Commercial law

Charlie used to run his own business as a chocolate maker. He had one shop from which he used to sell the chocolate that he had produced from his own cocoa beans plantation in Brazil. Unfortunately a large high street retailer, McChocolate plc, opened a store near to his shop. After a short time Charlie found it increasingly difficult to compete on price, although his chocolate was of a far superior quality to that produced by McChocolate plc. As a result he approached McChocolate plc to offer his services as a seller of the company's chocolate.

Charlie and McChocolate plc agreed to the following terms on 1 April 2006.

(i) Charlie would close his shop and act exclusively as a self employed seller of chocolate for McChocolate plc. He would make all decisions concerning sales. Charlie was given a list of clients and told that he was to represent McChocolate plc in all EU countries. If McChocolate plc were approached directly by anyone else wishing to buy chocolate from them they would refer them to Charlie.

(ii) Charlie would be paid a commission based on the value of products that he sold. There was a clause in the agreement under which Charlie agreed “not to engage in the chocolate trade for a period of six years after the termination of (his) association with McChocolate plc”. The agreement was to last for three years in the first instance, (starting on 1 June 2006), with the option to renew it after that.

(iii) Initially the arrangement worked well and Charlie sold large quantities of chocolate to customers in France, Spain, Italy and Germany. However, on a visit to two customers of McChocolate plc in January 2007, Charlie discovered that both the first from Switzerland and the second customer located in Belgium had had some chocolate orders taken directly by McChocolate plc.

(iv) In June 2007 Charlie received a letter from McChocolate plc's managing director which informed him that the company had decided to appoint another agent for international sales as the workload was considered too much for one person. McChocolate plc appointed Hillary as the new agent. As a result Charlie's income from commission decreased by 50%.

(v) Upset by the amount of loss he had suffered, Charlie cancelled his contract with McChocolate plc and opened a new store. Although Charlie provided all of the finance, the new store was put in the name of Paul, who agreed to act as a nominee for Charlie.

Turn Over

By reference to case law and statute where appropriate explain the following (all questions carry equal marks):

a) What types of authority has Charlie been given?

[1]The scope of Charlie's (A) agency would depend on what type of authority he has been given by McChocolate plc - the Principal (P). We are told that A is a contractual agent who would act exclusively as a self-employed seller of chocolate for P. Given the fact that P has given prior consent to A to the effect that he would make all decisions concerning contracts for sales of chocolate, thus altering P's position in relation to third parties, A can be said to have ‘actual authority'. As explained by Lord Diplock LJ in Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, actual authority will be conferred on A under the terms of the agreement of the contract between them and applying ordinary principles of construction of contracts.

[2] A's ‘actual' authority will be twofold: from the facts, it does not appear that (A) is restricted in any way as to how he is to perform. In Ashford Shire Council v Dependable Motors Pty Ltd [1961] AC 336, the Privy Council held that whereby A has authority in the form of a document not under seal or orally, it is construed liberally, with regard to the purpose of agency and the usages of such language in trade or business. Thus, A would have express ‘actual' authority.

[3] Similarly, A would also appear to have implied actual authority. This is illustrated by the case of Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549. As Lord Denning MR explained, it is implied when it is inferred from the conduct of the parties and the circumstances of the case, in effect, P authorises A to do all such things as fall within the usual scope of that office. Given that P has not by any express words restricted the mode of how is to A is to perform then he could be said to have customary authority. In other words, A has the implied authority to act in accordance with the usages and customs of the particular market place or business in which he acting, so long as those usages or customs are reasonable and lawful.

[4]In addition, A appears to have apparent or ostensible authority. However, three factors must be present to give rise to apparent authority. This was best explained by Slade J in Rama Corpn Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147: (i) P must have made a representation to a third party that A had the authority; (ii) the third party relies on that representation; and (iii) the third party alters his position in reliance to the representation. In effect, it would depend on what representations P makes to third parties. Where these elements are satisfied, P is estopped from denying that A has such authority.

b) What steps may Charlie take in respect of the orders taken directly by McChocolate plc?

