Commercial Contracts

17



Northumbria university
COMMERCIAL CONTRACTS
LL.B

PHOEBE TAN SHI YI
WORD COUNT: 3468 WORDS






Contents
Question 1 2
Introduction 2
Commercial agent 2
Notice 3
Rights 3
Differences between agency agreements and distribution agreements 4
Question 2 5
Entire agreement clause and an exclusion of misrepresentation 5
Implied terms 6
Price of goods 6
Time for payment 7
Delivery 7
Retention of title clause 8
Exclusion of the statutory implied terms 9




Question 1
Introduction
Despite the numerous attempts made at defining what an agency really is, there is not a single one which prides itself to be accurate, leading to the common misconception of the word 'agent'. On the outset however, the concept of an agency is very simple: it is a fiduciary relationship which is brought about when one person, the principal, vests authority in another person, the agent, to enter into or negotiate contracts on behalf of the principal. Commercial agents are introduced to further the customer base of the principal and introduce new customers. The latest upgrade in domestic law regarding the area of agencies comes in the form of the (Council Directive) Regulations 1993 (referred to as 'the Regulations' from now on) which implemented the EC Directive 86/653 and is specifically designed to deal with commercial agents. Unlike the general agent, a commercial agency relationship is much narrower and limited to a single transaction.
Commercial agent
In order to qualify as a commercial agent Arnold must either be an 'independent contractor' or 'self-employed', but, never an employee as that would mean he falls outside the ambit of the Regulations. Arnold is not being remunerated for a provision of service; in fact, his only remuneration comes in the form of commission, when he successfully concludes a contract for the sales of goods. Furthermore, the manner in which he negotiated or concluded a sale of goods contract is not under VAL's jurisdiction. The only limitation VAL imposed on Arnold is on the territory in which he may sell the vending machines. Hence Arnold is considered to be an 'independent contractor'. However, that does not mean he could act for himself as this would again bring him out of the reach of the Directive. It is worth noting that no fixed contractual period is stated in the agreement, aside from a starting date in February 2013. Hence Arnold clearly has the continuing authority to negotiate on behalf of VAL given the indefinite duration of the agency contract.
The agency relationship between Arnold and VAL also appears to be established contractually in writing. This should mean that the duties, rights and obligations of the principal and agent will be stated in contract and can be defeated or enforced by either party via the normal laws of the contract. However, the agency agreement seems to be a very brief one and does not include any of Arnold's rights and obligations. Given the fact that there is no requirement that a relationship of agency be contractual, where a contract purports to exist but lacks validity because sufficient consideration is not present, the agency is said to be 'gratuitous'. Agency by agreement is founded upon consent, not on the existence of a contract. It is sufficient if there is consent by the principal to the exercise by the agent of authority and consent by the agent to his exercising such authority on behalf of the principal.
Notice

Both the principal and the commercial agent are entitled to a period of notice before the termination of an agreement. Regulation 15(2) outlines the statutory minimum that is required by either party in a commercial agency agreement concluded for an indefinite period. The formula from which it is calculated is based on the length of the contract of the agency, with an increase of a month for every additional year the contract is commenced: one month in the first year, two months in the second year and three months for the third and subsequent years. Arnold and VAL may not agree on shorter notice periods but can negotiate on extending the statutory minimum provided under regulation 15(2) if either of them wishes, which is 3 months since contract has commenced in February 2013. If both Arnold and VAL agree on a longer notice period, the period of notice to be observed by VAL cannot be shorter than that to be observed by Arnold.
Rights
An agent is normally entitled to a payment from the principal upon termination or expiry of a commercial agency. The commercial agent is entitled to an indemnity if he has introduced new customers to the principal, or has given the principal a significant boost in the volume of businesses with the current customers and the principal continues to derive considerable benefits from the transactions with these customers. In its entirety, the concept of an indemnity allows Arnold to claim for the sum in return for the profits gained by VAL as a result of his own efforts. If he qualifies for an indemnity, he will receive an amount which is capped to a figure equivalent to one year's average commission calculated with reference to the commission he's paid in the five years prior to that, or if less than five years the actual period. Arnold may also be able to claim damages for a breach of agency contract in addition to an indemnity.
Arnold's right to compensation or an indemnity will be lost if: he fails to notify VAL of his plans to pursue his claim for an indemnity within one year of the agency contract being terminated; the contract of agency has been terminated by VAL due to Arnold's own default thereby justifying the termination under regulation 16; he has chosen to terminate the contract without any justification relating to circumstances attributable to VAL or his own age or infirmity; he assigns his rights and duties under the agency contract to another person with VAL's agreement.

