Is the Restraint of Trade Clause in my Agency Agreement Enforceable?

Since the introduction of the Commercial Agents (Council Directive) Regulations ('the Regulations') in 1993, commercial agents have long since benefitted from an extra layer of statutory protection than those afforded to employees.

The Regulations were introduced to ensure that the law of agency in the UK was aligned with other EU Member States.

Since the UK's departure from the Common Market, the Regulations continue to have effect in the UK as retained EU law.

The Regulations provide a statutory framework for any agreement between a principal and its commercial agent. They confer duties upon both principals and agents.

They also allow agents to receive compensation (on either the 'compensation' or 'indemnity' basis) on termination of the agency agreement, save in certain circumstances.

As with a contract of employment, principals will often seek to protect their interests by including restrictive covenants to restrain the activities of a commercial agent upon the termination of an agreement.

Regulation 20 sets out the requirements for any post-termination restrictions to be valid.

This article considers the common law position concerning restraint of trade and sets out the parameters prescribed by Regulation 20, which will both apply to a commercial agency agreement that is governed by English law.

The effect of Regulation 20 is that to be effective, any post-termination restraint of trade clause must:

• Be concluded in writing. A written memorandum of an oral agreement will not suffice for these purposes.
• Relate to the geographical area, group of customers and kind of goods covered by the agency.
• Last for no more than two years from termination.
• Comply with competition laws and common law restraint of trade principles.

Whether a clause drafted to last more than two years will fail in its entirety will depend on any severance clause in the agreement and whether the 'blue pencil test' applies.

In other words, if the clause is too wide in its scope, can words be deleted to 'narrow' the scope of the clause and thus make it enforceable?

In the context of commercial agency, there have also been cases where restrictive covenants for less than two years have been deemed invalid, violating the common law principles described above.