[1]The Commercial Agents (Council Directive) Regulations 1994, commonly known as the Commercial Agents Regulations (the regulations) came into effect on 1 January 1994 to govern the relationship between Principals and Commercial Agents in the EU. For A to qualify under the regulations, he must meet the criteria as stipulated in Reg 2.

[2] A would qualify as he is a self-employed seller or intermediary ‘who has continuing authority (Light v Ty Europe Ltd [2000] EWHC 174 (QB) to negotiate the sale or purchase of goods on behalf of P, or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that P” in accordance with Reg 2. (1); (Parkes v Esso Petroleum Co Ltd (1999) 18 Tr LR 232).

[3] Under Reg 7(2), A would be entitled to commission on transactions concluded during the period covered by the agency contract as he has been given the exclusive right to the EU specific geographical area or to a specific group of customers, so long as transacts with a customers belonging to that area or group.

[4]Therefore A has a right to earn commission and this should be paid during the period of his agency contract (Reg 7(1)). Thus as he is selling the chocolate, it is considered altering the contractual position of P with respect to third parties (Reg 7(1)(a)). Furthermore, if this results in repeat orders for chocolate then he will be entitled to commission based on the transaction of the same kind (Reg 7(1)(b).

[5] A would also be entitled to commission on transactions concluded after the contract has been terminated. Under Reg 8(a) and (b), subject to Reg 9(1), A would be entitled to the commission in full for contracts attributed to his efforts in procuring them up to the time he was the P's commercial agent or a reasonable time after the contract was terminated. In addition, any orders placed directly with P or A himself before the agency terminated.

[6] In order to ensure that he is getting the correct commission, not only for the orders that he has sold, but also for the contracts that P have concluded with customers within the EU. Under Reg 12(2), A is entitled to demand that he inspect the P's books to check the amount of commission due to him.

c) What remedies are available to Charlie in relation to his 50% decrease in his commission?

[1] The first point to consider is the duties of A to P and vice-versa under the Regulations to see if there has been any breach of the terms. Regulations 3 and 4 set out the duties and obligations on behalf of both A and P. These duties are implied into the terms of the contract and cannot be derogated from (Reg 5). Under Reg 3, the duties of a commercial agent to his principal are:

  • a) A must look after the interest of P and act dutifully and in good faith;

  • b) A must make proper efforts to negotiate and where appropriate conclude the transactions as instructed by the P;

  • c) A must communicate to P all necessary information to him and

  • d) A must comply with reasonable instructions by P.

Equally, under Reg 4, the duties of a Principal to his commercial agent are as follows:

  • a) P must also act dutifully and in good faith;

  • b) P must provide A with all relevant documentation in relation to the goods concerned;

  • c) P must obtain for A all information necessary for the performance of his contract and notify A within reasonable time if he anticipates the volume of commercial transactions will be significantly lower than the agent could normally have expected;

  • d) P must inform A within a reasonable period of his acceptance or refusal upon any non-execution by him of a commercial transaction which A has procured for him

[2]The next point to consider is whether P acted lawfully in decreasing A's commission. A's entitlement to the commission is twofold. By virtue of Reg 7(1)(a) and (b) A is entitled on transactions concluded by him during the agency contract where it has been concluded as a result of his action, or the transaction is concluded with a third party whom he has previously acquired as a customer for a transaction of the same kind. More importantly, under Reg 7(2), A is entitled to the commission on transactions concluded during the period covered by his contract where he has an exclusive right to a geographical area or a specific group of customers.

[3]On the facts, Hillary is appointed to international sales; that is to say, she is exclusive to sales outside of the EU countries, meanwhile A is given a client list exclusively for all EU Countries. Therefore, A is to receive his commission in full for EU sales and Hilary the same for International sales respectively. Therefore, A should not have had his commission decreased at all. Thus, P would be in breach of his duty to act in good faith to pay A's commission in full under Reg 7. As a result, P's actions would allow A a potential right to terminate the contract for breach in lieu of notice.