Differences between agency agreements and distribution agreements

Agents and distributors are both regarded as a channel to market, with both performing a similar function to effect a common commercial objective. Both the agent and distributor act as a bridge between the manufacturers and customers, hence in a nutshell they are the intermediary between the final-consumer and the producer of the goods. However it is important to note that there are significant differences between these two types of agreements.
For a start, an agent commonly handles the marketing –concluding and negotiating contracts on behalf of the principal either his own name or that of the principal. The agent rarely decides on the pricing or the terms of business, often working under restrictions imposed by the supplier. On the other hand, the distributor merely purchases the goods from the manufacturer or supplier and re-sells them to the customers as an independent principal, marking-up the initial cost price and re-selling them.
While an agent is remunerated by commission on sales concluded through his efforts, he does not receive the title in the goods and the customers are in a contractual relationship with the principal rather than with him. A distributor receives profits from re-selling the goods, and, instead of negotiating on behalf of a principal concludes contracts on his own account –which effectively means that he contracts directly with the customers. This would also mean that the distributor takes on a greater amount of risk in comparison to the agent who normally does not assume any liability in contracting on behalf of the principal. However this has not always been the case with an obvious exception to this situation being an agent's ultra vires act or an act which has not been ratified by the principal. Besides that, the distributor may in certain circumstances be indemnified from defective products if it falls within the ambit of the Consumer Protection Act 1987.
Another vital difference that cannot be overlooked would be that the agent has recourse to the law in a situation involving the termination of his agency agreement with the principal while the distributor is left to his own devices in an area shrouded with uncertainty, a predicament attributed to by the lack of any form of legislative guidance. A commercial agent would either be entitled to a compensation, indemnity or damages in the event of the termination of an agreement. This is not the case for a distributor as he does not have any remedy unless it is provided for in the agreement

There are generally no competition law issues in a genuine agency agreement as both the principal and agent are treated as one entity. Given that there is no risk taking on the part of the agent, the agreement falls outside the ambit of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). However there would be a possible involvement of competition law in the area of distribution agreements but only where it significantly affects the market taking into account the dominant position held by the parties.

An agent will help VAL retain its grip on the customer relationships besides allowing it to side-step various competition law issues and lower cost. On the other hand, a distributor significantly reduces the degree of risk and therefore administrative costs assumed by VAL because it deals with just the distributor rather than the end customers. However, VAL would not be able to exercise as much control over the activities of a distributor as it could have over an agent's as it does not have a direct relationship with the customers. Nevertheless, an agency arrangement may seem less commercially appealing as that of a distributor's as an agent is entitled to a compensation and indemnity payment upon the termination of an agreement while a distributor isn't.




Question 2
Entire agreement clause

DSN may want to add an entire agreement clause in the standard terms and conditions under Clause 2 to expressly exclude liability for anything said or done outside of the final written contract –these includes promises, discussions, statements, representations, or misrepresentations not contained within the contract. An entire agreement clause, otherwise known as a 'boiler plate' provision in a contract, provides that the terms present in the contract are the only ones that are included in the contract and are therefore enforceable. This clause should be drafted very clearly and specifically to exclude liability for non-fraudulent misrepresentations, both pre-contractual and contractual. Through an entire agreement clause, DSN would be able to exclude liability for any collateral contract arising from anything said or done, such as a chance remark or statement made in the course of negotiations, though liability for fraudulent pre-contractual representations can never be excluded. It is important to note that an entire agreement clause must be reasonable under the Unfair Contract Terms Act 1977, though it is unlikely that it would not be reasonable in the context of a commercial contract.


