Crane v Sky In-Home Service Ltd & Anor

This is the second of two judgments arising from the simultaneous trial of two related claims between parties including John Harold Crane (“Mr Crane”) and Sky In-Home Service Ltd (“SHS”). The first claim, by SHS and other members of the group (“the Sky Group”) including British Sky Broadcasting Ltd (“BSB”), alleged passing off by Mr Crane and a number of other defendants by reason of the sale of extended warranty contracts and repair services relating to the reception equipment (“the Hardware”) used by subscribers to the Sky Group’s satellite broadcasting service (“Sky Digital”). The second claim, to which this judgment relates (“the agency claim”), is by Mr Crane against SHS for compensation or indemnity under the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) by reason of the termination by SHS of an agreement between them relating to the sale by Mr Crane of part of the Hardware. The trial of this claim had been confined to liability only.

It is common ground that Mr Crane and SHS made an agreement in writing dated 15^th December 2003 and entitled Customer Offer Purchase and Agency Agreement (“COPA”) as part of a package of related agreements of even date, that it related to the sale of part of the Hardware, defined therein as “the Box Package”, and that it was terminated by SHS on 14 days’ written notice by letter dated 4^th February 2005.

The issues which I have to determine may be summarised as follows:

It emerged for the first time from reading the skeleton argument of Mr Ashley Roughton who appeared for Mr Crane that he wished to contend (as an insurance against the risk of being unsuccessful on issue (iii) above), that regs.2(3) and (4) of, and the Schedule to, the Regulations are ultra vires, being outwith the authority to make secondary legislation conferred by S.2(2) of the European Communities Act 1972. By way of riposte, early in the trial Mr Jasbir Dhillon who appeared for SHS notified his intention to submit if necessary that if (which he disputed) regs. 2(3) and (4) and the Schedule were ultra vires, then so must be the whole of the Regulations, on the ground that regs.2(3) and (4) and the Schedule could not be severed from the remainder.

There is no authority directly decisive of the ultra vires issue, and it plainly raises a question of general public importance. With the parties’ concurrence I permitted the Secretary of State for Trade and Industry, whose predecessor had made the Regulations, to intervene, and gave case management directions for that purpose on 16^th November 2006, the seventh day of a trial originally estimated for six days, the smooth progress of which had already been disrupted by late disclosure of important documents. 16^th November was the earliest date by which the Secretary of State could have been expected to respond to the very late invitation to consider intervention. The result was that, pursuant to those directions, the ultra vires issue had to be argued at a later date, after the end of the trial, causing further disruption which ought to have been unnecessary. It is also the reason why this judgment on the agency claim is being given separately from, and considerably later than, my judgment on the passing off claim.

This important issue ought to have been focussed upon in good time for its implications to have been addressed, at the latest, at the pre trial review which took place before Lewison J. on 17^th October 2006. That would have enabled the issue to be accommodated within the trial itself, and might have avoided the delay and additional expense which its separate treatment has caused.

The general factual background to this claim may be found in my judgment in the passing off claim, as will my conclusions about the reliability of the witnesses. I shall adopt the definitions and abbreviations used therein, save that I shall not refer to Mr Crane as John Crane, there being no present need to distinguish him from his brother Peter.

Save in one respect, the issues in the agency claim do not turn upon the outcome of any seriously disputed factual questions, but rather upon the construction of the Regulations and the relevant contractual framework, and the application of the Schedule to the background facts which are mainly undisputed. The exception arises from issue (iv), namely the extent of any breaches of his agency agreement by Mr Crane, and the reason why SHS terminated it.

For reasons which will in due course appear, SHS relied in closing submissions only upon that part of its original case of breach which alleged passing off by Mr Crane, on the basis that this amounted to a breach of his implied agency duty to look after the interests of his principal and to act dutifully and in good faith: see reg 3(1). I have in my judgment in the passing off case dealt fully with the allegations of passing off by Mr Crane. It was for that reason that the two claims were tried together. I refer in particular to paragraphs 230 to 233 of that judgment. It was unnecessary for me to address in that judgment the precise reasons why SHS terminated Mr Crane’s agency, and I shall address that question when dealing with issue (iv).

The only further introduction of the relevant facts which needs to precede my addressing the individual issues is a summary of the contractual structure regulating Mr Crane’s status as an Authorised Sales Agent of the Sky Group, generally abbreviated as an ASA. That status is in general, and was for Mr Crane, founded upon and regulated by a set of five agreements and a side letter, all of even date, but not all between the same parties. They were, in no particular order, COPA itself, between (1) SHS, (2) Marketing Contributions Limited (“MCCo”) and (3) Mr Crane trading as Indigital Satellite Services (“Indigital”). I shall return to its detailed terms below. Secondly, there was a Sky Digital Sales Agency Agreement (“SDSA”) between BSB and Mr Crane, again trading as Indigital. The third was an Approved Sky Digital Retailer Registration agreement, again between BSB and Mr Crane, and the fourth was an Authorised Sky Digital Installer Registration agreement between the same parties. Finally there was a self-billing agreement which regulated the administration of payments to be made pursuant to the other agreements. Nothing turns on the terms of the Side Letter, or for that matter upon the terms of the third, fourth and fifth agreements.

The purpose of the SDSA was to regulate the terms upon which Mr Crane was to act as BSB’s non-exclusive commission agent in respect of the sale of subscriptions to BSB’s Sky Digital satellite broadcast service. It is common ground that this did not qualify as a commercial agency within the Regulations because it was concerned with services rather than goods. It made reference to COPA, required Mr Crane to obtain BSB’s approval of any advertising marketing or promotional material used by him in selling subscriptions, and incorporated standard terms and conditions which sought to protect BSB’s intellectual property rights in the name Sky and associated trade marks.

The purpose of COPA was to regulate the terms upon which, as SHS’s agent, Mr Crane was to supply Customer Offers to Customers. A Customer is defined as a person acquiring a Box Package for use in a Home. A Box Package is defined as including a set top box and a Dish package. A Dish Package is defined as including a dish aerial and a low noise block converter. A Customer Offer means the supply to, and installation for, Customers of a Box Package. Clause 2.4 expressly excludes Sky+boxes from forming part of a Box package.