[4] Furthermore, under Reg 8(a) and (b) A would be entitled to the commission in full for contracts attributed to his efforts in procuring them up to the time he was the P's commercial agent or a reasonable time after the contract was terminated. In addition, any orders placed directly with P or A himself before the agency terminated.

[5] Finally, by virtue of Reg 9(2) P is liable to A for any amount of commission due under Reg 9(1) that has already been paid to Hilary; all monies she has received must be refunded to P. The commission due must be paid not later than on the last day of the month following the quarter in which it became due: Reg 10(3).

d) To what extent has Charlie acted lawfully in repudiating his contract with McChocolate plc and establishing his own business using Paul as a nominee?

[1] Whereas A is appointed for a fixed term, termination by him before the expiry of the term will be a repudiatory breach of contract, unless justified by a prior breach by the other party. It is not necessary that A is aware that P was in breach at he time of termination: Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339. Therefore A's immediate termination without notice can only be lawful if he can later prove that P was in breach of the terms of the contract or the Regulations.

[2] Where the Commercial Agent (Council Directive) Regulations 1993 apply, they stipulate minimum periods of notice which must be given to terminate the agency. Reg 15 covers termination; A would be required to give two months notice by law under Reg 15 (2) (b) as his second year of agency has already commenced. However, under paragraph (4) if there is no agreement between P and A as to notice of termination, then A is required to give notice which must coincide with the end of a calendar month. Therefore, he must give notice to terminate at the end of July in lieu of notice under para. (2).

[3]In commercial agent contracts, restraint of trade clauses fall under Reg 20. In effect, such a clause will only be valid if it is concluded in writing and it relates to the geographical area or group of customers and the geographical area entrusted to the commercial agent and to the kind of goods covered by his agency under the contract. Furthermore, such a clause would only be valid for two years if upheld.

[4]On analysis of the facts given, the clause was incorporated into A's contract in writing in accordance with Reg 20 (1)(a). However, it is arguable that the clause would satisfy the requirements of Reg 20(1)(b), it makes no reference in relation to the EU and its customers for which A is entrusted. However, it will be a matter for the courts to decide to allow the clause or not upon its proper construction and the test of reasonableness. If it is held to be valid, A would be restrained from engaging in the chocolate business with the EU for two years.

[5]In establishing his own business, A may argue that he is not engaging in the restricted trade as a former commercial agent of P. Further to this, A has provided all the share capital to establish his new company but he is using Paul as his nominee. As it relates to the restraint of trade clause and the forming of the company on a whole, the facts are identical in principle to the classic case of Gilford Motor Co Ltd v Horne [1933] Ch 935. In that case, the veil of incorporation was lifted whereby corporate identity was used to evade contractual obligations of a restraint of trade clause. In the instant case, clearly, A is using his newly formed company and his nominee as a ‘cloak' or ‘sham' to evade the clause. On this principle, it follows that P would able to get injunctive relief to stop A from engaging in the chocolate trade for the two year period.

“Dealing in the course of a business”

*The differing provisions when dealing in the course of a business.

The circumstances of a contract between two parties who are both in business may differ significantly from those relating to a contract between a business and a consumer. To what extent is this difference sufficiently recognised in the legislation relating to the Sale of Goods Act 1979 and to Unfair Contract Terms Act 1977 and by the judiciary in applying this legislation?

[1] The definition in law as to whether a buyer is dealing as a consumer ‘in the course of a business' has been the subject of much academic debate. The same phase appears in a number of statutes whereby there have been conflicting interpretations. Although the differing provisions and the case law that surround them may seem anomalous, the main objective is to widen consumer protection in accordance with public policy. This discussion will attempt to provide a chronological analysis of the issues.

[2] For the purposes of the Trade Descriptions Act 1968, the courts took a more restrictive approach since the Act largely imposed criminal liability. Thus, in Davies v Sumner [1984] 3 All ER 831, Lord Keith opined that s1(1) of the Act was not intended to cast a broad net to include almost any and every sale. For the purposes of the Act, the meaning of the phrase would only be regarded if; (a) the transaction is an integral part of the business or (b) there is sufficient regularity of similar transactions. However, this must be contrasted with the decision in Havering London Borough Council v Stevenson [1970] 3 All ER 609. In that case, it was recognised that a one-off venture in the nature of trade with a view to a profit could also be a sale in the course of trade or business because the transaction itself constituted a trade.