Implied terms
DSN should remove Clause 3 entirely from the standard terms and conditions. This is because there is already a pre-existing term implied under the Sale of Goods Act, specifically sections 12 to 15. The three main implied terms in section 13(1), section 14(2) and section 14(3), taken in that order, lay down a series of graduated duties upon the seller. In the first place, there is the implied term that where goods are sold by description the goods must correspond with their description. The next implied term is that the goods must be of satisfactory quality. The definition of satisfactory quality comprises of two limbs with the general basic principle provided in section 14(2)(a) and a list of specific aspects of quality in section 14(2)(b). Section 14(2)(a) provides that goods are of satisfactory quality if they meet the objective standard, which is if a reasonable person would regard as satisfactory, taking into consideration any description of the goods, the price and all other relevant circumstances. Section 14(2)(b) on the other hand widens the aspects taken into account while accessing if the goods are of a minimum satisfactory quality requirement and includes their state as well as condition. In still more limited circumstances, the buyer may be able to rely on the third implied term, namely that the goods must be fit for the purposes for which they were sold. Section 14(2) deals with the inherent quality of goods, however a further factor may be of relevance, the particular purpose for which goods may be required. Section 14(3) provides that the goods supplied under the contract should be reasonably fit for that purpose for which it was bought, regardless of whether the purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely on the skill or judgement of the seller.
Price of goods
DSL may wish to draft clause 4 and include a term which allows for a right to increase the price of the goods so as to reflect any increase in production cost on its part the event of an inflation which would affect the price of the raw materials. Clause 4 could also be specifically drafted so as to accommodate an increase in the cost of labour, services, transportation and taxation.
Time for payment
The basic position for time of payment under the Sale of Goods Act 1979 (SGA) is to be found in Section 10 and will supersede the common law position as it is automatically implied. Given the fact that payment for the price is the essence of the contract, as expressly stated in Clause 5.1, timely payment is to be regarded as a condition. Failure to pay for the goods within 7 days of the date of order, as specified under Clause 5.2, would therefore result in a repudiatory breach of the contract. Due to the fact that DSN has already specified clearly under Clause 5 that time of payment is of the essence, the inclusion of an interest rate of 2% per month on any overdue payment of the price of goods is therefore reasonable as it discourages late payment and ensures that the customers pay promptly upon receiving the goods. DSN should, however, raise the interest rate specified in Clause 5.2 from 2% to 5% in order to prevent slow cash flow and encourage immediate payment. Moreover, in order to minimise risk, DSN may want to draft the clause in a way which allows it to sue the customer for the full price of the goods if the payment is still due after 2 month as significant delays in payment may indicate an intention to repudiate the contract. Moreover, DSN should also add a clause which states that if the goods have been destroyed or stolen while they were at the buyer's risk, the buyer will then remain under a duty to pay the full price and he will not be able to avoid payment by arguing that delivery was rendered impossible under these circumstances.

Delivery

Rather than having a 48 hour bracket during which the delivery of the goods would have been made, DSN should include a term under Clause 6 which expressly and unequivocally states that the time of the delivery of the goods is not of the essence. This is because under common law, especially in the context of a commercial contract for the sale of goods, the general rule is that time is prima facie of the essence when it comes to delivery. Therefore time of the delivery is construed to be a condition, and if not met, would mean that customers are entitled to sue DSN for damages, or repudiate the contract. DSN may also opt to add a force majeure clause which states that it would not be liable for a delay in the delivery of goods if that delay is attributable to an unexpected or unfortunate incident beyond its control. DSN should then proceed to provide a non-exhaustive list of events that would potentially cause such a delay, for example an industrial action, bad weather, act of God, war, strike, riot or crime. This would be a useful addition to the standard terms and conditions as it would mean that DSN is able to suspend its obligations momentarily, to allow for additional time to deliver the goods, while preventing a repudiation of the contract if the interruption turns out to be very lengthy. Besides that, DSN should also draft in a term which excludes liability if the one of the caveats are met in the event that there is a shortfall in the quantity of goods delivered. Firstly, if the shortfall is merely a microscopic deviation of the quantity contracted for, the buyer is not entitled to reject the goods as the shortfall is so immaterial that the courts will disregard it under the de minimis non curat lex principle. Secondly, if the shortfall is so insignificant that it would render the buyer's rejection of it unreasonable, irrespective of the fact that the buyer is not dealing as a consumer. Rather than rejecting it the buyer would simply have to pay a lesser sum than that which is initially owed to DSN. Furthermore, DSN should add a term to Clause 6 which specifies that delivery to a carrier would mean that the goods would be prima facie regarded as delivered to the buyer. A delivery through an agent or servant of DSN however would not constitute a delivery to the buyer because of the connection between DSN and the carrier.

Retention of title clause
DSN may wish to safeguard its position in the event the customer is not able to pay. Since goods passes when both parties intend of it too and the intention of the parties are to be inferred from the terms of the contract, it is advisable for DSN to incorporate a retention of title clause into its standard terms and condition. Essentially, such a clause would mean that the property does not pass to the customer until payment has been made regardless of the delivery of goods. The retention of title clause may be invoked by DSN whenever the customer has yet to make the requisite payment though if not properly incorporated into the contract will be void. The main reason why DSN should introduce such a clause into its standard term contract would be because any unpaid goods remain recoverable in the event of a customers' insolvency, DSN is merely recovering what actually belongs to it as the property in the goods have not passed to the customer. Alternatively, DSN may add an all-monies retention clause (or all-liabilities) into its contract. Unlike a simple retention of title clause, an all monies-clause may apply to debts accruing from other separate or unrelated contracts of sale and would essentially allow DSN to withhold the goods until all monies or liabilities owed to it is paid. An all-monies clause will provide more flexibility for DSN as debts arising from such a clause need not be from debts alone, in fact, any justified legal ground will be sufficient.

