The commercial agent’s duty of good faith: short-changed by the Court of Appeal?

A commercial agent falling within the Commercial Agents (Council Directive) Regulations 1993 owes both a fiduciary duty towards his principal at common law and a duty to act in good faith towards that principal under reg 3(1).  There has been little case law in the UK on the meaning of the statutory duty.  Although, by contrast,  there is a large body of case law on the agent’s fiduciary duty at common law, that duty is often expressed using broad abstract language, making it difficult to apply to concrete situations.  The English Court of Appeal case Crocs Europe BV v Craig Lee Anderson & Anor t/a Spectrum Agencies [2012] EWCA Civ 1400, presented an opportunity to shed light on the meaning of both duties and the effect the agent’s breach has on the agency contract. 

The dispute centred around a practical joke taken too far.  Employees of the agent were frustrated with the alleged poor service offered by the principal, the manufacturer of the famous crocs shoes.  The agent’s employees created a “Crawl”, i.e. a posting on a website poking fun at this lack of service.  The Crawl was in the form of rolling credits, a spoof of the format used in the Star Wars films.  Unfortunately, the principal did not see the funny side.  Describing the Crawl as “highly derogatory,” the principal treated it as repudiatory conduct on the part of the agent and rescinded the agency contract.  Where the principal has terminated the agency contract because of a default attributable to the agent which would justify immediate termination, no indemnity or compensation is payable to the agent (reg 18, read in conjunction with reg 16).  The agent, not surprisingly, argued that the principal’s identification of the Crawl as repudiatory conduct was nothing other than a veiled attempt to escape from an agency contract which was no longer attractive at the same time avoiding payment of compensation to the agent.  Compensation is, after all, the agent’s entitlement under reg 17.     

Decision at first instance
At first instance judgment was entered by Sir Raymond Jack for the agent, with damages due to be assessed.  Only one point was appealed by the principal, namely that the principal had not been entitled to terminate the contract on the grounds of a repudiatory breach.  The trial judge concluded that a reasonable person would not have concluded that the Crawl showed an intention on the part of the agent not to fulfil the contract (para 42).

Court of Appeal – Defendants’ Submissions
On appeal, the defendants (the principal) argued that reg 3 implied a “condition” into the agency contract.  This is to use the word “condition” as it is understood in English contract law, i.e. as an important contract term, breach of which results in the right to terminate.  It can be contrasted with a warranty, breach of which results only in damages.  This distinction is not part of Scots law where a material breach results in a right to rescind, with non-material breaches resulting in a right to damages only. Scots law has no hierarchy of the importance of contract terms.  The English classification is more complex than has been presented here: innominate terms also exist, but thankfully that class, and indeed the English approach as a whole, need not be analysed here.  If the principal was correct in its assertion that the duty of good faith is a condition, any breach of that duty would result in the principal’s  right to terminate.

The defendant drew interesting analogies in their appeal (the defendant was represented by Fergus Randolph, one of the two authors of the leading English text on commercial agency, The European Law of Commercial Agency, the other author being Jonathan Davey).  The first was with contracts of marine insurance, where they argued that an agency contract was, like a contract of marine insurance, a contract of utmost good faith.  The second was with the duty of trust and confidence which lies at the heart of the employment relationship.  This analogy was supported by the fact that it would be productive of commercial uncertainty if a principal was forced to accept a disloyal agent. 

Court of Appeal – Lord Justice Mummery 
Lord Justice Mummery reviewed the relevant provisions of the Regulations and, in particular, reg 3 which contains the agent’s duty of good faith towards the principal.  He noted that the Regulations did not specify the consequences which flowed from breach of the duty of good faith (para 18).  Rather, reg 6 provides that the law applicable to the contract governs the consequences of breach of the rights and obligations under regs 3 and 4.  Thus, the correct approach is to apply English contract law relating to termination for breach. 

The principal appealed on the basis of both the agent’s duty of good faith under the regulations and the common law fiduciary duty.  Lord Justice Mummery indicated that these duties “co-exist” (para 22).  He noted that, according to Bowstead and Reynolds on Agency, not all breaches of fiduciary duty go to the root of the contract (para 23, referring to this book at para 7-049).  From this he concluded that whether or not a breach was repudiatory “depends, in general, on an objective assessment of all the surrounding circumstances” (para 23).  And, indeed, not all of the agent’s duties are fiduciary in nature (para 24).     

Lord Justice Mummery had no hesitation in rejecting the defendant’s “condition” argument, describing it as suffering from “insuperable difficulties” (para 44).  Reg 3 was not expressed in a way that would suggest an intention to create a condition (para 45).  He emphasised his earlier observations that not all agency duties are fiduciary in nature, and not all breaches of fiduciary duties give rise to a right to rescind.  He indicated that the remedial consequences of breach of fiduciary duty depend “…not only on the nature of the duty owed but also on the factual circumstances in which the particular breach occurred and the intentions of the parties, as expressed or inferred, in relation to the contract” (para 48). 

The analogy with the employee’s duties did not, in Lord Justice Mummery’s opinion, assist the defendant.  He identified a line of employment law cases in which an isolated act of misconduct did not justify termination of the contract (para 49). 

