Can an agent act for a competitor of his original principal?

To what extent is an agent entitled to act for a competitor of his original principal?  This important question was considered by the Court of Appeal in Rossetti and Anor v Diamond Sofa Company Ltd ([2012] EWCA Civ 1021) in a judgment issued on 27th July. 

This case was an appeal from a decision of Cranston, J., determining certain preliminary issues.  As such, the judgment does not contain a full analysis of all the legal issues.   The Master of the Rolls, Lord Neuberger, delivered the main judgment with which Lords Moses and Rimer agreed. 

Diamond is a company whose operation is based in Thailand, where it manufactures leather upholstery.  Diamond entered into an agreement with a company called SML.  SML was set up to represent Asian furniture manufacturers and to assist them in penetrating the UK market. 

In February 2004, Diamond and SML orally agreed that SML would act as Diamond’s exclusive agent in connection with the sale of leather upholstery in the UK and Irish markets.  During negotiations, SML informed Diamond that SML was already acting for two other manufacturers of upholstery: Linkwise and ArtPeak.  SML indicated that the furniture range of each of the two companies did not clash with that of Diamond. 
The agency agreement was entered into for one year initially and, because SML proved to be “remarkably successful” at acting on Diamond’s behalf, the agency agreement was continued beyond the initial duration (Lord Neuberger quoting from Cranston J’s judgment at [2011] EWHC 2482 (QB), para 20).

In 2008, the agency agreement came to an end consensually, and Diamond appointed another company, RML, as agent.  RML had in fact been set up by the individuals behind SML to take over the clients of SML.  By this time, however, the parties were beginning to fall out.  Diamond determined the agency agreement on 4 June 2008. 

Decision of the High Court (Queen’s Bench)
In the subsequent dispute, Diamond indicated that it had terminated the agreement because RML had acted for two direct competitors of Diamond, Cassaredo and Creative.  Cranston J., held that there was no express term about SML or RML acting for competing principals but that there was an implied term at the outset of the contract that SML would continue to act for Linkwise and ArtPeak.  He also held that this implied term was varied by a course of dealing between the parties, and in particular that Diamond knew that SML had assumed agencies for Cassaredo and Creative and Diamond had not objected.  Cranston J., found, however, that nothing in the course of dealing meant that there was an implied term in the agency agreement enabling SML or RML to place orders with other principals at the expense of Diamond. 

Court of Appeal decision
Fiduciary Duties in General
Lord Neuberger began his judgment with an explanation of the agent’s fiduciary duty.  Quoting Millett LJ in Bristol and West v Mothew ([1998] Ch 1, 18A-B), he referred to the “single-minded duty of loyalty” that an agent owes to a principal: he “…must not place himself in a position where his duty and his interest conflict, and he “may not act for…the benefit of a third party without the informed consent of his principal.”  He referred to another leading case, Kelly v Cooper ([1993] AC 205, 214D) in which Lord Browne-Wilkinson had said that “it is normally said that it is a breach of an agent’s duty to act for competing principals.”  He had also been referred to Hospital Products Ltd v United States Surgical Corporation ((1984) 156 CLR 41, 97) in which Mason J. stated that where a fiduciary duty arises out of a commercial contractual arrangement, that duty “if it exists at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them.” 

Acting for a competitor
Lord Neuberger identified two types of cases in which an agent may act for a competitor (paras 22 and 23).  The first is where both principals agree.  In such a case the agent must show that the principal not merely consented, but that the consent was given on a fully informed basis (Quoting Tuckey LJ in Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351, para 35, approving a passage from Bowstead & Reynolds on Agency, now at para 6-039 of the 19th edition.)  The second type of case is where the principal must have appreciated that the nature of the agent’s business is to act for numerous principals.  The most obvious example of this type is the estate agent, whose business is to act for a number of principals at the same time. 

Lord Neuberger concluded that there was no reason to conclude that, in this case, the normal non-compete rule did not apply (para 24).  Diamond had not agreed that SML could act for competitors.  Diamond had been told that, although SML acted for Linkwise and ArtPeak, there would be no clash of products.  This supported the conclusion that Diamond would not have expected SML to act for competitors, and had certainly not agreed to this.  An attempt to place SML/RML within the same class as residential estate agents was unsuccessful.  Reference was made (at para. 27) to a conclusion in Bowstead and Reynolds (footnote 294 of para 6-945) that “estate agents are only imperfectly agents and are known to act for many principals.”  He also referred to an article by Joshua Getzler ((2006) LQR 122) in which Getzler supported the House of Lords decision in Hilton v Barker Booth & Eastwood ([2005] UKHL 8, [2005] 1 WLR 567).  Lord Walker in that case referred to the “content of the contractual duty of full disclosure being rooted in the fiduciary relationship” between principal and agent. 

Nor did SML/RML acquire the right to act for competitors after 2004.  Oral evidence established that Diamond was aware that RML was acting for Casserado and Creative.  Diamond was, however, led to believe that those companies’ products did not clash with their own.  Whilst there was informed consent to RML acting for Creative and Casserado in relation to non-clashing products, there was no informed consent in relation to clashing products. 

