Make a choice – otherwise you might not like what you get – governing law in agency contracts

November 12, 2012

Usually it is the principal in an agency relationship which faces the most risk if a written agency agreement is not put in place at the beginning or during the agency.  However, a recent case has shown that it may not actually be in the best interests of the agent for there to be no contract.

In Lawlor v Sandvik, Mr Lawlor, the commercial agent, had been acting for Extec (which was acquired by Sandvik in 2007) since around 1994.  Initially he had started as an employed sales representative but then changed to acting as a commercial agent in the same year, when he began to focus on selling Extec’s products to the Spanish market.  The agency was not recorded in writing until 2006, when Extec sought to formalise its relations with its agents.  Mr Lawlor and Extec could not reach agreement as to what was to be written down and, ultimately, the agency was terminated.

By the trial Extec had agreed that a termination payment was due to Mr Lawlor but the legal basis of the payment was disputed.  Essentially, the EU Directive which grants agents protection provides for two different regimes, either an indemnity payment or a post-termination compensation payment. 

While the majority of EU countries, including Spain, opted for indemnity payments, which are generally lower (due to a maximum cap of 5 years average annual commission), the United Kingdom made no election making the default position (in the absence of a contractual agreement to the contrary), payment of post-termination compensation.  There is no maximum limit to a post-termination compensation payment.

Mr Lawlor said the correct law of the agreement was English law.  Sandvik said that it was Spanish law.  As there was no formal agreement, it was left for the Court to decide under EU law whether the parties had (i) impliedly agreed the applicable law; or (ii) in the absence of any implied choice which country the contract was most closely connected with. 

The impact for Mr Lawlor of the Court’s decision would make a significant difference to the amount he got in his hand.

Implied choice?

EU law provides that the choice of law must be express or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. 

The Court accepted that if the parties had made a choice it would have been English law but that on the facts no such choice had been made.  

While the employment contract (prior to the agency) was most likely to have been governed by English law and the new agency agreement that was proposed (but not agreed) was subject to English law, the Court found that these facts were not enough to leave it without any doubt that the contract in between would have been an English law contract.  

Therefore, the facts of the operation of the agency would decide the governing law.

Most closely connected

EU law applies where no choice has been made.  This assessment focuses on the country with which the contract is most closely connected and will ultimately be determined on the factual background of each individual case.  

While rebuttable, the presumption is that the country with the closest connection will be the one where the party who is to effect the performance of the contract has his habitual residence or in the case of a trade has his principal place of business.  If the place of characteristic performance cannot be established or it appears from the circumstances that another country is more closely connected than either of these, then it is possible for the Court to look at the circumstances as a whole and select a different country’s law as being the governing law.

At the outset of the agency, Mr Lawlor’s principal place of business was Spain.  However, he asked the Court (as it is entitled under EU law to do) to take into account things that happened after the commencement of the agency.  He submitted that the characteristic performance of the agency took place in two countries as he was required to effect performance in Spain (visiting customers) but also in England, visiting the factory. Accordingly the Court should disregard characteristic performance and look at other factors.  Alternatively, Mr Lawlor argued that the characteristic performance was through Extec’s factory in England, all sales documentation was produced in English and, therefore, the right law was English law.  

Ultimately, the Court decided that the characteristic place of performance on the evidence was “undoubtedly” Spain.  Equally, even looking at factors such as the new draft agency agreement, the fact that Extec’s other contracts were governed by English law, the agent’s travels to other countries, and the factory visits in England, the Court still confirmed that the Spanish connection was “much deeper and more extensive than that of England”.  

Comment

The Judge commented that this case was highly dependent on the recollections of individual witnesses and their credibility due to the length of time that had elapsed since the agency commenced and the lack of documentation from the early period of the agency.  

In this sense the agent had already scored a form of own goal, as the Judge had (more than in passing) mentioned his tax status and the fact that he appeared to have managed to pay no government in any EU country personal income tax for the duration of the agency.  Overall, his evidence was dismissed by the Judge as being “neither accurate nor truthful”.    

However, even without this kind of a handicap, it is not a good plan to leave significant issues which could cost the agent or the principal £100,000s to the vagaries of memory and who the Judge prefers on the day.  Where a contract is performed in two different countries there is real potential for the factual background to be complex.  It is far better to have an agreed contract in place.  

Failing that to the extent that you do not like some of the terms but accept others, agents and/or principals may be wise to communicate clearly that while they try to formalise any arrangement they believe the law is that of a particular country.  If the other party does not object and the terms are never fixed in writing, this may be enough to satisfy Article 3’s requirement of a clear and certain choice of law.   
            


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