It will be immediately apparent that COPA contains express terms negating the creation of any agency of Mr Crane for the sale of Sky+boxes, and clause 5.2 required any authority of Mr Crane to do anything on behalf of SHS to be in writing. Mr Crane’s case, to the extent that it was pursued in closing, was that notwithstanding those terms, he later obtained such written authority in the form of a series of “Special Offer” letters written to him and other ASAs by BSB between July and December 2004, and that his authority in relation to Sky+boxes is in some way evidentially fortified by the fact that one of the distributors from which he sought to acquire Sky+boxes was under instructions from the Sky group only to sell them to ASAs.

The background to the Special offer letters is that ASAs had always been free to acquire Sky+boxes from distributors and to sell them to Sky Digital customers as principals, on whatever terms they could negotiate. Such sales might occur either upon a customer becoming a Sky Digital customer for the first time, or by way of an upgrade or addition to an existing customer’s Hardware. The question arising in relation to the Special Offer letters is whether their references to sales of Sky+boxes is to sales by ASAs as agents for SHS or to sales by ASAs acting as principal.

Although much forensic effort has been expended upon the factual question whether in fact the Sky Group ever gave instructions to the distributor concerned only to sell Sky+boxes to ASAs, I have been unable to discern from start to finish why the outcome of that question has anything to do with this issue. Even if the Sky Group did decide to instruct one of its distributors to limit their sales of Sky+boxes to ASAs, that would not begin to support the proposition that when an ASA on-sold the Sky+box to a customer, he was doing so as agent for a Sky company, rather than as principal. That proposition depends upon the identification within the Special Offer letters of written authority to that effect from SHS, as Mr Roughton (who appeared for Mr Crane) was sensibly minded in the end to accept, in paragraph 12 of his written closing submissions. The presence or absence of such authority in those letters is a matter of construction, in the light of the background to which I have referred. The letters certainly assume, as was the case, that the ASAs to whom alone they were written would be able to obtain Sky+boxes from Sky authorised distributors. A prohibition on the sale by a particular distributor of Sky+boxes to anyone other than ASAs seems to me irrelevant to the true construction of the letters, even as a matter of background.

The Special Offer letters (which are not in identical form) consist of a series of offers by BSB to the named ASA recipient (here, Mr Crane), to enter into a contract authorising him to “carry” a precisely defined offer (“the Offer”) in his marketing of Sky goods and services to his customers, for a precisely limited period. Although the period defined by the first letter expired on 31^st August 2004, long before the termination of Mr Crane’s agency in February 2005, it was in effect superseded by a series of further offers with later expiry dates, so that there was a succession of such offers available until (or shortly before) the termination date.

BSB’s offer of authority to the ASA could be accepted either in writing or by conduct, in the latter case by the ASA “choosing to run the Offer”. If accepted, the terms of the authority conferred were to “apply in addition to the terms and conditions of the Commercial Terms and Purchase and Agency Agreements between us”. There is no evidence that Mr Crane ever accepted any of the offers made to him by BSB, either in writing or by conduct, but he did sell subscriptions to customers coupled with the simultaneous sale of Sky+boxes during the period when the series of offers was current.

The Offer to customers which the letters invited ASAs to “carry” or “run” applied only to customers who during the offer period visit the ASA’s store and during the same visit:

“a)

Takes up Sky’s free minidish and digibox offer, or buys a Sky+box;

b)

Completes and signs a Sky digital subscription contract…

c)

Agrees to receive a Sky World package”

Those requirements are cumulative.

A customer who jumps through those hoops, and who is a first time Sky subscriber, becomes entitled to:

“a)

£30 standard installation of their Sky+box or free minidish and Sky box; and

b)

receive Sky Sports free for a month”

The ASA who makes such a sale to a qualifying customer becomes entitled to an enhanced ASA commission from BSB of £25.53 plus VAT, regardless whether the customer takes up Sky’s free minidish and digibox offer, or purchases a Sky+box, while simultaneously subscribing for the first time to Sky Digital.

The quotations in the above description of the Special Offer letters are taken from the first in the series, but the others are not materially different, or at least not materially more favourable to the construction which Mr Roughton sought to place on the series as a whole. The detailed terms and conditions enclosed with the first of the letters expressly contemplated that the ASA might, but not necessarily would, carry out installations on Sky’s behalf. That would naturally follow if a customer had accepted Sky’s free minidish and digibox offer (i.e. a Box Package), but not if he had purchased a Sky+box from the ASA, acting as principal.

In my judgment the Special Offer letters (even if acted upon) came nowhere near providing written authority to Mr Crane (or any other ASA) to negotiate as agent for SHS a sale of a Sky+box to a customer. They are primarily concerned with identifying the circumstances in which the sale of a Sky Digital subscription to a first time subscriber will trigger two specific entitlements for the subscriber, and an enhanced agency commission (i.e. enhanced beyond that payable under the SDSA) for the ASA. On the contrary, the setting out of the conditions for those entitlements goes out of its way to distinguish between, on the one hand, an associated sale on Sky’s behalf of the free minidish and digibox, and the sale by the ASA (by implication as principal) of a Sky+box. The former is the “Box Package” which the ASA is authorised to sell as Sky’s agent under COPA. The latter is outside that authority altogether, and is not an agency sale at all.

I therefore decide issue (i) in favour of SHS. Mr Crane was at no time authorised to sell Sky+boxes as agent for SHS.

Since all the other issues involve to a greater of lesser extent the construction and application of the Regulations, I must next deal with the challenge to their validity.

The Regulations were made by the Secretary of State expressly pursuant to section 2 (2) of the European Communities Act 1972 on 7^th December 1993. As their name implies, they were made with the intention of giving effect within the United Kingdom to the Council Directive of 18^th December 1986 on the Co-ordination of the law of the Member States relating to self employed commercial agents (Dir 86/653/EEC). I shall refer to it as “the Directive”. It had a long gestation period which began with an Explanatory Memorandum in December 1976, and a proposal by the Commission submitted on 18^th January 1977.

