The motor trade as self-employed commercial agents

 Dealers, or retailers as they are often called or distributors as the Block Exemption refers to them (and as I will do below), could enjoy new legal protection because of the accelerating move towards converting networks into collections of agents. While there's a lot of talk about the form of any future block exemption, more important is the fact that it has no application to the agency model and distributors should be looking elsewhere for legislation that affects their relationship with the manufacturer.

Distribution and agency

The first thing to understand is the nature of the principal-agent relationship. I remember trying to teach Legal Practice Course students about this, over 20 years ago, and the concept seemed be surprisingly difficult for them. The whole idea of an agent is that he, she, they or it acts on the instructions of the principal: within the scope of the agency agreement, the agent has no, or limited, freedom of movement. It's a concept that we encounter in many contexts: for one example, a company lacks the ability to do anything itself - it can only make things by using human agents (employees) to do the work for it.

Agents do enjoy different levels of autonomy, depending on the nature of the agreement. Some employees, for example, are specifically engaged to do creative work and therefore enjoy more freedom to spend their working time as they think appropriate: others are there just to put machines together, and giving them scope to do that however they want would result in chaos. Distributors already act as agents for their suppliers in some respects, and generally the agency agreements they have show that the supplier recognises that dealers have expertise that they need to be free to use.

The key feature of an agency relationship is the allocation of risk. A distributor buys cars and parts and sells them on their own account: there is a lot more to it, inclusing sales targets, bonuses, and consignment and financing arrangements, but in essence the distributor is a retailer (and is often called just that). If the cars don't sell, the distributor makes no profit. If the cars are damaged in the showroom, then in principle the loss is the distributor's (though in practice the cars will usually be on consignment, so still the supplier's property). An agent, on the other hand, finds buyers for the principal's goods, then either makes the contract on behalf of the principal or drops out of the picture and leaves the customer and supplier to make their own deal.

So far so good, or bad as the case may be. The line between distributor is not, however, as clear as it might be. In Case 266/93, Budeskartellamt v VW AG, VAG Leasing GmbH and VW Haendlerbeirat eV, the Court of Justice considered that the risk taken by the dealer/agent when they had to buy the car back at the end of the lease meant that, whatever else the agreement said about the relationship with the leasing company, it was not truly an agency one.

VW's argument in that case was that the brand's German dealers and the leasing company on whose behalf they acted as intermediaries formed a single undertaking. Competition law is not so much concerned with legal form as with economic effect, and an agent who enjoys no autonomy will be considered to be part of a single economic unit: in that situation, Article 85(1) of the Treaty (as it was then - Article 101(1) now) has no application to the relationship. If you only have one undertaking involved, you cannot logically have an agreement or arrangement between undertakings. If Article 101(1) is not engaged, the arrangement is not prima facie prohibited and there is no need for it to be exempted. The current block exemption, found in Regulations 330/2010 and 461/2010, applies to certain vertical agreements, meaning:

... agreement[s] or concerted practice[s] entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services...

Clearly, it does not apply to agency agreements, but it doesn't need to.

Back in the days when the Block Exemption used to give extensive protection to dealers, this would have been significant: staying within the distribution model would have guaranteed a certain amount of protection. However, the 2010 iteration of the block exemption dropped the last vestiges of dealer protection and left it to national law to protect dealers, if countries wanted to (and many continental jurisdictions do). The UK, however, doesn't: traditionally, English law has emphasised freedom of contract, and regarded as unobjectionable business activities that do not cross the line into criminality.

Legal protection for commercial agents

Dealers (or distributors) don't enjoy any special treatment under English law, but crucially some agents do, and that's thanks to the European Union. The Commercial Agents (Council Directive) Regulations 1993 (SI 1993 No. 3053) implemented the directive on self-employed commercial agents, and like tons of other laws survive Brexit under the general heading of "retained EU law". How long the regulations might survive is another matter, but for the time being we still have to consider them.

The Regulations give commercial agents the sort of protection that you might normally associate with employment - but they are not applicable only to individuals. They define a commercial agent as a "self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of their principal or to negotiate and conclude such transactions on behalf of and in the name of that principal". Although "self-employed" suggests an individual, it also includes other legal persons - a limited company can be a commercial agent.

If the commercial agent's activities as a commercial agent are secondary, the Regulations will not apply to them, and arguably this would mean that they are of no help to distributors whose primary business activity is governed by a traditional dealer agreement but who have side-agreements with their supplier under which they are agents. The driving force in the shift to agency is electric vehicles, of course, and as they become a larger proportion of the distributor's business the likelihood that this exception will apply will diminish.

The Regulations only apply where the agent is negotiating the sale or purchase of goods, so services are outside the scope of the Regulations - important, given that service is an area where carmakers are making the switch, as the needs of electric vehicles demand a different approach to that taken in the past. But with that proviso, it seems that the switch to agency will bring the franchised motor trade firmly within the scope of the Regulations.