Exclusion of the statutory implied terms
DSN is free to exclude the terms implied by SGA 1979 provided that it fulfils the reasonableness test under the Unfair Contract Terms Act 1977 (UCTA 1977). The requirement of reasonableness, which lies within UCTA 1977, provides that a term is reasonable if it is a fair and reasonable one, taking into account all the circumstance that were or ought to reasonably have known about. Reasonableness is determined based on the factors listed in Schedule 2 of the UCTA 1977. Among the list of factors taken into account when deciding if something is reasonable or not is the strength of the bargaining positions, whether or not the buyer has received an inducement, whether the buyer ought to have known or ought reasonably to have known of the existence and principal of the term. The third is practicable compliance in the event that it was reasonable. Where a term is found to be unreasonable, it cannot be relied on to exclude or restrict liability. The requirement for a buyer to notify DSN of any failure or defect in the products within 2 days is not an unreasonable one as the goods involved are not used for the manufacturing of other end-products and is not being re-sold, rather it is of a type ordinarily supplied for private use. DSN should also include a clause which limits its liability to an amount which does not exceed the price of goods provided. This would mean that the reasonableness test under section 11(4) of the SGA 1979 applies and the factors to be taken into consideration are the resources expected to be available to DSN in order to meet any liability should it arise, and, how far it was open to DSN to cover itself with insurance. Besides that, DSL may draft its standard terms contract to exclude liability in relation to third party contracts, for example when a buyer contracts with a sub-buyer, and consequential losses. Moreover, DSL should narrow the scope of Clause 8.2 and state that the buyer would not be entitled to replacement if such a remedy is impossible to perform, or is disproportionate either to other remedies or a reduction in the price of the goods.















Bibliography
Primary Sources
Cases
Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (CA)
AMB Imballaggi Plastici SRL v Pacflex Ltd [1999] CLC 1391 (CA)
Arcos Ltd v EA Ronaasen & Son [1933] AC 470 (HL)
Armour v Thyssen Edelstahlwerke AG [1991] 2 AC
Case 5/69 Franz Völk v ETS Vervaecke SPRL [1969] CMLR 273
Charles Rickards Ltd v Oppenheim [1950] 1 KB 616 (CA)
Clegg v Andersson [2003] EWCA Civ 320
Deepak Fertilisers & Petrochemicals Corp Ltd v ICI Chemicals & Polymers [1999] 1 Lloyds Rep
Galbraith & Grant Ltd v Block [1922] 2 KB 155 (KB)
Grant v Australian Knitting Mills Ltd [1935] All ER 209
Hartley v Hymans [1920] 3 KB 475 (KB)
Inntreprenuer Pub Co v East Crown [2000] 2 Lloyd's Rep
Lombard North Central plc v Butterworth [1987] QB 527 (CA)
Moore v Piretta PTA Ltd [1999] 1 All ER 174
Niblett v Confectioners' Materials Co [1921] 3 KB 387
Varley v Whipp [1900] 1 QB 513

Volvo Germany v Autohof Weidensdorf [2010] All ER (D) 30 (Nov)

Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] QB 174 (QB) 185




Statutes and statutory instruments
Commercial Agents (Council Directive) Regulations 1993
Competition Act 1998

Council Directive 86/653/EEC on the coordination of the laws of the Member States relating to self-employed commercial agents [2006] QJ L 382/17
Guidelines on Vertical Restraints (Text with EEA relevance) 2010/C 130/01
Sales of Goods Act 1979
Unfair Contract Terms Act 1977
Secondary sources
Books

AP Dobson and Robert Stokes, Commercial Law (8th edn, Sweet & Maxwell 2012)
Eric Baskind, Greg Osborne and Lee Roach, Commercial Law (1st edn, OUP 2013)
Odavia Bueno Diaz, Manolo Scotton, Muriel Veldman and others, Commercial Agency, Franchise and Distribution Contracts (1st edn, European Law Publishers 2006)

PS Atiyah, John Adams and HL MacQueen, Atiyah's Sale of Goods (12th edn, Pearson 2010)

Roderick Munday, Agency: Law and principles (1st edn, OUP 2010)

Websites

Dr Malcolm Bates, 'Entire agreement clauses' (Taylor Wessing 2015) accessed 18 April 2015