Throughout that gestation period, there was debate as to the question whether there should be any and if so how wide an option for Member States to derogate from the regime proposed for the protection of commercial agents. In the Explanatory Memorandum, the principle regulating the extent of permitted derogation was expressed as follows:

“thus, with the object of establishing certainty as to the law, renvoi to the internal law of Member States takes place solely in relation to matters for which it has not been possible to create uniform rules for the Member States of the Community, or in which no element of competition is involved, or which do not effect the degree of protection by the law which has already been achieved.”

The draft of the Directive proposed in January 1977 contained at article 4 the following provision:

“The Member States are at liberty:

1.

Not to apply Article 15 (4), last sentence, 19, 26 (2), 30 and 31 to persons who act as commercial agents but by way of secondary activity only; the question whether the activity is carried on in that way being determined in accordance with commercial usage in the State whose law governs the relations between principal and agent;”

In an opinion published on the 8^th March 1978 the Economic and Social Committee said this, at paragraph 2.3.5, in relation to Article 4:

“The Committee considers that Article 4 gives Member States too much latitude and this might make it difficult to define the scope of the Directive precisely. Article 4 should, therefore, be deleted…”

In his report on behalf of the Legal Affairs Committee dated 27^th July 1978 Mr P. De. Keersmaeker recommended the inclusion of Article 4 substantially as originally drafted, and at paragraph 25 of the report said this:

“Under Article 4 (1) Member States are also free not to apply the provisions of the directive to persons who act as commercial agents by way on secondary activity only. No definition is given of “commercial agency by way of secondary activity” because it is impossible to lay down suitable criteria for every possible case, and instead reference is made to commercial usage in individual Member States.”

On 9^th October 1978 the European Parliament gave its support to the proposed Directive without significant amendment to Article 4. In the event, what was then drafted as Article 4 came to be embodied in Article 2(2) of the Directive as finally adopted by the Council in the following terms:

“Each of the Member States shall have the right to provide that the Directive shall not apply to those persons whose activities as commercial agents are considered secondary by the law of that Member State”

It is apparent that two significant changes had been made to the formulation of the derogation option. The first was to extend its application to all the provisions of the Directive rather than merely to certain specific paragraphs. The second was to alter the criterion for the identification of activities as secondary from the commercial usage of individual Member States, to the law of such states.

It is common ground that at the time of the adoption of the Directive, the law of the United Kingdom (and for that matter the law of the Republic of Ireland) neither identified a distinct category of persons as commercial agents, nor provided them with any special rights. Necessarily therefore, it provided no definition of secondary activity for the purpose of excluding any sub-class of commercial agents from special protection. In this respect the common law in force in the United Kingdom and Ireland differed from the legal systems of most other Member States, which did contain such provisions, but not in any single or consistent manner. In terms of the result intended to be achieved, the Directive was modelled primarily on provisions of German law, save in relation to compensation for termination, in respect of which it was derived more closely from French law.

The absence of any recognition or protection of commercial agents as a particular class under English law had been emphasised by the Law Commission in a report (Law Com 84) on the then proposed Directive, in 1977. Whether or not those responsible for framing the Directive in its final form were aware of the Law Commission report, it is in my judgment reasonable to suppose that the European Commission was well aware that in adopting a directive designed to recognise and provide special protection to commercial agents, they would be imposing upon the United Kingdom and the Republic of Ireland a legislative burden substantially greater than that imposed upon other Member States, whose national law already contained provisions to that or similar effect. This assumption is confirmed by the final recital to the Directive, and by Article 22, the relevant parts of which are as follows:

I must briefly refer to certain further recitals in the Directive which are as follows:

“Having regard to the Treaty establishing the European Economic Community, and in particular Articles 57 (2) & 100 thereof,

…

Whereas the differences in national laws concerning commercial representation substantially affect the conditions of competition and the carrying-on of that activity within the Community and are detrimental both to the protection available to commercial agents vis-à-vis their principals and to the security of commercial transactions; whereas moreover those differences are such as to inhibit substantially the conclusion and operation of commercial representation contracts where principal and commercial agent are established in different Member States;

Whereas trade and goods between Member States should be carried on under conditions which are similar to those of a single market, and this necessitates approximation of the legal systems of the Member States to the extent required for the proper functioning of the common market; whereas in this regard the rules concerning conflict of laws do not, in the matter of commercial representation, remove the inconsistencies referred to above, nor would they even if they were made uniform, and accordingly the proposed harmonisation is necessary notwithstanding the existence of those rules;”

The Secretary of State sought in the Regulations to exercise the right conferred on the United Kingdom by Article 2 (2) of the Directive in the following manner. First, by reg 2, as follows;

Mr Roughton for Mr Crane submitted that the combination of reg 2(3) and (4) and the Schedule was not a legitimate method either of implementing the Directive, or of exercising any right to derogate conferred by Article 2 (2) of the Directive. As a result, he submitted that the power to make regulations conferred by section 2(2)(a) and (b) of the ECA did not authorise the Secretary of State to define and then exclude commercial agents whose activities were secondary in that way. His argument developed as follows:

I reject Mr Rougton’s argument. The starting point is to be found in my judgment in Article 249 of the EC Treaty, which provides that:

“A Directive shall be binding, as to the result to be achieved, upon each member state to which it is addressed, but shall leave to the national authorities the choice of form and methods.”

I consider it implicit that the manner whereby the result intended by a Directive to be achieved is actually implemented in any particular Member State is a matter of indifference from the perspective of the Treaty and of the Commission. Whether that is to be done by primary or delegated legislation in the United Kingdom is therefore a matter for Parliament, which has expressed its will in that regard by the terms of Section 2(2) of the ECA: see per Jacob LJ. in Oakley Inc v Animal Limited [2006] Ch 337 at paragraph 52 – 56, and 61 – 64.

