Legal Updates

Commercial - Breach of a Commercial Agency Agreement - Compensation

In PJ Pipe and Valve Co Ltd v Audco India Ltd [2005], the Court ruled that damages for a breach of a commercial agency agreement should be assessed on a flexible basis according to the particular facts of each case.

The claimant, PJ Pipe, is an agency in the petrochemicals industry, promoting and selling products in this industry. The defendant, Audco, is based in India and manufactures valves some of which are used in the petrochemical industry.

Audco hired PJ Pipe as their agent and entered into two agreements with them. In 2001, they entered into an Agency Agreement granting PJ Pipe the right to sell products as its agent in Nanhai (the "Nanhai Agreement"). In 2002, the two parties entered into a general exclusive agency agreement which gave PJ Pipe exclusive rights to represent six named UK contractors for a period of two years expiring on 31 December 2003 (the "Exclusive Agreement").

In September/October 2002, Audco breached the Exclusive Agreement by employing an alternative UK agent and by purporting to terminate the Exclusive Agreement with PJ Pipe before the expiration of the term of the Exclusive Agreement.

PJ Pipe accepted the breach and commenced proceedings against Audco for commission and damages under the two agreements.

Regulation 17 of the Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053, , provides: '(6) . the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal. (7) For the purpose of these Regulations such damage shall be deemed to occur particularly when the termination takes place in either or both of the following circumstances, namely circumstances which- (a) deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; or (b) have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.'

The case concerned a number of issues, for instance, whether the claimant was a commercial agent within the meaning of the Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053 (see above) and the approach to be taken in the calculation of the amount of compensation, if any, arising under Regulation 17 of the Regulations. The arguments centred on whether the approach of the French courts should be adopted whereby the level of compensation was fixed as the global sum of the last two years' commission or the sum of two years' commission calculated over the average of the last three years of the agency contract, although the court retained a discretion to award a lesser sum.

PJ Pipe argued that a 5% commission rate should have been awarded as this was the standard commission rate in this industry. Audco contended that there was no such standard commission rate but rather the commission rate depended on a number of factors which would reduce the rate to 3.5%.
The Court concluded that:-

• the "rule of thumb" commission level in the oil, gas and petrochemical supply business is 5%;
• to reflect commercial reality, the 5% figure is not immutable and will be fact sensitive to the relevant case, particularly when either low or large value orders are involved;
• for small amounts of work undertaken late in the day, the commission rate would be 4.5%;
• where PJ Pipe had simply "opened the door" for Audco in Nanhai the commission rate would be 3%;
• PJ Pipe was a commercial agent for the purpose of The Commercial Agents (Council Directive) Regulations ("the Regulations") as PJ Pipe played a crucial role in effecting introductions, persuading contractors to deal with Audco and assisting with quotations and queries;
• in accordance with the Regulations, the Court should gauge the loss to PJ Pipe by the termination of the agency and avoid any double counting;
• the Court need not confine itself to the French two-year tariff approach when assessing loss (the global sum of the last two years' commission or the sum of two years' commission calculated over the average of the last three years of the agency contract); and
• PJ Pipe was entitled to compensation of $118,518.60 under the Regulations as well as damages for loss of commission.

It is likely that Audco will appeal this award.

If you require any advice on drafting or termination of agency agreements, please contact us at [email protected]

© RT COOPERS, 2005. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.