Emma Roake, 'What period of notice does a party have to give to terminate a supply or distributorship agreement' (Agent Law, 28 Jan 2014) accessed 18 April 2015

Lyndsay Gough, 'Expanding into new territories –should you appoint a distributor or an agent?' (Keystone Law, 16 November 2011) accessed 15 April 2015

Melanie Ashworth, 'Agency and distribution compared' (Lexis PSL Commercial 2015) accessed 18 April 2015

–– 'Agency and distributorship agreements' (Agent law 2001) accessed 20 April 2015





Eric Baskind, Greg Osborne and Lee Roach, Commercial Law (1st edn, OUP 2013) 65
Guidelines on Vertical Restraints (Text with EEA relevance) 2010/C 130/01 Art 2.1 para 12
Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents [2006] QJ L 382/17
AMB Imballaggi Plastici SRL v Pacflex Ltd [1999] CLC 1391 (CA)
Roderick Munday, Agency: Law and principles (1st edn, OUP 2010) 23
Eric Baskind, Greg Osborne and Lee Roach, Commercial Law (1st edn, OUP 2013) 65
Yasuda Fire & Marine Insurance Co of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] QB 174 (QB) 185
Odavia Bueno Diaz, Manolo Scotton, Muriel Veldman and others, Commercial Agency, Franchise and Distribution Contracts (1st edn, European Law Publishers 2006) 130
Commercial Agents (Council Directive) Regulations 1993, reg 15(3)
Ibid reg 17(3)(a)
Ibid reg 17(3)
Moore v Piretta PTA Ltd [1999] 1 All ER 174
Ibid reg 17(4)
Ibid reg 17(5)
Ibid reg 17(9)
Ibid reg 18(a)
Volvo Germany v Autohof Weidensdorf [2010] All ER (D) 30 (Nov)
Commercial Agents (Council Directive) Regulations 1993, reg 18(c)
Melanie Ashworth, 'Agency and distribution compared' (Lexis PSL Commercial 2015) accessed 18 April 2015
–– 'Agency and distributorship agreements' (Agent law 2001) accessed 20 April 2015
Emma Roake, 'What period of notice does a party have to give to terminate a supply or distributorship agreement' (Agent Law, 28 Jan 2014) accessed 18 April 2015
Competition Act 1998
Guidelines on Vertical Restraints (Text with EEA Relevance) 2010/C 130/01 Art 2(2.2) para 18
Case 5/69 Franz Völk v ETS Vervaecke SPRL [1969] CMLR 273
Lyndsay Gough, 'Expanding into new territories –should you appoint a distributor or an agent?' (Keystone Law, 16 November 2011) < http://www.keystonelaw.co.uk/other/keynotes/2011/november/expanding-into-new-territories-should-you-appoint-a-distributor-or-an-agent/> accessed 15 April 2015
Deepak Fertilisers & Petrochemicals Corp Ltd v ICI Chemicals & Polymers [1999] 1 Lloyds Rep 138
Inntreprenuer Pub Co v East Crown [2000] 2 Lloyd's Rep 611
Dr Malcolm Bates, 'Entire agreement clauses' (Taylor Wessing 2015) accessed 18 April 2015
PS Atiyah, John Adams and HL MacQueen, Atiyah's Sale of Goods (12th edn, Pearson 2010) 151
Varley v Whipp [1900] 1 QB 513
Clegg v Andersson [2003] EWCA Civ 320
Niblett v Confectioners' Materials Co [1921] 3 KB 387
Grant v Australian Knitting Mills Ltd [1935] All ER 209
Lombard North Central plc v Butterworth [1987] QB 527 (CA)
Eric Baskind, Greg Osborne and Lee Roach, Commercial Law (1st edn, OUP 2013) 337
Baskind (n 41) 336
Hartley v Hymans [1920] 3 KB 475 (KB)
Sales of Goods Act 1979, s 11(4)
Charles Rickards Ltd v Oppenheim [1950] 1 KB 616 (CA)
Eric Baskind, Greg Osborne and Lee Roach, Commercial Law (1st edn, OUP 2013) 319
Baskind (n 46) 329
Arcos Ltd v EA Ronaasen & Son [1933] AC 470 (HL) 480
Sales of Goods Act 1979, s 30(2A)(a)
SGA 1979, s 32(1)
Galbraith & Grant Ltd v Block [1922] 2 KB 155 (KB)
Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 (CA)
Armour v Thyssen Edelstahlwerke AG [1991] 2 AC 339 (HL)
AP Dobson and Robert Stokes, Commercial Law (8th edn, Sweet & Maxwell 2012) 197
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