Section 2(2) of the ECA provides as follows:

“(2)

Subject to Schedule 2 to this Act at any time after its passing Her Majesty may by Order in Council, and any designated Minister or department may by regulations, make provision-

(a)

for the purpose of implementing any Community obligation of the United Kingdom, or enabling any such obligation to be implemented, or of enabling any rights enjoyed or to be enjoyed by the United Kingdom under or by virtue of the Treaties to be exercised; or

(b)

For the purpose of dealing with matters arising out of or related to any such obligation or rights or the coming into force, or the operation from time to time, of subsection (1) above;

and in the exercise of any statutory power or duty, including any power to give directions or to legislate by means of orders, rules, regulations or other subordinate instrument, the person entrusted with the power or duty may have regard to the objects of the Communities and to any such obligation or rights as aforesaid.”

The leading case on the interpretation of section 2(2) is Oakley v Animal (supra). I derive from it the following principles relevant for present purposes:

Applying those principles to the present case, it seems to me that, first, the exercise of the “right” to derogate expressly conferred by Article 2(2) of the Directive was ‘enabled’ by reg 2(3) and (4) of the Regulations and by the Schedule thereto, because without the creation of a UK law definition of secondary activity the right could not be exercised at all. Those parts of the Regulations are therefore plainly authorised by section 2(2)(a) of the ECA. It may be, as was submitted by Mr Dhillon and by Mr Crow QC for SHS and the Secretary of State respectively, that those provisions also constituted the implementation of an obligation and/or the enabling of an obligation to be implemented, but I need not go that far.

Mr Roughton’s only answer to this analysis was that a right to derogate of the type found in Article 2(2) of the Directive was not a Treaty right within the meaning of Section 2(2)(a) of the ECA. I can envisage no reason why the words “any rights enjoyed or to be enjoyed by the United Kingdom under or by virtue of the Treaties” should be so narrowly construed.

Secondly, it would be a perverse interpretation of Article 2(2) of the Directive to conclude that it was designed and intended only to avail those Member States which already had national law which made a distinction between the general class of commercial agents and the sub-class of agents whose activities were secondary. The result would be to confer a unique disability upon those Member States without such a national law, namely the United Kingdom and Ireland, and thereby impose for the first time a regime for the protection of commercial agents more comprehensive than that required or imposed upon Member States whose law had for many years already conferred such protection.

In my judgment the rational and common-sense interpretation of Article 2(2) in relation to Member States with no such existing national law is that to enable them to exercise the right to derogate expressly conferred, they were expected if necessary to create national rules defining secondary activities by whatever means they thought fit. As I have noted, the United Kingdom and Ireland were given extra time with which to do so, by Article 22(3), precisely because it was understood that their existing national law was deficient in that and other relevant respects, so far as concerned the identification and protection of commercial agents.

Mr Roughton’s submission would lead to the bizarre and unfair conclusion that the purpose and intent of the Directive was to impose a regime for the protection of a larger class of commercial agents in Member States which had previously afforded none at all, than in those States which had afforded it to a limited class of commercial agents.

There was in any event no conceivable purpose behind the enactment of reg 2(3) and (4) and the Schedule than the creation of sufficient national law provisions to satisfy the requirement in Article 2(2) of the Directive. Those provisions have no other purpose in the law of the United Kingdom than to limit the size of the class of commercial agents to which the regime laid down by the Directive is to be applied. The test laid down by Jacob LJ in paragraph 65 of Oakley v Animal is therefore satisfied.

Finally, even if the distinction identified by May LJ in paragraph 47 of Oakley v Animal leads to the conclusion that the derogation option in Article 2(2) of the Directive gave rise to a choice which its implementation did not require the United Kingdom to make, the consequence is merely that reg 2(3) and (4) and the Schedule fall within the authority conferred by section 2(2)(b) rather than 2(2)(a). Either way, those provisions are, in my judgment, duly authorised by section 2(2) of the ECA and are not ultra vires.

Having reached that conclusion, I consider it unnecessary to deal with the question whether, had I found otherwise, reg 2(3) and (4) and the Schedule were severable from the rest of the Regulations.

Issue (ii) – Whether Mr Crane was a commercial agent within reg 2(1).

Two points were taken by SHS under this heading. The first was that Indigital was the agent rather than Mr Crane. Wisely Mr Dhillon did not purse this point in argument, dependent as it was on the supposed difference in legal personality between a sole trader and his chosen trading name. The second was that on its true construction COPA did not even constitute Mr Crane its agent for the sale of Box Packages within the meaning of the definition in reg 2(1), which reads as follows:

“ “commercial agent” means a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (“the principal”), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal…”

The essence of the second argument was that, looking at the substance rather than the form of COPA, on every sale of a Box Package to a subscriber, the ASA is really selling as principal, and merely completing the sale with a circuitous and momentary transfer of title to the Box Package to SHS a split second before completion: see in particular clause 6.3. It relies upon the fact that during the negotiation of the sale the Box Package forms part of the ASA’s stock, purchased in his own name and at his commercial risk from a distributor: see e.g. clauses 6.1 and 6.4.

I accept that it is a fair description of the mechanism laid down by COPA to say that the transfer of title of the Box Package to SHS occurs just before completion, and that during the negotiation of the sale, the Box Package with which SHS will in due course discharge its obligation as seller on completion forms part of the ASA’s stock, at his risk. But that is in my judgment no reason for labelling the careful and precise terms of COPA which provide for the ASA to negotiate the sale as agent on SHS’s behalf, and for SHS rather than the ASA to transfer title to the customer as seller, as pure form rather than substance or reality.

Although the full reasons for this rather convoluted process were never fully explored at trial, SHS undoubtedly became the contracting counterparty with the customer in relation to the sale of the Box Package, incurring all the liabilities as seller to the exclusion of the ASA, and the ASA did in truth negotiate the sale to the customer as SHS’s agent, as COPA expressly and unambiguously provides.

Accordingly I decide Issue (ii) in favour of Mr Crane. He was a commercial agent of SHS within the meaning of Regulation 2(1), in respect of the sale of Box Packages.

This issue raises questions as to the application of the Schedule to a body of largely undisputed fact about Mr Crane’s activities, and SHS’s reasons for appointing him as its representative.