Notice periods

What, then, are the legal consequences? For one thing, minimum notice periods apply, but compared with what the Block Exemption used to give they are very unexciting: one month for the first year, two months for the second year and three months for any third or subsequent years. The parties may agree longer notice periods than those specified by the Regulations but, if they do, the notice provisions imposed on the agent must be no longer than those to be given by the principal. Of course, the notice periods will be part of the supplier's "take it or leave it" offer, but the fact that the agent cannot be obliged to give longer notice than the principal should ensure that notice periods remain in line with current practice - the old Block Exemption's minimum two-year notice period, along with the one-year period where a re-organisation is necessary, seems to have been generally adopted by the industry.

Duties of agent and principal

The Regulations set out the parties' duties, which is not something that the Block Exemption ever set out to do.The common law already imposes duties on agents, including to obey the principal's lawful instruction, to act only only within the limits of authority,not to put itself in position where there is a conflict of interest,not to make a secret profit or accept bribes, and not to delegate authority, and carmakers can be expected to include specific duties in their agreements. The Regulations expand a little on the common law duties, stating that the agent must:

• act in the best interests of the principal, and act dutifully and in good faith;
• make proper efforts to negotiate and, where appropriate, conclude transactions;
• communicate to the principal all necessary information available to him;
• comply with the reasonable instructions of the principal.

The Regulations also impose duties on the principal, in addition to common law duties to pay commission or remuneration, to pay the agent's expenses, and to indemnify the agent against losses suffered in the proper performance of the agreement. The principal is required to act dutifully and in good faith when dealing with the agent, for one thing, which is rather general but pretty big. It must provide necessary documentation relating to the goods, obtain for the agent all information necessary to perform the agency contract, and notify the agent of any anticipated drop in volume of transactions or any refusal or non-execution by the principal of a transaction which the agent has procured (which would affect the commission payable to the agent).

Remuneration and commission

The agency agreement should, and surely will, clearly set out what commission is payable to the agent and when. The Regulations contain a fall-back position in case the parties fail to agree, but it is unlikely that this will be something that the agreement omits to deal with in detail.  The agent is entitled to commission on a transaction where the transaction between the principal and third party is concluded as a result of the agent's action, or with a third party whom the agent has previously acquired as a customer for transactions of the same kind, or with a customer belonging to any specific geographical area or group of customers to which the agent has been given an exclusive right under the agency agreement.

Commission is also payable on transactions concluded after the agency agreement is terminated if the transaction is mainly attributable to the agent's efforts during the agreement term and entered into within a reasonable period after the agency contract has terminated, or where the customer's order reaches the agent or the principal before the agreement expires or is terminated, or where the order is only accepted after the agency agreement has terminated. However, we can expect that agency agreements offered by carmakers will contain express provisions dealing with these and other matters relating to commission, so the legislation will not have to be relied on.

Any provisions in the agreement relating to post-termination restraint of trade restriction must be in writing and relate to the geographical area, goods and groups of customers covered by the agency agreement, and may last for no more than two years post-termination.

Termination

When an agency agreement is terminated, the agent will be concerned about any outstanding commission and any 'pipeline' commission (unless this is specifically excluded from the agreement). But probably the best thing about the Regulations (from the agent's point of view) is that it will be entitled to compensation for termination to reflect the value of the goodwill the agent has generated for the principal, unless the agent has been terminated for breach or has terminated the agreement itself.

This may be on an indemnity basis or compensation basis. If the agreement does not specify how compensation will be calculated, the payment will be calculated on a compensation basis which will probably be less valuable to the agent, and could involve a considerable burden of proof. But either way, the possibility of a termination payment is a radical departure compared with what the Block Exemption gives.

Indemnity basis: an agent will be entitled to an indemnity if it has brought in new customers or increased volume from existing customers, and the principal continues to derive substantial benefits from the business. The amount of the indemnity must be equitable, and is subject to a cap based on one year's average gross commission based on the five years before termination or the whole life of the agreement if shorter.

Compensation basis: the agent will be entitled to compensation for the damage it suffers as a result of the termination of the agreement. When the termination takes place in circumstances which deprive the agent of commission which it would have earned had the agreement continued, or have not enabled the agent to recover the costs it has incurred in connection with the performance of the agreement, or both, damage will be deemed to have occurred.

The amount of compensation  depends on the value of the agency that has been lost. This is often hard to quantify, especially if in that sector agencies are not traded as businesses (and how transferrable an agency is, compared to a dealership, is another matter). Importantly, there is no cap on the level of a compensatory payment. The agent may also be entitled to an additional amount in lieu of notice.

