"For the purposes of this Directive, 'commercial agent' shall mean a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person, hereinafter called the 'principal' or to negotiate and conclude such transactions on behalf of and in the name of that principal".

Article 2.2 states that:-

"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".

"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".

Paragraph 2 provides that:

"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 resources 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 interests 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 through the agent".

Findings of the Sheriff and Sheriff Principal

'In the third place, it is necessary to consider the various criteria set out in paragraphs 3 and 4, and to decide whether those criteria affect the conclusion that the court reaches about the applicability of paragraph 2.'

Thus the approach taken by Lord Drummond Young would appear to be that one forms a view about the applicability of paragraph 2 and then sees if paragraphs 3 and 4 alter the conclusion to which one has already come. I was thus fortified in the approach which I had adopted.

I accept that one could say, given the opening words in paragraph 2, namely 'an arrangement falls within this paragraph if -' certain criteria are met that if they are met that should be determinative of the issue. However as I have sought to explain that could deny any content to at least some of the indicators in paragraphs 3 and 4.

I have been further assisted in my interpretation of the Regulations by the analysis in Lord Drummond Young's opinion as to the purpose of the Regulations and the Directive. It seems to me that there is little room for disputing the view expressed by Lord Drummond Young when he states at paragraph 26 of his opinion:-

'The underlying mischief at which the Directive is aimed is the situation where an agent builds up goodwill through his own efforts but cannot realise the goodwill for his own benefit, with the result that his business activities are in a vulnerable position and require protection.'

'The crucial point here seems to be that appointing an agent to negotiate sales and thereby develop the market should operate in the commercial interests of the principal. In other words, goodwill is built up by the agent's effort and skill and the use of the agent's resources but enures to the principal because it is identified with his goods. Thus the agent is in a vulnerable position because the capital asset that he builds up, goodwill in the goods, is something that he cannot realise for his own benefit. That, it may be supposed, is why such an agent requires protection by legislation. In other cases, however, no such protection is needed. It appears that this is the rationale underlying the Schedule, and in particular its exclusion of agents whose activities as commercial agents are considered secondary. In essence, the Schedule attempts to distinguish agents who build up the goodwill of their principals' businesses from those who do not.'

In my respectful opinion that is a very succinct summation of the purpose of the Regulation. As I have already indicated in this Note, I am unable to make any finding that the pursuer built up goodwill which enured to the principal and could not be realised for the pursuer's own benefit. In my opinion the paragraph must be interpreted in light of the mischief against which the Regulation is directed. That being so it seems to me that the approach to this part of paragraph 2 of the Schedule adopted by Lord Drummond Young is correct. It is thus only satisfied if one interprets 'the commercial interests of the principal' as meaning that goodwill attaches to the principal's product as a result of the efforts of the agent. Since such goodwill did not attach to the defenders' products by virtue of the actings of the pursuer I do not consider that this part of the paragraph has been satisfied."

"is to exclude from the ambit of the Regulations agents whose contract with their principal has terminated in circumstances where the principal does not continue to benefit from the activities of the former agent". (Emphasis added.)

Ground of appeal

"The learned sheriff principal erred in holding that the arrangement between the parties did not satisfy the criteria in paragraph 2 Schedule 1 of the Commercial Agents (Council Directive) Regulations 1993. He did so as he concluded that the goodwill generated by the sales of aluminium containers attached to the pursuer and not the defenders. The sheriff principal should have held on the evidence that the pursuer had been engaged to develop the market for the defenders' goods, and that accordingly the arrangement was in the commercial interests of the defenders."

Submissions of the parties

"who, by their devotion of time to a particular principal in promoting goods identified with him, thereby develop the market in his goods without the benefit of acquiring for themselves any advantages from that enhanced market". (Emphasis added.)

It was going too far to include the passage in italics. As the Sheriff Principal himself later acknowledged (paragraph 20), the test necessary for the agent to qualify for indemnity and/or compensation at the end of the arrangement in terms of Regulation 17 was different from and complementary to the test whether at the inception of the arrangement the agent met the requirements of a commercial agent to whom the Regulations applied. Mr McEntagart accepted, however, that the purpose in "developing the market" in terms of the last part of paragraph 2 was the generation of goodwill for the principal. The Sheriff Principal and Sheriff were correct in that but Mr McEntagart submitted that they came to the wrong conclusion in respect of the factual findings that the goodwill attached to the appellant and not to the respondent. The Sheriff had based his conclusion in relation to where the goodwill attached on the appellant's dominant position in the market. But on the facts the intention at the inception of the arrangement was that the appellant would use his dominant position to develop the market in such a way as to benefit the respondents' goodwill. On the facts, therefore, the Sheriff and the Sheriff Principal were not entitled to find that the intention was otherwise. To try to decide who had the dominant goodwill would be to usurp the function of Regulation 17. If that was correct, the Sheriff Principal (and the Sheriff) erred in law in finding that the appellant did not satisfy the last part of paragraph 2 of the Schedule.