Paragraphs 1 to 4 of the Schedule are in the following terms:

“1.

The activities of a person as a commercial agent are to be considered secondary where it may reasonably be taken that the primary purpose of the arrangement with his principal is other than as set out in paragraph 2 below.

2.

An arrangement falls within this paragraph if –

a)

the business of the principal is the sale, or as the case may be purchase, of goods of a particular kind; and

b)

the goods concerned are such that –

i)

transactions are normally individually negotiated and concluded on a commercial basis, and

ii)

procuring a transaction on one occasion is likely to lead to further transactions in those goods with that customer on future occasions, or to transactions in those goods with other customers in the same geographical area or among the same group of customers, and

that accordingly it is in the commercial interests of the principal in developing the market in those goods to appoint a representative to such customers with a view to the representative devoting effort, skill and expenditure from his own resource to that end.

3.

The following are indications that an arrangement falls within paragraph 2 above, and the absence of any of them is an indication to the contrary –

a)

the principal is the manufacturer, importer or distributor of the goods;

b)

the goods are specifically identified with the principal in the market in question rather than, or to a greater extent than, with any other person;

c)

the agent devotes substantially the whole of his time to representative activities (whether for one principal or for a number of principals whose interest are not conflicting);

d)

the goods are not normally available in the market in question other than by means of the agent;

e)

The arrangement is described as one of commercial agency.

4.

The following are indications that an arrangement does not fall within paragraph 2 above –

a)

promotional material is supplied direct to potential customers;

b)

persons are granted agencies without reference to existing agents in a particular area or in relation to a particular group;

c)

Customers normally select the goods for themselves and merely place their orders though the agent.”

Although reg 2(3) introduces the Schedule as a guide to the activities which are to be considered secondary, paragraph 1 in effect reverses that approach by assuming that a commercial agent’s activities are secondary if the primary purpose of the arrangement with his principal is other than as stated in paragraph 2, as amplified by the “indications” in paragraphs 3 and 4, and the presumptions in paragraph 5.

It was common ground before me that the reversal which I have described means that the burden normally lies on the claimant to show that his arrangement with his principal falls within paragraph 2; i.e. that it is an arrangement the primary purpose of which is as described in paragraph 2. Generally speaking, that seems to me to be true. If the claimant can show that the primary purpose of his arrangement with his principal is as described in paragraph 2, he will succeed. If not, he will fail, because some other purpose of the arrangement will be primary. There may however be cases, and Mr Roughton suggested that the present case may be one, where two purposes of the relevant arrangement can be identified, but with equal status, so that neither can be described as primary. In such a case, paragraph 1 will not apply, there being no single primary purpose, and the activities of the agent will not be secondary.

Where as here the issue is to be decided by an analysis of the purpose of an arrangement between two persons, the question arises: whose purpose? Paragraph 2 focuses almost exclusively on the purpose of the principal. The claimant has to show that it is in the commercial interests of the principal in developing the market for the particular kind of goods which are the subject of the arrangement to appoint a representative to the defined customers of his with a view to the representative devoting effort, skill and expenditure from his own resources to the development of that market.

The court is not permitted an unfettered analysis of that question. It will only be able to find that the commercial interests of the principal are furthered by such an appointment if that conclusion is reached via sub-paragraphs (a) and (b). That is the meaning of the words “if” at the end of the first line, and “that accordingly” which introduce the last four lines of paragraph 2. There may be numerous other reasons than those described in sub-paragraphs (a) and (b) why the interests of the principal might be served by such an appointment, but they would not be relevant reasons in the analysis required by the Schedule.

Proof that the requirements of sub-paragraphs (a) and (b) are satisfied will be necessary, but not always sufficient, to satisfy paragraph 2 as a whole. There may be cases where the requirements of the sub-paragraphs are satisfied, but the commercial interests test set out in the last four lines is nonetheless failed for some other reason. The sub-paragraphs therefore merit close but not exclusive attention.

It was suggested to me that paragraph 2(a) would not be satisfied unless the sale (or purchase) of the relevant goods was the sole or main business of the principal. I disagree. The purpose of the Regulations as a whole is (consistent with the Directive which it implements) the protection of a particular class of self employed intermediaries. The same agent may be appointed for the development of the same market in the same particular goods by, on the one hand, a large unitary corporation with many different businesses, including the sale of those goods, and on the other hand by a group of companies in which each different business is carried on by a different group company. It would be curious if the relevant group company was liable to pay compensation on termination, but the large unitary corporation not liable because the sale of those goods was not its sole or main business. The purpose of paragraph 2(a) is not to make that distinction, but to focus the analysis on the commercial interests served by the development of a market for goods of the relevant kind, rather than, for example, a market for related services.

It was common ground before me that the “indications” for and against a conclusion that an arrangement falls within paragraph 2, in paragraphs 3 and 4 respectively, are not to be used in some slavish numerical way. They are a non-exclusive list of pointers, each of which may be of differing weight in different cases. Viewed in the aggregate they do provide some assistance towards an understanding of the elusive concept of secondary activities which the Schedule seeks to define by its identification of the opposite. Taken as a whole they appear to me to be directed at distinguishing between a relationship where the agent develops goodwill (in relation to the market for the particular goods) which passes to the principal, and one where that does not happen, either because the agent’s activities are not typically generative of such goodwill, or because the principal generates goodwill mainly by other means.

I was referred to a number of cases in which the meaning and application of the Schedule has been reviewed, in particular Tamarind International Ltd v Eastern Energy Ltd [2000] Eu.L.R. 708; AMB Imballagi Plastici SRL v Pacflex Ltd [1999] 2 All ER (Comm) 249; and Edwards v International Connection (UK) Ltd [2006] EWCA Civ 662.I believe that the analysis which I have set out above, focused as it is upon the resolution of the issues in this case, is consistent with the reasoning to be derived from those authorities. I remind myself that like any other statutory provision, the Schedule is not to be paraphrased. It means what it says. I therefore turn to the application of the Schedule to the facts, starting with paragraph 1, which calls for an identification both of the relevant arrangement and the principal.

