Since the introduction of the Commercial Agents (Council Directive) Regulations (‘the Regulations’) in 1993, commercial agents have long since benefitted from an extra layer of statutory protection than those afforded to employees.
The Regulations were introduced to ensure that the law of agency in the UK was aligned with other EU Member States. Since the UK’s departure from the Common Market, the Regulations continue to have effect in the UK as retained EU law.
The Regulations provide a statutory framework for any agreement between a principal and its commercial agent. They confer duties upon both principals and agents.
They also allow agents to receive compensation (on either the ‘compensation’ or ‘indemnity’ basis) on termination of the agency agreement, save in certain circumstances.
As with a contract of employment, principals will often seek to protect their interests by including restrictive covenants to restrain the activities of a commercial agent upon the termination of an agreement.
Regulation 20 sets out the requirements for any post-termination restrictions to be valid.
This article considers the common law position concerning restraint of trade and sets out the parameters prescribed by Regulation 20, which will both apply to a commercial agency agreement that is governed by English law.
Restraint of Trade – The Position at Common Law
Although it is well established that the doctrine of restraint of trade applies to covenants in employment contracts and between buyers and sellers of a company, the position is slightly more nuanced where the commercial agency is concerned.
While restrictions during the lifetime of the agreement are likely to be deemed acceptable, more caution is required with post-termination covenants.
The courts look at the parties’ relationship and consider whether it is analogous to an employment relationship.
Where the doctrine of restraint of trade applies, clauses which seek to restrict trade are regarded as void (and therefore unenforceable) unless they are designed to protect a legitimate business interest and are no wider than is reasonable.
This test is applied by reference to the interests of the parties concerned and the interests of the public.
In determining if the clause is void, the courts will consider the parties’ respective bargaining positions and the nature of the restriction.
Critically, it will consider whether the restraint goes further than is necessary to protect a legitimate business interest and whether it is reasonable between the parties.
The effect of Regulation 20 is that to be effective, any post-termination restraint of trade clause
- Be concluded in writing. A written memorandum of an oral agreement will not suffice for these purposes.
- Relate to the geographical area, group of customers and kind of goods covered by the agency.
- Last for no more than two years from termination.
- Comply with competition laws and common law restraint of trade principles.
Whether a clause drafted to last more than two years will fail in its entirety will depend on any severance clause in the agreement and whether the ‘blue pencil test’ applies.
In other words, if the clause is too wide in its scope, can words be deleted to ‘narrow’ the scope of the clause and thus make it enforceable?
In the context of commercial agency, there have also been cases where restrictive covenants for less than two years have been deemed invalid, violating the common law principles described above.
To be confident of enforceability, parties should seek advice concerning any post-termination restrictions before entering into any agency agreement.
One must balance the requirements set out in the Regulations with the common law position and competition laws.
Written by Suzanne Carr.
Partner | Dispute Resolution & Commercial Litigation