The judge at first instance had, in Lord Justice Mummery’s opinion, used the correct approach which was to judge the seriousness of the agent’s conduct in connection with the Crawl (para 50).  An appeal court could only overturn what was, essentially, an issue of fact if the judge had misdirected himself in law, and there was no evidence to support this conclusion (para 50).  The breach was simply not serious enough to support repudiation: “The Crawl did not in terms disparage the goods to any one (sic).  It referred to the inability of the defendant to meet delivery obligations, a state of affairs that was well known.  The style of the Crawl was obviously jokey, though not everyone might see the joke and though the defendant was not amused.  The circulation of the Crawl was limited and temporary.  The website was soon shut down for other reasons and the Crawl was removed…There was no evidence of harm suffered by the defendant” (para 51).  The breach did not go to the root of the agency, rather it was a “one-off incident that did not involve bad faith on the part of the claimant, was not shown to involve a real risk of harm to the defendant by dissemination to the world at large and did not, when viewed objectively, evince an intention to abandon or to refuse to perform the commercial agency contract” (para 52).  This led him to dismiss the appeal.  

Court of Appeal – Mr Justice Bean
Mr Justice Bean was more persuaded by the analogy with the employee’s duties in the employment contract.  He observed that the agent’s duties were not materially different from the employee’s duties (para 56).  Counsel for the defendant had argued that the agent’s duty was at least as wide as the Malik term.  He referred (at para 56) to the formulation of this implied term in Woods v WM Car Services (Peterborough) Ltd ([1982] ICR 693) and Western Excavating (ECC)Ltd v Sharp ([1978] ICR 221).  This was, in Mr Justice Bean’s opinion, no more than the application to employment contracts of classic principles of general contract law (para 58): “If party A conducts himself in a way which viewed objectively, is likely to destroy or seriously damage the contractual relationship, that amounts to a repudiation of the contract which party B can accept and thus terminate the relationship” (para 58).

The attempts by counsel for the defendant to draw an analogy with shipping law and specifically the obligation to perform timeously were thought to be unhelpful. 

Mr Justice Bean simply agreed with Lord Justice Mummery’s conclusions on the submissions on regulation 3 as a fiduciary duty.        

Although indicating that he thought the breach in question was close to the line between a breach sounding only in damages and one which could be repudiatory in nature, he found no reason to overturn the trial judge’s decision, and dismissed the appeal.  Lord Justice Hughes agreed with both judgments. 

This is a welcome decision, underlining the fact that not all breaches on the part of the agent necessarily result in termination, and, in the context of commercial agency, the forfeiture by the agent of his rights to either compensation or indemnity.  This must surely be correct.

It is a useful decision for Scots lawyers.  Clearly there are differences in the underlying law of contract in relation to breach in Scotland and England.  Nevertheless, the exercise of examining the breach carried out in the Court of Appeal is highly similar to the one which should be applied in Scotland.  It is a highly factual exercise. 

In other respects one cannot help feeling short-changed by the Court of Appeal’s analysis.  There is no analysis of the meaning of the agent’s fiduciary duty in the context of commercial agency.  There are broad references to “loyalty” but little more. 

There is also a failure to address the manner in which the fiduciary duties at common law interact with the statutory duties of good faith appearing in reg 3.  Randolph and Davey, in The European Law of Commercial Agency (referred to above) concluded that the duties of the commercial agent under reg 3 “essentially mirror the fiduciary duties imposed on the agent by English law” (p. 55).  And yet they later refer to the significant different between the two, i.e. the fact that fiduciary duties require the agent to place the principal’s interests above his own whereas duties of good faith do not impose this very strict requirement (p. 64). It is surely questionable whether there is a mirror-like quality between the two duties.   The need for judicial analysis seems obvious.  They are likely to differ.  In particular, we should understand the duty of good faith imposed by the regulations by reference to the law in other European member states, particularly France and Germany, the acknowledged inspiration for the compensation and indemnity provisions in the Directive.  Where such an exercise of comparison is carried out, the court is more likely to achieve harmonisation, the aim of the Directive.

Finally, I would question Mr Justice Bean’s use of the employment contract as an analogy for the agent’s duty of good faith.  There are sufficient differences between the two types of contract to make such analogies dangerous.  The law is highly protective of employees and rightly so, given that the employee is almost invariably the economically weaker party.  That can be contrasted with the tradition in the UK where agents are economically independent actors.  It is true that the Directive has made a significant inroad into this tradition, extending to agents significant protections on termination of their contracts.  But we are not yet at a stage where an agent can be completely equated with an employee.  Where an employee breaches his duty of trust and confidence, it will indeed be difficult for employer and employee to carry on the employment relationship.  But an agent is in a different position, one step further removed from the principal.  A breach of the fiduciary duty of loyalty is serious, but need not rule out the continuation of the agency contract.  The agent is not in such close proximity to the principal.

Despite these questions, this case is a significant one which should be a point of reference for future cases in Scotland where the question of the commercial agent’s breach of fiduciary or good faith duties arises.