The principal in this case is SHS, not the Sky Group as a whole, still less BSB. While the word arrangement is wide enough to encompass more than a contract, the relevant arrangement in this case is COPA itself, together with the Side Letter and such part of the self-billing agreement as related to payments due under COPA. Nothing turns on the Side Letter or the self-billing agreement. The other agreements were not made between Mr Crane and SHS. They may be a relevant part of the factual matrix when applying the Schedule, but they form no part of the “arrangement with his principal”. Furthermore COPA (together with the Side letter and the relevant part of the self-billing agreement) constitutes the whole of the arrangement between Mr Crane and SHS with regard to the sale of the particular goods, namely Box Packages, as defined in COPA.

Turning to paragraph 2(a), the business of SHS includes the sale of Box Packages. Those are the “goods of a particular kind” because they are the subject matter of the arrangement. For the reasons already given, it is in my judgment irrelevant to the paragraph 2(a) test that SHS’s business includes the sale of other goods (e.g. Sky+boxes) and services (e.g. servicing and repair). That test is therefore satisfied.

Paragraph 2(b) sets up a more complex test. Sub paragraph (i) is in my judgment clearly satisfied. Box Packages are normally sold one by one, to customers in a retail transaction on a commercial basis. Sub paragraph (ii) raises a central issue in dispute. It encapsulates the concept that the sale of the particular goods by the agent must generate goodwill, i.e. the attractive force that brings in repeat custom, either from the same customer or from others. The question is to be answered by reference to the nature of the goods concerned, as the opening words of paragraph 2(b) make clear.

The central theme of SHS’s case in relation to the Schedule (both by way of evidence and submission) was that the goodwill leading to repeat custom was generated not by the sale of the Box Package, but by the sale of the Sky Digital subscription. Assuming without accepting that the activities of an ASA generated the relevant goodwill, Mr Dhillon submitted that it was the ASA’s sale of the Sky Digital service which generated repeat orders for Box Packages, whether from customers replacing old ones which had broken down or extra ones for other rooms, or from friends and neighbours. That sale of the Sky Digital service was neither part of the arrangement between Mr Crane and SHS, nor something which the Regulations were intended to deal with at all, since agencies in relation to the sale of services are excluded altogether.

Mr Roughton submitted that no such proportional assessment of the respective contribution to goodwill made by the Sky Digital service and the Box Package could legitimately be made. A customer could not enjoy a Sky programme on his television without both the Digital service and the Box Package. Each contributed equally to the generation of the goodwill, so that one could not be said to be primary or secondary to the other. This submission was mainly aimed at the primary purpose test in paragraph 1 of the Schedule, but it first needs to be addressed in relation to paragraph 2(b)(ii).

In my judgment SHS is correct about this. The starting point is to ask what it is that leads a customer to buy a Box Package. The obvious reason is that he wishes to view programmes on his television which he cannot view without one. The relevant programmes that he wants (or programme mix that he prefers) are broadcast from the Sky satellite. He cannot view them without paying a subscription. But to ensure that only paid up subscribers can view programmes broadcast from the Sky satellite, the Sky Group cause the signal to be encrypted in such a way that it can only be decoded by a set top box that has been enabled by the installation engineer and activated by the insertion of the appropriate smart card. The customer could probably buy an equivalent dish aerial and low noise block elsewhere, but the set top box has to be one of the three types which the Sky Group make available, directly or through the distribution network which I described in my judgment in the passing off action. The distribution network for the basic set top box forming part of the Box Package includes COPA.

It seems to me to be unreal to describe the Box Package as playing any significant part in the generation of goodwill in the sale of further Box Packages. The Box Package is like the key which unlocks the attractive new car. The point may be tested by asking why an existing customer might want a new or further Box Package, or, more realistically, set top box. If his existing box has broken down (and is not warranty protected) he will not buy a replacement because he liked the old box. He will probably thoroughly dislike it. He buys the new box to unlock the programme stream which he wishes to go on viewing, and for which he is paying a subscription. If he buys a further box, (necessary to watch different broadcasts on different televisions, but not the same broadcast on two), it is precisely because his family’s thirst for the programme stream is not assuaged by them all watching the same Sky broadcast together, or even in different rooms.

The same test in relation to purchases by new customers produces the same result. It will not be the dish aerial or the set top box that persuades the friend or neighbour to seek their own Box Package. They will want to become a Sky Digital subscriber in order to receive the satellite programme mix, and must arrange for the installation of the reception equipment if they are to receive it. True it is that the arrival of the first dish aerial in a particular street may encourage neighbours to take the plunge into satellite television, and that this may be the consequence of the hard work of an ASA, but it will be his sale of the first Sky Digital subscription in the street that pulls in the repeat business. The first customer in the street was not in the market for dish aerials.

The analysis that treats the Box Package (which always contains only the basic set top box) as little more than the key which unlocks the attractive service may not hold good in relation to Sky+boxes or HD boxes, because each of them contain more than just a decoder, and their added features (explained in my passing off judgment) may be an attractive force in the market in their own right. Having regard to my decision that Mr Crane’s sales agency did not extend to Sky+boxes, and since the HD box came on stream only after the agency was terminated, the possibility of a different analysis in relation to goods of these different kinds makes no difference to the outcome of this issue.

I therefore conclude that Mr Crane’s case fails to surmount the hurdle presented by paragraph 2(b)(ii). Whatever the commercial interests of SHS which led to Mr Crane’s appointment, they were not derived from a likelihood that sales of Box Packages would lead in any causative sense to further such sales. Mr Crane’s arrangement with SHS must have had a primary purpose different from that described in paragraph 2, and must therefore be considered secondary within the meaning of paragraph 1. That is sufficient to require issue (iii) to be determined in favour of SHS. In case however a higher court were to take an analysis of the effect of paragraph 2 different from that which I have described, I shall briefly address the remaining stages in the application of the Schedule.