"It is ... necessary to examine the purpose of the Agreement (or perhaps the 'prospects' of it in relation to goodwill) for the purpose of determining whether an Agreement involves the relationship of 'commercial agent' and principal at its inception. That task is carried out by reference to the Schedule. To qualify for indemnity and compensation at the end of the arrangement, it has to be shown that the agent has developed goodwill which enures to the principal. That is necessary for qualification under Regulation 17. The tests are different and in a sense complementary".

Turning to the indications in paragraphs 3 and 4, Mr McEntagart said that the indication in paragraph 3(a) was present. He accepted that the Sheriff had found that the indication in paragraph 3(b) was not present. That was not a critical factor, however, and should not override any contrary conclusion to which a consideration of paragraph 2 pointed. It should not be given undue weight. Mr McEntagart accepted that the Sheriff's conclusion that the indications in paragraph 3(c), (d) and (e) and paragraph 4(c), the only part of paragraph 4 on which there was sufficient evidence to come to a conclusion, were not present. These indications did not, however, affect the conclusion that the appellant had satisfied paragraph 2.

Discussion

"The underlying mischief at which the Directive is aimed is the situation where an agent builds up goodwill through his own efforts but cannot realise that goodwill for his own benefit, with the result that his business activities are in a vulnerable position and require protection".

At paragraph [29] he expressed the view that the Schedule to the Regulations should be interpreted in the light of that mischief. The same approach was taken by Morison J. in the English case of Tamarind International and Others v Eastern Natural Gas and Another [2000] Eu LR 708. At paragraph [28] of his Opinion he said this:-

"What the Directive is aimed at is the protection of agents by giving them a share of the goodwill which they have generated for the principal and from which the principal derives benefit after the agency has been terminated ... Essentially ... the Regulations are asking whether this agent has been engaged in such circumstances as he can be said to have been engaged to develop goodwill in the principal's business."

In our opinion the approach adopted in these two cases is the correct approach. We therefore do not agree that the Sheriff Principal posed the wrong question. On the contrary, in our opinion he posed the correct question and on the facts found by the Sheriff came to the correct conclusion. The arrangement between the parties did not satisfy the last part of paragraph 2 of the Schedule.

'For the purposes of this Directive, 'commercial agent' shall mean a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person, hereinafter called the 'principal', or to negotiate and conclude such transactions on behalf of and in the name of that principal'.

That is the basic provision that restricts the definition of a commercial agent to agents who sell or purchase goods on behalf of their principals. Article 1.3 excludes corporate officers, partners and insolvency practitioners from the definition. Article 2.2 provides as follows:

'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'.

The word 'secondary' is not explained further. One situation that article 2.2 appears to contemplate is where an agent's activities involving the buying and selling of goods is of lesser importance than his other activities on behalf of the principal, or perhaps his other activities generally. That follows from perhaps the most fundamental meaning of the word 'secondary'; if something is secondary, it logically entails that some other thing is primary. In the present context it seems clear that, where an agent's activities other than the sale of and purchase of goods can be regarded as primary, member states are authorised when incorporating the Directive into their domestic law to exclude such an agent from the category of commercial agents. It is only where the buying and selling of goods on behalf of an agent's principal can be regarded as his primary activity that the member state is obliged to apply the Directive in full. Consequently article 2.2 appears to contemplate that member states may exclude from the application of the Directive any agent where it appears that the major part of his work does not fall within the definition in article 1.2. The word "secondary" may, however, have a wider signification than a mere numerical comparison of the agent's activities as a commercial agent and his other activities. The underlying mischief at which the Directive is aimed is the situation where an agent builds up goodwill through his own efforts but cannot realise that goodwill for his own benefit, with the result that his business activities are in a vulnerable position and require protection. The expression 'activities as commercial agents', as used in article 2.2, seems to point to activities that involve this underlying mischief. Where, accordingly, the mischief is absent or of relatively limited significance, it is open to the legal system of a member state to deem the agent's activities as a commercial agent to be secondary and thus to exclude him from the protection of the Directive".

"any lingering doubt that one might have as to whether the arrangement between the parties fell within paragraph 2 is ... removed by the absence of this indicator".

The context of Mr McEntagart's submission was that if, as he had submitted, the appellant met all the requirements of paragraph 2, at least on a prima facie view, the absence of the indication in paragraph 3(b) should not lead to a contrary conclusion. That scenario has not materialised but whatever the context in our view the indication in paragraph 3(b) is clearly important, for the reason given by Lord Drummond Young, namely, that it is only in the event that the goods are specifically identified with the principal that the goodwill attaching to the goods will pass to the principal. We see no reason to dissent from the view expressed by Lord Drummond Young that if this factor is absent there is a strong likelihood that the last of the requirements in paragraph 2 of the Schedule does not exist. How strong that likelihood is, however, must depend on all the circumstances of the particular case.

Decision