ABG Commercial Newsletter – December 2012

Fluctuations in exchange rates

The Court of Appeal has recently considered a case in which a buyer of goods argued that a fixed exchange rate should be implied into the supply agreement which it had with its supplier. Under the agreement the price for the goods supplied was specified in euros, but payment was to be made in sterling. As a result of fluctuations in the exchange rate, paying the invoices in sterling became more expensive for the buyer.

The buyer argued that a fixed exchange rate should be used to convert the euro prices into sterling for the purposes of payment because there was a scheduled costs budget which contained a fixed exchange rate. It argued that this showed there was an intention for the supplier to buy the products at cost whereas the exchange rate fluctuation was giving the supplier a profit.

However, the Court of Appeal rejected this argument and refused to imply the term argued for by the buyer. It decided that a fixed rate had not been agreed between the parties. Both of them were significant commercial organisations and they could easily have inserted a fixed exchange rate into the payment provisions. They had not done so and the buyer should have realised that it was exposed to an exchange rate risk.

This decision starkly demonstrates the importance of addressing exchange rate risks and including appropriate provisions in the contract or through appropriate hedging measures.

Commercial Agents Regulations

The Commercial Agents Regulations govern the relationship between a commercial agent and the principal. Under the Regulations a commercial agent is under a duty to look after the interests of the principal and to act dutifully and in good faith in performing his activities. In particular the agent must make proper efforts to negotiate and conclude the transactions he is instructed to take care of and comply with reasonable instructions given by the principal.

On termination of the agency contract the agent has a right to compensation, but there is no such right where the principal has terminated the agency contract because of default on the agent’s part which would justify immediate termination of the agency contract under common law rules.

In a recent case the Court of Appeal had to decide whether an agent’s breach of the duty to look after the principal’s interests and to act dutifully and in good faith amounted to a repudiatory breach of the agency contract justifying immediate termination and therefore depriving the agent of any right to compensation. The Court ruled that the agent’s breach of its mandatory duties under the Regulations did not automatically qualify as a repudiatory breach of contract, but that instead the normal common law rules for deciding whether or not a breach of contract is repudiatory would apply. The test was whether, on an objective assessment of the facts, the agent’s breach was sufficiently serious to entitle the principal to treat the agency contract as terminated.

One of the commercial agent’s employees had created an internet post containing disparaging comments about the principal. He then sent a link to a number of organisations, including major customers of the principal.

After the principal had terminated the agency contract, the agent tried to claim compensation under the Regulations. The principal disputed the claim, arguing that it was entitled to treat the agency contract as at an end due to the agent’s repudiatory breach and so no compensation was payable.

However, the High Court ruled that the breach of contract was not sufficiently serious to amount to a repudiatory breach entitling the principal to terminate the agency contract. The principal appealed against this decision arguing that an agent’s breach of the fiduciary duty of good faith and loyalty under the Regulations is always repudiatory.

The appeal was rejected by the Court of Appeal. It agreed with the High Court that, although the disparaging comments about the principal were a breach of contract, they did not amount to a repudiatory breach because the breach was not sufficiently serious. The comments posted on the Internet did not disparage the principal’s products, but referred to its well-known inability to meet delivery obligations and it had only been of limited and temporary circulation. It had been intended as a joke and, although the principal had not been amused, there was no evidence of damage suffered by the principal.

This case is a lesson for principals that, to avoid the payment of compensation on termination of an agency contract on the grounds of an agent’s breach, the principal must be able to demonstrate that the breach was sufficiently serious to amount to a repudiatory breach of contract under common law rules.

Shareholder protection against unfair prejudice

A shareholder can petition the court for relief if the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of the company’s members generally or some of those members, including the shareholder himself. This may arise if, for example, there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. However, the courts take a wide view of unfair prejudice suffered by a shareholder and are flexible in their approach.

If the court finds that unfair prejudice has taken place, it has wide powers as regards remedy, including the power to make a buyout order for the shareholder’s shares to be purchased by the other parties to the petition.

In a recent case a minority shareholder’s petition based on unfair prejudice succeeded when the company’s sole director had paid himself excessive remuneration. Originally the High Court had dismissed the shareholder’s petition because it said that the shareholder had failed to inspect the company’s accounts disclosing the payments and that he could not complain of an act which otherwise would have amounted to unfair prejudice if he could have found out about it earlier through taking some action.

However, the Court of Appeal overturned this ruling as it would mean that minority shareholders are at risk of losing their rights if they do not read their company’s filed accounts. The Court of Appeal ruled that the sole director had acted in breach of his duty as a director by fixing his remuneration by reference to his own interests and this amounted to unfairly prejudicial conduct. The company had subsequently gone into liquidation and so the case was sent back to the High Court to decide what remedy to grant the shareholder in the interests of fairness.

 

The comments in this note are of a general nature only. Full advice should be sought on any specific problems.

Tim Sisson
tsisson@abg-law.com
+44 (0)115 934 3333

Andrew Sutton
asutton@abg-law.com
+44 (0)115 934 3303