I turn to the last four lines of paragraph 2. Notwithstanding SHS’s case to the contrary, it seems clear to me that it must have been in SHS’s commercial interests to appoint Mr Crane under COPA as its agent for the sale of Box Packages, with a view to his devoting effort, skill and expenditure from his own resources. But beyond that, Mr Crane’s case runs into further difficulties.

The first is that it is not obvious that the development of a distinct market for Box Packages was a commercial objective of SHS. It sold Box Packages at a loss, as an incentive to customers to subscribe for the Sky Digital service provided by its sister company BSB. I would not however have regarded that as an insuperable difficulty. Where one group company carries on a loss making activity for the benefit of another group company, the court is entitled to assume (in the absence of evidence to the contrary, and there is none), that its directors regard that as a legitimate business activity in the interests of its shareholders. It follows that the commercial interests of a group may satisfy the commercial interests test in paragraph 2 without having to show that the purely separate interests of the principal are served, viewed in isolation. Furthermore SHS had a profitable business in servicing and repairing Box Packages.

The more serious difficulty for Mr Crane lies in showing that his efforts, skill and expenditure as an agent under COPA had anything to do with developing the market in “those goods” i.e. Box Packages. His efforts, skill and expenditure as a sales agent for Sky Digital subscriptions under his agreements with BSB may have contributed to the development of the market for the sale of Box Packages, for the reasons I have already given. Those efforts do not qualify under paragraph 2, because they do not arise from Mr Crane’s appointment under COPA, or from any appointment by SHS. They arise from his appointment by BSB under the SDSA. This negative conclusion in relation to the applicability of the last four lines of paragraph 2 therefore goes hand in hand with my adverse conclusion in relation to paragraph 2(b)(ii).

I will now set out my conclusions in relation to the “indications” in paragraphs 3 and 4, again only against the possibility that this matter may go further. Paragraph 3(a) is on balance satisfied, in the sense that SHS’s sale of Box Packages is built on an arrangement whereby the Box Packages are assembled from items from different manufacturers by a sister company MCCo. In that respect the fact that this activity is not carried out by SHS itself does not seem to me to strike at the concept behind this sub paragraph.

Mr Dhillon submitted that there was no identification of Box Packages in the market with SHS, but only with the Sky Group generally. I accept that as a matter of fact, but it does not seem to me that it matters. The purpose of sub paragraph (b) is to point towards a situation where the goodwill generated by the agent’s activity inures to his principal rather than, for example himself. The fact that the goodwill attaches to an associated company of the principal is neither here nor there, if the principal benefits from the goodwill by virtue of that association. Accordingly I consider that paragraph 3(b) is also satisfied.

The same cannot on the facts established by the evidence be said about paragraph 3(c). During the period between December 2003 and February 2005, i.e. the currency of COPA, Mr Crane carried out only about 55 “enablements”, a word meaning the simultaneous sale of a Sky Digital subscription and the installation and sale of a package including a basic set top box or Sky+ box. The vast majority of those were Sky+boxes. I have held that Mr Crane sold Sky+boxes as a principal rather than as agent. His other activities, such as the sale of warranties and the carrying out of installation and repair work were not representative at all.

Mr Dhillon submitted that “representative activities” in paragraph 3(c) must mean activities in relation to goods rather than services, so as to exclude Mr Crane’s sale of Sky Digital subscriptions. I disagree. In my judgment paragraph 3(c) is directed to a focus on the question why (i.e. for what primary purpose) the agent was appointed. If his agency is ancillary to other non- representative activities, then it is unlikely that he was appointed for the exploitation of his skills as an agent. The question is simply whether the person in question is a full time agent (i.e. sales or purchase representative). Since the question addresses the purpose of the appointment, it is best answered at the time of the appointment. Otherwise he might drift in and out of qualifying commercial agency during the currency of the arrangement.

Notwithstanding my rejection of Mr Dhillon’s submission about the meaning and purpose of paragraph 3(c), the evidence nonetheless fails to persuade me that Mr Crane was, either at the start of, during or at the end of the period of his agency devoting substantially the whole of his time to representative activities. Paragraph 3(c) is not therefore satisfied. In the circumstances it is unnecessary for me to rule on Mr Dhillon’ other submission based on the undoubted fact that most of Mr Crane’s activity was carried out for the financial benefit of his company Say It Loud Marketing Limited.

Paragraph 3(d) is plainly not satisfied. Box packages were throughout the relevant period available direct from the Sky Group, and the majority were actually sold direct. As for paragraph 3(e), COPA speaks for itself. It is an agency agreement, both by its title and by its terms. Mr Dhillon submitted that the exclusion of compensation on termination in clause 5.5 of COPA means that the arrangement is not described as a commercial agency within the meaning of the Regulations. I disagree. A person may be (and in Mr Crane’s case is) disentitled to compensation by reason of the Schedule, even though he is a commercial agent within the meaning of Regulation 2(1), because he fails the secondary activities test.

Paragraph 4 (a) and (b) are clearly satisfied on the evidence; i.e. those are indications against the arrangement falling within paragraph 2. The evidence did not enable me to reach any clear conclusion in relation to paragraph 4(c).

It will be evident that my conclusion that Mr Crane’s activities were secondary within the meaning of the Schedule does not depend upon any fine analysis of the indications in paragraphs 3 or 4. In my view he failed to pass the tests in paragraph 2(b)(ii) and in the last four lines of paragraph 2. If the answer had depended on that fine analysis, then his failure to satisfy paragraph 3(c) and (d) would have told heavily against him, as would the indications in paragraph 4(a) and (b). Whether they would have been fatal if the facts relevant to the paragraph 2 tests which he failed had been different is a hypothetical question which I must leave to others.

Reg 18 excludes indemnity or compensation where:

“(a)

the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to regulation 16…”

Reg 16 forms part of Part IV of the Regulations. That Part contains rules which override freedom of contract in relation to termination, for example by imposing minimum notice periods. Reg 16 is designed to qualify those rules, as follows:

“These Regulations shall not affect the application of any enactment or rule of law which provides for the immediate termination of the agency contract-

(a)

because of the failure of one party to carry out all or part of his obligations under that contract

(b)

where exceptional circumstances arise”

Clause 8.1.2 of COPA permitted termination forthwith where the other party committed irremediable, persistent or recurring breaches, or remediable breaches which were not remedied within seven days of notice of the breach. Mr Dhillon submitted that these provisions in a contract governed by English Law meant that a default would justify immediate termination pursuant to reg 16 wherever it would also justify termination forthwith under clause 8.1.2 of COPA. The relevant “rule of law” was, he said, English contract law.

