The English High Court has recently ruled that an assignment is insufficient to transfer an agency agreement to a limited company set up for tax reasons. This can have serious consequences if the principal subsequently terminates the agency and the agency company seeks compensation from its principal under the Commercial Agents Regulations (“the Regulations”).
The recent decision in Barnett Fashion Agency Ltd v Nigel Hall Menswear Ltd is a stark reminder for agents that the process of transferring an agency agreement to a new entity is not a straightforward matter. This transfer often takes place when a sole trader (agent) decides to incorporate a limited company to transact the agency business through.
The transfer of the agreement should be considered fully and legal advice should be sought on whether it is effective to transfer both the benefit and the burden of the agency agreement to the new entity. If the agency agreement is only assigned, then this will not be effective to transfer the burden of the agency agreement and this will have serious financial consequences if the new entity seeks compensation on the termination of the agreement.
Nigel Hall was a manufacturer of high quality menswear. He traded through a limited company, Nigel Hall Menswear Ltd (“the defendant”). In 2000, the defendant appointed David Barnett, an agent for clothing manufacturers to be its agent. At the time, David Barnett traded as David Barnett Associates (“DBA”), a partnership.
The agency agreement was contained within a letter from the defendant to DBA and was governed by the Commercial Agents Regulations, which give agents minimum rights under European Union law, such as the right to claim substantial lump sum payments on the termination of an agency agreement in certain circumstances.
DBA initially sent the defendant invoices and these were duly paid. Mr Barnett later received accountancy advice and was advised to incorporate a company through which to provide DBA’s agency services. Barnett Fashion Agency Limited (“the claimant”) was incorporated in 2003 and DBA purported to transfer all its agency contracts to the claimant.
All invoices for commission due were presented to the defendant as “David Barnett Associates trading as Barnet Fashion Agency Limited”. No discussion took place between the parties as to the assignment of the agency agreement, however the defendant did not raise any objections to the new invoices and continued to trade under the agency agreement.
In 2005, the relationship between the parties broke down and the agreement was terminated by the defendant.
The claimant brought a claim for compensation in the sum of £190,000 for the loss of the value of the agency agreement under the Regulations. The defendant stated that the claimant had no standing to bring such a claim, because it was not a party to the agency agreement (the agency agreement being with DBA the partnership that was in existence at the time the agency commenced and not the limited company being the vehicle that was created to transact the agency business through).
The High Court decided to consider whether the claimant had standing to bring the claim before considering the evidence. The High Court ultimately ruled that the agency agreement was between DBA and the defendant and that the defendant owed no duties to the claimant.
Even if DBA had assigned its rights under the contract to the claimant, that did not have the effect of transferring the whole agreement. In order to transfer the whole agreement (i.e. the benefit and the burden) all three parties would have had to consent in the form of a novation agreement.
There had been no discussion about the assignment with the defendant and it had not agreed to a novation. The only right that DBA could assign to the claimant was its right to receive commission payments from the defendant. The claimant was not entitled to receive compensation payments from the defendant under the Regulations.
Only the benefit and not the burden of an agency agreement can be assigned. In order to transfer the whole agreement to a limited company (or any other entity), all three parties would need to enter into a novation agreement. This will require the principal’s consent.
DBA would still, in principle, have been entitled to bring the claim for compensation. However, the Commercial Agents Regulations impose a one year time limit for compensation claims to be notified. This period had expired whilst the wrong party was pursuing the claim. DBA, the correct party, therefore lost its right to claim compensation.
This case highlights the benefit of ensuring that the contractual position is reflected properly in the documentation and of using a specialist lawyer with more expertise in this area. We have a specialist team of lawyers dealing with commercial agents’ issues and contractual issues regarding the importing and exporting of goods generally. In the event of a dispute, our specialist Commercial Agents Dispute Resolution team is on hand to protect your position.