 1977 substitutes the Misrepresentation Act 1967, section 3. In Thos Witter v TBP Industries, it was held that a clause excluding liability for misrepresentation was unreasonable as it purported to exclude liability for fraudulent misrepresentation
Contracts in relation to goods
Sections 6 and 7 of the UCTA, deal with exclusion or limitations on implied terms, contained in the Sale of Goods Act 1979, relating to exclusions in contracts for the sale or supply of goods. They provide, that other than where a party is dealing as consumer, the implied terms relating to correspondence with description (section 13), satisfactory quality, fitness for a particular purpose (section 14 (2) and (3)) and correspondence with sample (section 15) can be excluded if the exclusion clause satisfies the requirement of reasonableness.
The Court in R & B Customs Brokers Co v United Dominions Trust held that the contract it would not be made 'in the course of a business', if it was incidental to the company's main purpose and that the sale of a car was a consumer sale and so the requirement of reasonableness did not arise.
In determining, for the purposes of the provisions relating to sale, hire-purchase and miscellaneous contracts under which goods pass, whether a contract term satisfies the requirement of reasonableness, regard shall be had to the Guidelines in Schedule 2 of the UCTA which are relevant to terms, which seek to exclude, or limit liability for a breach of the terms implied into contracts. Treitel commented: "Guidelines help to reduce the uncertainty to which the requirement of reasonableness gives rise; but the restrictions on their scope are hard to understand". In Zockoll Group v Mercury Communications the Guidelines were used in considering reasonableness of a term caught by section 3(2) of the UCTA.
One case on the issue of reasonableness is George Mitchell v Finney Lock Seeds. The plaintiff bought seeds from the defendant and he planted it, but it was defective. He claimed damages for breach of contract, based on the loss of the crop. The defendants were relying on a clause in the contract which limited their liability to the cost of the seeds. It was held that although the clause was part of the agreement, it was unreasonable because the practice of the seller was to negotiate settlements of reasonable claims; the breach was a result of seller's negligence.
In R W Green v Cade Bros Farm there was a contract for the sale of seed potatoes which excluded liability for consequential damage and limited the responsibility of the sellers to returning the price. The buyers suffered loss because the potatoes were infected with a virus. Griffiths J upheld the limitation clause as reasonable though he struck down as unreasonable a clause requiring the buyers to give notice of a claim within three days of delivery.
Judicial approaches to the requirement of reasonableness
Many decisions of the courts have given sign of the factors that might be related in determining whether a clause satisfies the requirement of reasonableness.
An approach to explain what is "fair and reasonable" has made in Smith v Eric Bush. Lord Griffith suggested four points that may be considered: 1) Equality of Bargaining Powers, 2) How practical was it to obtain independent legal advice regarding the term? 3) How difficult is the task being for which liability is being excluded? 4) What are the consequences of ruling that a term is unreasonable? Conditions 1 and 2 are similar to factors (a) and (b) in Schedule 2 of the UCTA, and condition 4 highlight the significance of the availability of insurance which under section 11(4) of the UCTA, is a factor in determining whether is reasonable a clause limiting liability. Also section 11(4) state that where the exclusion clause seeks to limit liability to a specified sum of money rather than exclude it completely, the court must have regard and the resources available to meet the liability.
In St Albans City & District Council v International Computers Ltd the defendant's standard conditions limited liability to £100,000. Scott Baker J held that the term was subject to section 3 of the UCTA and section 11(4) applied because the defendants restrict their liability to a specific sum. Also either section 6 or 7 applied. He held that the term was unreasonable because the parties were of unequal bargaining power and ICL had not justified the figure of £100,000 which was small in relation to the potential risk and the actual loss. Also the defendant was insured for an aggregate sum of £50m worldwide and ICL was better able than the Council to insure. This limitation was held by the Court of Appeal to be unreasonable.
In Stewart Gill v Horatio Myer & Co. it was held that reasonableness is assessed at the time of contract and the Court must evaluate the clause as a whole; it cannot sever unreasonable parts of a clause. Staughton J held in Stag Line v Tyne Repair Group that the fact that the terms of the contract are in a small print, or difficult to understand, is an argument against their reasonableness.
In Edmund Murray v BSP International Foundations, BSP supplied Murray with a drilling rig but it was alleged not to be able to do what it was contracted to do. BSB excluded on terms all its liabilities except for replacement of defective equipment. The Court identified that it was not reasonable for the party in breach to rely on an exclusion clause for failing to meet the specifications of the other party.
Equality of bargaining power
The equality of bargaining power is an important factor according to the Guidelines of the UCTA and to the decision of the House of Lords in Smith v Bush, for a clause to pass the reasonableness test.
In Watford Electronics v Sanderson CFL there was a contract for the supply of software and the claimant sought a variation of the limitation and obtained some improvement to it. Chadwick LJ noted: "Where experienced businessmen representing companies of equal bargaining power negotiate an agreement, they should be taken to be the best judges of the commercial fairness of the agreement and of the question whether the terms were reasonable. The Court should not interfere unless satisfied that one party had taken unfair advantage of the other or that a term was so unreasonable that it could not have been understood."
There was a similar approach and in Granville Oil& Chemicals v Davies Turner & Co. The Court stated: "The 1977 Act plays an important role in protecting vulnerable consumers from the effects of draconian contract terms. But I am less enthusiastic about its construction into contracts between parties of equal bargaining strength, who should be considered capable of being able to make contracts of their choosing and expect to be bound by their terms".
In Britvic Soft Drinks v Messer UK it was considered that the approach in Watford should be seen against the background of facts of that case and not on the equality of bargaining power. The goods which supplied to be incorporated in the product were not of satisfactory quality and the Court held that the clause which excluded liability for breach of the requirement of satisfactory quality was unreasonable. The exclusion of liability for faulty equipment and liability for faulty work cannot be excluded.