Lord Neuberger’s inescapable conclusion (at para 48) is worth quoting: “…the sensible and proper course for SML to have taken if it wished to act for a manufacturer of furniture which competed with that made by Diamond, was to inform Mr Charoenyos, [the managing director of Diamond] and to obtain his consent.  By not taking that course, SML, and then RML, took the risk that, when it appreciated what had occurred, Diamond would stand on its strict legal rights, and that is what has happened.” 

Lessons for Scots law?
The case also includes discussion of claims under the Commercial Agents (Council Directive) Regulations 1993, commented on below.  For the moment however, it is important to ask how relevant the Court of Appeal’s conclusion on acting for the principal’s competitor is to the Scots lawyer.  The ability of an agent to act for a competitor of his principal was considered in the Scottish case of Lothian v Jenolite (1969 S.C. 111).    The court decided that it was not necessarily the case that every agency contract has an implied condition that the agent is not entitled to act for a competitor.  Lord Milligan stated (at 117):

“The proposition which the defenders invite us to affirm is that in all agency cases there is an implied condition that the agent will not without the permission of his principal act, even in an outside matter, in such a way as to bring his interests into conflict with those of his principal.  There is admittedly no case in which such a proposition has been affirmed, and the proposition is a sweeping one which, if it is sound, would undoubtedly affect a very large number of cases where an agents acts for two or more principals.  There would normally be no objection to such a condition or term being expressly included in a contract of agency…but it is a different matter to imply such a condition when it does not appear expressly in the contract.  It is, moreover, more difficult to imply a condition in a written contract than a verbal contract…The introduction of the condition would…make the contract a different contract altogether, and moreover it was a condition to which the parties could readily have given expression if that was their intention….The many authorities quoted by the defenders establish that, while actually performing his principal’s business, an agent is not entitled to take advantage of his position and make a profit for himself, but, as I have said, no authority was quoted for the much wider proposition for which the defenders now contend.”   

Notably, Jenolite had not appointed Lothian as full-time agents, nor exclusive agents, whereas in Rossetti SML/RML were exclusive agents in the UK. 

Could Rossetti v Diamond Sofa be used as a persuasive authority in a Scottish case?  Part of the difficulty here is that the pursuers in Lothian framed their claim too broadly.  Clearly, an agent is not completely prohibited from acting for a competitor of the principal in every case.  There is no implied term to that effect.  Having said that, the judges in Lothian did not depart from the general rule that an agent must not let his own interests compete with those of his principal.  Lord Milligan twice referred to the phrase “even in an outside matter”, in other words, the pursuer’s contention, if correct, would have prevented an agent from acting for a different principal even where the agent was selling goods which did not compete with those of his original principal.  That, of course, was not correct either.  The issue probably remains an open one in Scots law.   In a Scottish case in future, those
acting for a principal could frame a legal proposition narrower than that argued in Lothian.  It seems likely that a Scottish court would find that, where the agent acts for a direct competitor of his principal, selling for that competitor the same type of goods as the agent is instructed to sell for his original principal, that conduct will constitute a breach of the agent’s fiduciary duty.  The court may be more likely to reach that conclusion where the agent is appointed an exclusive agent, given that in such a case the original principal will have no other outlet for the sale of his goods.  Rossetti may indeed be a useful case to cite in support of an argument to that effect.     

Commercial Agents (Council Directive) Regulations 1993
The change from SML to RML provided food for thought for the application of the Commercial Agents (Council Directive) Regulations 1993.  Although little was said on this point, Lord Neuberger concluded that the transfer was probably novation rather than assignment.  This is an important point: under regulation 15 the periods of notice differ depending on the duration of the agency agreement.  The length of the agency agreement may also be taken into account in calculation of compensation under reg 17 – the Extra Division of the Inner House in King v Tunnock (2000 S.C. 424) emphasised not only the duration of Mr King’s agency, but also the fact that his father had held the agency before him.   Lord Neuberger concluded (at para 55) from the terms of regulation 18(c) that where a principal agrees to instruct a new agent in place of an existing agent, in circumstances where the existing agent has transferred the agency business to the new agent, the new agent is to be treated as having taken an assignment of the existing agent’s rights and duties.  His conclusion on this point is important.  The English language version of reg 18(c) uses the word “assigns.”  Lord Neuberger did not, in this case, give that word its normal English legal meaning, which would have had the effect of limiting it to cases of true assignation in English law.  Rather, he gave it a purposive interpretation, noting (at para 55):

“…the fact that the common law might treat the new agency as a new contract is neither here nor there.  This conclusion appears to me to comply with the commercial purpose of the Regulations.” 

This is a notable example of the interpretation of the regulations in a purposive manner, consistent with the protective nature of the original Directive. 

Given that this case sought only to determine preliminary issues, there is no analysis of the amount of compensation RML is due under reg 17.  A fully litigated claim for compensation may yet be to follow.