Greece: Fiat dealers asked to waive rights

The transition from one block exemption to the next has always been troublesome, although we seem to have got past the technique of terminating the entire network and offering reappointment to some or all of them. However, this time round Fiat Group Automobiles Hellas S.A. (FGAH) seem to have excelled themselves. Determined, it seems, to enter fully into the spirit of the new regulation, which of course contains nothing in the way of dealer protection, they are requiring their dealers to waive any accrued rights that they might have under the old Regulation.

They have sent out a letter of intent, in English as well as in Greek, which requires dealers to waive their rights against FGAH in relation to their existing agreements and the termination of those agreements. On 31 January next year, dealers will be required to declare that they have no claims against Fiat arising from the existing agreements and their termination, and irrevocably to waive any claims they do have.

Greek FIAT dealers are not amused. They consider the importer's and the manufacturer's actions unacceptable. The Greek car market, in common with much of the Greek economy, is in crisis, and dealers fear that FGAH is intending sometime probably next year (hence the date mentioned in the letter) to transfer the import contract to a third party. Waiving claims to protection from termination with that in prospect is not an attractive proposition for the dealers (though for the importer, in anticipation of handing over the franchise, it makes commercial sense to clear the decks).

Moreover, under Greek law I am told that a dealer may very possibly have a claim for a goodwill indemnity on termination based on the commercial agents directive (Directive 86/653 EC) and the Greek law which implements it, Presidential Decree 219/91. Recent Greek Supreme Court judgments (139/2006 and more recently 15/2013 and 16/2013, although I am not convinced that the first of those links is to the right case) indicate that dealers are more likely than not entitled to a goodwill indemnity. The Fiat letter seems to be designed to ensure no such claims will be possible, notwithstanding that Article 19 of the Directive specifies that the parties may not derogate from the indemnity and compensation provisions (Articles 17 and 18) before the contract is terminated. It would also rule out claims for sunk costs.

The commercial agents directive has been mooted by CECRA and the European Distribution Lawyers as an alternative source of protection for dealers, given the removal of their protection in the latest block exemption. But it could never serve such a purpose directly, for the simple reason that dealers are not and never have been commercial agents. At best, the directive could provide a model to be used to create a European equivalent, perhaps, of the dealers day in court acts found throughout the United States. What the Greek Presidential Decree says I do not know, but if it extends commercial-agents-style protection to dealers, it goes beyond what the directive requires, and I cannot see that a EU point involving Article 19 can arise - which is not to say that the Decree itself contains no such provision, just that if it does it's a home-grown Greek thing.

Fiat's action makes the conclusion of the new contract conditional upon the acceptance of unrelated terms and obligations, and takes undue advantage of the situation in which dealers who have significant sunk investments find themselves, especially in a crisis market with no alternatives. Lawyers acting for dealers contend that this approach is illegal under Greek law, so we might find ourselves watching this for quite long time.

No summary judgment in New York dealer dispute

... but does the manufacturer owe a fiduciary duty? Aaron Zerykier of Farrell Fritz PC reports a decision on 14 July by Justice Emerson in the Supreme Court of Suffolk County, New York. Two Audi dealers, aggrieved by the appointment of a new dealer in a bodering market area which had been assigned to them, sued Audi and one of its executive alleging, among other things, breaches of fiduciary duty and breach of contract.

The court summarily dismissed the claims for what the article calls "tortuous interference" (many American lawyers seem to have trouble with the word "tortious": the interference might well have been tortuous too, but that surely discloses no legal remedy) and aiding and abetting breach of fiduciary duty against the executive. A corporate officer cannot generally be held liable for his actions on behalf of the corporation if he is acting in good faith. There are exceptions to that rule, but the evidence did not suggest that they applied in this case.

As for the claim for breach of fiduciary duty claim against the manufacturer, the court considered that this might well have some legs. There were issues of fact about the nature and extent of the manufacturer’s relationship with the plaintiff dealership which may, exceptionally, have created a fiduciary relationship. The breach of fiduciary duty claim did not merely repeat the breach of contract claim because a fiduciary duty may arise independent of the contract. The court declined to give summary judgment dismissing the claims for breach of contract and breach of the implied covenant of good faith and fair dealing, because there was an issue of fact whether the manufacturer exercised the discretion it had in its relations with its dealers in bad faith.

A judgment of a court in the US declining to decide a case without a trial is rarely likely to be interesting. Here, however, there are several interesting points, not least the question whether a manufacturer owes its dealers a fiduciary duty. Were that the case in English law, things would be fundamentally different from the way they are - and perhaps if interested parties succeed in persuading the Commission that dealer agreements should be treated as, or like, commercial agency agreements, it might not be so very far-fetched!

Legend Autorama, Ltd. et al v. Audi of Amer., Inc. et al., Sup Ct, Suffolk County, July 14, 2011, Emerson, J, Index No. 38667/08.