The reasonableness test is flexible and the requirement of reasonableness stands at the centre of the process of the UCTA but there has been development and in Common Law. The reasonableness requirement in sale of goods contracts is confined by some features such as the parties bargaining strength, the experience of the buyer and who is best placed to insure the loss, which the Courts consider when they have to decide whether a term in the contract meets that requirement. It can be seen that clauses are subject to the requirement of reasonableness by the UCTA, but they apply if the Courts consider that it is reasonable for them to do so.
Jonathon wants to appoint distributors, one in each of the three countries. To appoint the distributors, Jonathon has to make a distribution agreement with them. Distribution agreement is a vertical agreement where suppliers agree to supply distributors with goods, and distributors sell them to their customers in a specified territory. The customers would have no contract with the supplier. Distributor is an independent party who bears the risk in transactions with third parties.
Vertical Agreements Block Exemption
Article 81(1) of the EC Treaty of Rome prohibits as incompatible agreements between undertakings, that may affect trade between Member States and which prevent, restrict or distort competition. If Jonathon offers his products on the market using the distributors on a concerted practice, it will be an agreement between undertakings.
A distribution agreement which have anticompetitive results can be exempted under article 81(3), which makes Articles 81(1) prohibition inapplicable, and allows restrictive contractual conditions to be imposed, provided that they contribute to consumer benefit and "economic progress".
If the distribution agreement meets the conditions set out in the Block Exemption Regulation which applies to vertical agreements, then is exempted from Article 81(1). The agreement must not contain any hard-core restrictions or non- compete obligations. Also the block exemption will not apply where the supplier's market share exceeds the 30%.
Hard-core restrictions in vertical agreements include resale price maintenance and territorial and customer restrictions on resale. There are hard-core restrictions which apply to agreements between competitors, and agreements between non competitors. If one hard-core restriction is present in the agreement, the agreement will lose the benefit of the block exemption so Article 81(1) may apply.
Jonathon wants his distributors to sell at the recommended retail price, which he will set. Article 4(a) of the Block Exemption Regulation, concerns resale price maintenance. The restriction on the buyer's ability to determine his sale price amounts to a hard-core restriction. However, Paragraph 47 of the Guidelines states that "the provision of a list of price recommendations by the supplier to the buyer is not considered in itself as leading to resale price maintenance" if they do not amount to a fixed or a minimum sale price. In Pronuptia de Paris v Pronuptia de Paris Irmgard Schillgalis, the Court held that the recommendation of prices would not infringe Article 81(1). If Jonathon recommends retail price it will not be a hard-core restriction according to paragraph 47 which recognizes that the recommendation of prices is not a hard-core restriction.
Jonathon is prepared to give the exclusive right to each distributor to sell in their appointed country and will agree not to sell direct to customers in those areas, regardless of whether the customer contacts him or not. Article 4(b) states that restricting sales by the buyer into specified territories or to specified customers is a hard-core restriction. Distributors must remain free to decide where and to whom they sell. Paragraph 49 of the Guidelines recognizes two restrictions on buyers that would not be considered as hard-core under 4(b): a prohibition on resale except to certain and users for which there is an "objective justification related to the product", and an obligation on the reseller relating to the display of the supplier's brand names. There are exceptions to 4(b), such as restriction "of active sales into the exclusive territory or to an exclusive customer group reserved by the supplier or allocated by the supplier to another buyer". 'Active sales' are defined in paragraph 50 of the Guidelines and it means actively approaching individual customers inside another distributor's exclusive territory or exclusive consumer group.
Jonathon has to specify the distributor's territory and he may be able to restrict active sales according to paragraph 50 of the Guidelines. The agreement between Jonathon and the distributors it will be an exclusive distribution agreement, where a supplier agrees to sell the contract products only to the distributor within a defined territory and not to appoint other distributors or sell the products directly to other customers within the territory.
According to Paragraph 66 of the Guidelines, the Block Exemption Regulation exempts vertical agreements if there is no hard-core restriction, as set out in Article 4, contained in or practiced with the vertical agreement.
Non-Compete obligations after the termination of the agreement
Jonathon likes to ensure that the distributors do not compete with JFF for at least three years if they terminate the distribution agreement. Article 5(b) of the Block Exemption Regulation concerns post term non-compete obligations. Any obligation causing the buyer not to manufacture, purchase, sell or resell goods or services after the termination of the agreement is excluded from the exemption of the Block Exemption Regulation, "unless the obligation is indispensable to protect know-how transferred by the supplier to the buyer, is limited to the point of sale from which the buyer has operated during the contract period and is limited to a maximum period of one year after termination of the contract".
The know-how must result from "experience and testing by the supplier" and includes information which is indispensable to the buyer for the use, sale or resale of the contact goods or services. The benefit of the block exemption is lost to that part of the agreement which does not comply with the conditions set out in Article 5, according to Paragraph 67 of the Guidelines.
Jonathon can agree with the distributors that they will not compete with JFF for a period of one year after the termination of the agreement. There is no prejudice to the possibility of prohibiting the use and disclosure of know-how for an unlimited time.
If an agreement does not exceed the 30% threshold, and does not contain any hard-core restrictions or non-compete obligations then the agreement is exempted from Article 81(1). Recommended prices set by Jonathon should be carefully analysed to ensure they could not be a hard-core restriction under article 4(a). Also he may legally prevent a buyer from selling actively to customer groups or territories reserved exclusively for the supplier or another buyer. However, he can't agree with the distributors that they will not compete with JFF if they terminate the agreement for a period of three years, but only for one.