I disagree. If Mr Dhillon’s submission were correct, the parties could evade the obvious intent and purpose of Part IV by providing in their agreement that any breach would justify immediate termination. In my judgment the expression “any enactment or rule of law” points to a provision of the applicable law which justifies immediate termination regardless of the terms of the contract. The obvious candidate in English law is the doctrine of repudiatory breach. No enactment was relied upon.

Mr Roughton submitted that in order to exclude indemnity or compensation under reg 18 it was necessary to show that the principal actually did terminate the contract with immediate effect, in a manner justified by an enactment or rule of law under reg 16. In the present case SHS terminated COPA on 14 days notice pursuant to clause 8.1.1, and asserted neither a right to summary termination nor a right to accept a repudiatory breach as putting an end to the contract. Again, I disagree. In my judgment reg 18 (a) is plainly drafted in terms which allow the principal to terminate otherwise than summarily or by the acceptance of a repudiatory breach, provided that at that moment the principal had a right to terminate immediately within the meaning of reg 16, i.e. by the acceptance of a repudiatory breach.

Mr Dhillon submitted that when on 4^th February 2005 SHS gave notice terminating COPA it had just such a right, by reason of Mr Crane’s persistent course of conduct in passing off his extended warranty service as a Sky service, in breach of his duty of fidelity implied by reg 3(1) and the general law of agency. I have held in the passing off action that Mr Crane was indeed the deliberate perpetrator of just such a persistent course of passing off during a period which straddled February 2005, although the evidence of active marketing of his service to new customers (as opposed to continuing to describe his service as if it were Sky’s to existing customers) does not extend beyond the distribution of the final version of his written marketing material in about December 2004: see paragraphs 224 to 229 of my judgment in the passing off claim.

Mr Roughton submitted that by making payments to Mr Crane after July 2004 (by which time the Sky Group was well aware of Mr Crane’s passing off) for enablements carried out by him, SHS elected not to accept his passing off activity as a repudiatory breach, but rather elected to affirm COPA. He submitted further that the evidence did not establish that SHS terminated COPA because of any further repudiatory breach discovered after July 2004, but rather after a lengthy process of internal thought, mostly protected by legal professional privilege which was not waived, based upon knowledge of Mr Crane’s activities up to July. Accordingly, even if (as I have held) there was a major further episode of passing off in December 2004, in the form of the distribution of MM H, that was not the reason why SHS terminated COPA, so that the causative element in reg 18(a) enshrined in the phrase “because of default” is not satisfied on the facts.

The evidence of the reasons why SHS terminated COPA was given by Mr Timothy Wright, the Head of Independent Retail and Distribution at BSB. In summary, he said in chief by affirming his witness statement that after taking legal advice, he decided to terminate Mr Crane’s status as an ASA by reason, among other things, of his persistent mis-use of Sky marks in breach of the express terms of the SDSA, and because of passing off. He knew that all the ASA agreements (including COPA) contained provision for immediate termination for persistent breach, and regarded the conduct of Mr Crane as a breach of his duty of loyalty to SHS. The particular instances of Mr Crane’s conduct identified in Mr Wright’s evidence extended up to, but not in any particulars beyond, December 2003, save for an isolated and for present purposes quite different and irrelevant alleged breach in March 2004. Thereafter he relied upon Sky’s requests to Mr Crane to reform his conduct, and Mr Crane’s refusal to do so, all in the correspondence which petered out in July 2004. He made no mention of MM H.

Mr Wright was cross examined about his reasons for termination, but chose as he was entitled to do to hide behind the cloak of legal professional privilege. The implication was that he acted on legal advice, but not that he relied on any specific new or repeated breaches after July 2004. Taken as a whole, his evidence (which I accept) shows that he believed without making any specific further enquiry that Mr Crane was continuing upon his course of disloyal conduct, in the light of his refusal to reform, in the correspondence to which I have referred. He plainly never adverted to the complexities of regs 16 and 18, or to the possible need to have regard to the doctrine of repudiatory breach. In the event he took the low risk course of giving 14 days notice.

Mr Dhillon submitted that provided that a qualifying ground for immediate termination exists under reg 16 at the time of termination, reg 18 may be relied upon even if the principal is unaware of it. However consistent with the general law, that submission fails to address the need to show, under reg 18(a) that the contract was terminated “because of” the qualifying breach.

Nonetheless in my judgment SHS just succeeds under reg 18(a). Mr Crane was by February 2005 still deliberately and persistently passing off his extended warranty service as that of the Sky Group. That was a continuing and serious breach of his duty of fidelity to SHS. The person responsible for termination of COPA on behalf of SHS correctly believed that Mr Crane had continued in that course of conduct, and terminated COPA because of it. The fact that he made no further enquiries which would have demonstrated the truth of that belief is in my judgment neither here or there. Nor, for reasons already given, was his decision to take the risk free course of giving 14 days notice.

In the result therefore, SHS also succeeds on Issue (iv).

Reg 17(2) provides that except where the agency contract otherwise provides, the commercial agent shall be entitled to compensation rather than to indemnity. Clause 5.2 of COPA purported to exclude both compensation and indemnity. Mr Dhillon submitted that this did not “provide otherwise” within the meaning of reg 17(2), and Mr Roughton did not challenge this. I agree with Mr Dhillon. The answer to issue (v) therefore is that if Mr Crane had been entitled to anything by reason of the Regulations, it would have been to compensation rather than to indemnity.

Mr Crane’s claim under the regulations therefore fails. His activities under his arrangement with SHS were secondary within the meaning of the Schedule, and even if they had not been, his agency was terminated because of his default within the ambit of reg 18(a).