[3]Consideration should now be given to the approach taken to the phrase ‘in the course of a business' in the Unfair Contract Terms Act 1977, where is it central to the meaning of ‘deals as consumer'. Section 12(1) defines ‘dealing as consumer'; the key difference is whether the buyer is an individual or a company. If the buyer is an individual then two conditions apply; (i) the buyer cannot contract in the course of a business and (ii) the seller must contract in the course of a business. If the buyer is a company then a third rule applies; the goods supplied must be goods that are normally supplied to consumers. This is of major significance as it relates to s3, which renders ineffective unreasonable exemption clauses where the party seeking to rely on it claims to ‘deal as consumer'. In addition, s6 which prevents a seller excluding or restricting liability for breach of terms implied by the Sale of Goods Act 1979, ss 13-15.

[4]In R&B Customs Brokers v UDT Finance Ltd [1988] 1 All ER 847 the Court of Appeal considered the meaning of the phrase for the purposes of the UTCA 1977 The claimant, a freight forwarding company, had bought three cars over a five year period. One of the cars was found not to comply with the terms implied by the Sale of Goods Act 1979 s14(2) and 14(3), the question before the court was whether the sellers could exclude liability for breach of those terms as the buyer was dealing as a consumer within the definition of s12 UTCA. The Court of Appeal followed the case law under the Trade Descriptions Act and held that the claimant was not acting in the course of a business but was dealing as a consumer.

[5] The decision in R&B Customs Brokers widened the definition of ‘consumer in the 1977 Act and hence the scope of consumer protection. It allowed for incidental and not regularly occurring business purchases to gain protection. Although providing consumer protection under the 1977 Act, the approach taken in R&B is restrictive in and of itself because of the use of the phrase ‘in the course of a business' in both s12(1)(a) and s12(1)(b). For example, if R&B had bought the car without defects and then sold it to X whom clearly had no business connections. On the approach taken in R&B, X would not have bought in the course of business; (s12(1)(a), in order for X to have dealt as a consumer the same requirement is necessary under s12(1)(b) and equally that would not have been the case.

[6]However, if the same approach were to be applied under s14 of the SGA 1979, it would restrict the scope of consumer protection. In Stevenson v Rogers [1999] 1 All ER 613 the Court of Appeal had to consider the meaning of ‘in the course of a business' in the context of the SGA 1979, s14(2). The defendant R had sold his Trawler the Jelle to S in April 1988. The plaintiff complained that the Jelle was not of mercantile quality within the terms implied by the SGA, s14(2). However, a requirement of mercantilability was only implied if the sale was made ‘in the course of a business'. The Court of Appeal based its decision on the legislative history of the SGA provisions and took the purposive approach to distinguish R&B Customs Brokers and the cases it followed, and held that there is no requirement of regularity for a sale to be in the course of a business under the SGA. The court concluded that a sale ‘in the course a business' under the Act is a sale whenever it is otherwise than a purely private transaction.

[7] Strictly speaking, therefore, R&B remains good law for the purposes of interpretation of the phrase under the UCTA 1977. It is questionable however, whether R&B can be reconconciled with Stevenson. So it can be said that ‘in the course of a business' means on thing when considering s14 of the SGA 1979 and a different thing when considering whether a person was dealing as a consumer for the purposes of s12 UCTA 1977. It can be seen from the decision in St Alban's City and District Council Ltd v International Computers ltd [1995] FSR 686, the courts are departing the Approach in R&B. However, recently, in Feldaroll Foundry plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747, the Court of Appeal confirmed that R&B and Stevenson were correctly decided. It therefore seems likely that in due course either R&B or Stevenson will have to be reconsidered, and it is submitted by academics that it is R&B that should go.