In the case of Accentuate Limited v Asigra Inc, Mr Justice Tugendhat in the High Court interpreted and applied Regulations 17 and 19 of the Commercial Agents (Council Directive) Regulations 1993 (the Regulations), concerning the payment of compensation to an agent on termination of the agency contract.
The Regulations were introduced to implement in the UK EC Directive 86/653/EEC on the co-ordination of the laws of Member States relating to self-employed commercial agents. A commercial agent is defined as:
“.. a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the “principal”) or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal”.
Regulation 17 entitles a commercial agent to an indemnity or compensation on termination of the agency agreement. Regulation 19 provides that the parties may not derogate from Regulation 17 to the detriment of the commercial agent. In Igmar v Eaton Leonard Technologies, the ECJ held that a choice of law clause could not be used to evade liabilities under the Regulations and that any clause that purported to derogate from the Regulations would be unenforceable.
S9 of the Arbitration Act 1996 (the Act) requires a court to stay proceedings in respect of a matter that the parties have agreed to refer to arbitration. S9(4) requires the court to grant a stay unless the arbitration agreement is “null and void, inoperative or incapable of being performed”.
Asigra (a Canadian company) as licensor (L) and Accentuate (an English company) as distributor (D) entered into a Master Reseller Agreement (MRA) pursuant to which D was to distribute L’s software and related hardware, being a DS-Key necessary for the software to function properly. Clause 18.3 provided that the governing law of the MRA was to be the laws of Ontario and the federal laws of Canada. Clause 18.5 provided that all disputes were to be settled by arbitration to be held in Toronto.
Disputes arose. D informed L that it intended to make a claim against L for compensation under the Regulations. L commenced arbitration proceedings. D participated in the arbitration but argued that its claim for compensation under the Regulations fell outside the scope of the arbitration as it was not subject to the arbitration agreement in clause 18.5 of the MRA. In its award, the Arbitral Tribunal denied D’s request that its claim for compensation fell outside the scope of the arbitration agreement and determined that the Regulations did not apply as between D and L but that Ontario law applied instead.
D did not apply to the Canadian courts to challenge the award. Instead, it issued proceedings in the English courts claiming compensation under the Regulations. D obtained permission to serve proceedings on L out of the jurisdiction under CPR 6.20 (as it then was). L subsequently obtained an order setting aside this permission and staying the proceedings under S9 of the Act.
D appealed. It argued that the arbitration agreement in clause 18.5 of the MRA amounted to an evasion of the Regulations under the principles in Igmar and so was unenforceable. It followed that the proceedings should not be stayed under S9 of the Act and it should continue to have permission to serve out of the jurisdiction.
Mr Justice Tugendhat upheld D’s permission to serve proceedings on L out of the jurisdiction and lifted the stay on the proceedings.
He first considered the question of whether D was a “commercial agent” for the purposes of the Regulations and concluded that it was arguable that he was. To reach this conclusion, he assessed the terms of the MRA and what D was required to do under it. He found that D was required to find end users who would enter into a Software Licence Agreement with L. He found that this fell within the test developed in Esso v Parks of a commercial agent as someone “dealing with, managing or concluding the sale of the [principal’s] goods to third party customers”.
Mr Justice Tugendhat had to overcome the problem that to be a commercial agent within the Regulations, D must be negotiating/concluding the sale of goods. He found that software did not constitute goods but that the related hardware (the DS-Key) did. This hardware was provided to the end user once they had become a party to a Software Licence Agreement with L. As the sale of the software and provision of the hardware were bound together in this way, Mr Justice Tugendhat found that D was selling L’s goods and was, therefore, arguably a commercial agent within the Regulations. L submitted that it sold hardware to D who sold it on to end users on its own behalf. D was contracting with customers on its own behalf and following Sagal v Bunz this meant that D was not a commercial agent. Mr Justice Tugendhat rejected L’s submission finding that there was no evidence that D contracted in its own name with end users. Also, this did not sit alongside the fact that L entered into Software Licence Agreements with end users. The provision of hardware was merely a means of finalising that Agreement to ensure that the software functioned and could not be viewed as a separate transaction.
Having found that the Regulations applied to D, Mr Justice Tugendhat went on to consider the issue of payment of compensation. He held that he was bound by the ECJ’s decision in Igmar to give effect to D’s mandatory rights under EC law and Regulation 17 of the Regulations. The arbitration agreement in clause 18.5 derogated from D’s right to compensation under Regulation 17 and, also following Igmar, was unenforceable in so far as it required the submission to arbitration of questions relating to the Regulations. The principles in Igmar applied to arbitration agreements that specified a place and law in the same way as they applied to simple choice of law clauses. As questions relating to the Regulations were not caught by the arbitration agreement and not governed by Ontario law, the only law they could be governed by was English law. D could bring proceedings in the English courts. The arbitration agreement was unenforceable and so, under S9(4) of the Act, the stay would be lifted. D’s permission to serve out of the jurisdiction would stand.
In this case, mandatory provisions of EC law (implemented by Regulations) had the effect of making the arbitration agreement and choice of law clause in the MRA unenforceable. The judgment is a reminder to parties drafting agency agreements that any attempt to contract out of the indemnity/compensation provisions in the Regulations, even indirectly via a choice of law clause or similar, will be unenforceable.
Click here for a copy of the judgment