When can a breach of trust justify terminating an agency contract?

As anticipated in ‘Should a breach of trust be “serious” to end an agency agreement?’ (13 July 2012, Solicitors Journal), the Court of Appeal has handed down its judgment in Crocs Europe BV v Spectrum Agencies [2012] EWCA Civ 1400 in favour of the respondent.

Such anticipation does not detract from a consideration of the reasons put forward by Mummery LJ and Bean J in their concurring judgments. Nor should it detract from the appeal to the Supreme Court which, it is understood, is being made by Crocs.

In his judgment, Mummery LJ started by rejecting the possibility that regulation 3 of the Commercial Agents (Council Directive) Regulations 1993 (as amended) could be a condition of the agency contract, breach of which automatically terminates the contract. Regulation 3 is concerned with requiring that an agent look after the interests of his principal and act dutifully and in good faith

Mummery LJ then turned to the alternative argument made on behalf of Crocs, that regulation 3 created a statutory duty. Again relying on regulation 5(2), he dismissed this alternative argument.

A large part of Mummery LJ’s judgment is given over to the issue of fiduciary duties. This was in response to the appellant’s third submission being that breach of the duty of loyalty owed by an agent to his principal under the general law exists alongside regulation 3 and, more particularly, that a serious breach of this duty justified summary termination of the agency contract.

In considering this argument, he implicitly relied on Bowstead & Reynolds in distinguishing between:

? those duties which are fiduciary in nature and those which are not; and

? those fiduciary duties a breach of which will and will not result in the repudiation of an agency contract.

But in doing so, Mummery LJ advanced no case authority to support his judgment. Instead he swiftly addressed an analogous argument made in respect of the duties of an employee. But his citation of cases in dealing with this analogous argument only serves to highlight their earlier absence.

In contrast to Mummery LJ, the judgment of Bean J is concerned exclusively with regulation 3. In giving his judgment, he focused on the issue of what constitutes a repudiation of an agency contract and, by analogy, an employment contract. But while Bean J considered that the “legal test” is easily stated, he accepted that, “… the more difficult question is whether in the particular case party A’s conduct viewed objectively was likely to destroy or seriously damage the relationship.”

In this respect he had to tackle the argu-ment put forward by Fergus Randolph QC on behalf of Crocs that the fact that there had been a breach of regulation 3 meant that Crocs could treat the agency contract as repudiated. This was on the basis that “as with pregnancy… a party is either in breach of regulation 3 or not”. Or, as stated in the above article, the nature of the principal or agent relationship is such that it can either be alive or dead, it cannot be half-dead.

However, for Bean J most obligations in an employment contract are innominate terms. In taking this position, it was then easy for Bean J to knock over the reliance placed by Mr Randolph QC on the maritime case of Bunge Corporation v Tradax Export SA [1981] UKHL 11. This was on the basis that the obligations of an agent under regulation 3 (or the corresponding duties of an employee) were “analogous with the seaworthiness obligation rather than with a time clause given that… there is no reason why [time] should be of the essence in a commercial agency contract…”.

Ultimately, Bean J could not accept that regulation 3(1) is a condition of an agency contract.

Ironically, Bean J considered that the breach by Spectrum Agencies was “quite close to the borderline” to being capable of being treated as a repudiation. But, in determining that it was properly open to Sir Raymond Jack in the first instance to find as a tribunal fact that the breach was not repudiatory, Bean J refused to interfere with it.

The upshot of this is that there can be situations where an agent’s actions are repudiatory. But where the line is crossed is uncertain. If the Supreme Court should hear Crocs’ appeal and reverse the earlier courts, principals and agents alike are likely to have greater certainty of where that line is.