“Pure” intermediaries  v. commercial agents

Can an intermediary acting for a supplier or purchaser, also be a commercial agent, and why does this matter?

Whilst intermediary or agent may seem to be a distinction without a difference, the High Court judgment last month in RSW International v Purple Surgical Manufacturing highlighted its significance.

Principals will have a vested interest in determining the nature of an intermediary’s role, given the bearing that this could have on the scope of a principal’s liabilities. However, for intermediaries themselves, what impact does this distinction have? 

The key issue addressed in this judgment was whether there had been a binding agreement between claimant and defendant for the supply of face masks. Central to determining this issue was the role of the intermediary in the transaction, namely whether it had been that of a “pure” intermediary or an agent.

Judgment

The High Court ultimately decided that the intermediary in this case was to be regarded as a dual agent, not a “pure” intermediary, nor as a sole agent for one of the parties only. This was on the basis that the intermediary’s relationship with each party satisfied what the judge described as the core definition of an agent.

Who or what is an agent?

The RSW case sets out this definition of an agent as being where:

• a relationship exists between two parties where one party (the agent) owes a fiduciary duty to the other (the principal)
• the agent has the authority (and has consented) to act on their principal’s behalf so as to affect their relations with third parties.

It is a long-established legal principle that an agent owes fiduciary duties to their principal. This fiduciary duty requires the agent to put the interests of the principal ahead of their own or those of a third party.

The Commercial Agents Regulations further defines a commercial agent as being a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of their principal.

Two key aspects of who or what is an agent were highlighted in the judgment in the RSW case, namely that:

1. the authority given to an agent to act in a particular way so as to affect the principal’s relationship with third parties. This covers situations where an agent is authorised to enter into a contract on behalf of a principal. It can also cover situations where an agent is authorised to negotiate on the principal’s behalf but not to enter into a binding contract. In the latter the agent is therefore simply the go-between in negotiations, providing a conduit or channel between principal and customer (see our previous article for further discussion on this point)
2. an agent is not precluded from acting concurrently for both parties to a transaction. Instances of dual agency are, however, rare, owing to an agent’s fiduciary duty to act in their principal’s best interest – where multiple principals are party to the same transaction, a conflict of interest may arise. Whilst somewhat surprising, the High Court decided that it does not matter if an agent “potentially exposes himself to a conflict of duty” when acting as a dual agent – it will not prevent them from being an agent as a matter of law. Rather, where this potential conflict of duty exists, an agent will require the prior informed consent of both parties to a transaction in order to engage as a dual agent on their behalf.
   

Who or what is a “pure” intermediary?

The High Court in the RSW case makes reference to “pure” intermediaries. A distinction between and intermediary and a “pure” intermediary was not, however, expressly noted in the judgment. This description of intermediaries as “pure” can therefore be taken as an attempt to distinguish intermediaries who are not agents from those who are.

An intermediary will be a “pure” intermediary where:

• their only actual authority is to accurately transmit messages which they have received
• there is no basis for their being treated as having, or being held out as having, any other or wider authority.

In contrast an agent will be distinguished from a “pure” intermediary in instances where an agent has authority to enter into binding agreements. However, the distinction becomes less clear when an agent’s only authority is to act as a conduit between their principal and a third party, which has previously been described by the Court of Appeal as a form of negotiation (see here).

The difference between an agent acting as a conduit or channel and a “pure” intermediary transmitting messages has not yet been subject to substantive judicial review. However, factors that would increase the likelihood of a party being classified as an agent or “pure” intermediary would include where the party:

• has substantial knowledge of the subject matter of the transaction
• provides advice to the parties in respect of (i) who they should transact with, and (ii) the transaction terms themselves
• has entered into a relationship with a party in which it is reasonable for that party to repose trust and confidence in them.
  

Why does it matter?

The distinction between a “pure” intermediary and an agent matters for a number of reasons. Most notably:

• Agents can be expected to have more authority than “pure” intermediaries
  Agents have the power (in certain circumstances) to affect the contractual obligations and liabilities of their principals by entering into binding agreements on their behalf. This is important for parties to a transaction to bear in mind where intermediaries are involved.
• Agents often have greater protection than “pure” intermediaries 
  Unless otherwise agreed, a principal is under a common law duty to indemnify an agent against liabilities incurred by the agent in the lawful performance of acts falling within the scope of the agent’s authority. Additionally, the Commercial Agents Regulations provides commercial agent with certain rights upon termination of their agency, including the right to compensation or an indemnity payment in certain circumstances. The scope of a “pure” intermediary’s protection, on the other hand, would be solely dictated by the terms of any contract they have with another party.
  
• Agents often have more duties than “pure” intermediaries.

Examples of the duties owed by agents to principals include:

• common law duties – namely duties owed by the agent to obey the lawful instructions of the principal, to act only within the limits of its authority and to use reasonable diligence and care, and reasonable despatch
• fiduciary duties – as discussed above
• duties imposed on commercial agents by the Commercial Agents Regulations – namely duties owed by the agent to look after the interests of their principal and act dutifully and in good faith, to “make proper efforts” to negotiate and (where appropriate) conclude those transactions they are instructed by their principal to take care of, to communicate to their principal all the necessary information available to the agent and to comply with their principal’s reasonable instructions.

In contrast, a “pure” intermediary’s duties are limited to those expressly set out in the terms of any contract they have with another party.

In short, making the distinction between a “pure” intermediary and an agent matters as it can influence the rights, obligations and liabilities of both parties and intermediary involved in a transaction.