A diamond in the rough

There is a little known exception in the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) which states that the Regulations do not apply to commercial agents when they operate on commodity exchanges or in the commodity market. The Regulations do not explain what these terms actually mean and, until quite recently, there hasn’t been a case before the Courts to give any guidance on when this exception might apply.

The Court of Appeal has now provided that guidance in the case of W Nagel v Pluczenik Diamond Company NV. The guidance was given in passing and did not actually form part of the core judgment but is nevertheless useful to commercial agents and principals who deal with commodities.

For many years Nagel acted as broker for Pluczenik in the purchase of rough diamonds from de Beers. Pluczenik terminated the arrangements in 2013, triggering a claim by Nagel for compensation under the Regulations (amongst other claims). The question of whether the commodity exchange / commodity market exceptions applied was first considered in the High Court in 2017. In considering whether these exceptions applied to the sale of rough diamonds, the Judge focussed on the nature of the goods sold and the manner and place of sale and decided that the exceptions did apply.

The Court of Appeal took a different view and explained that the relevant question is not whether the goods were sold by de Beers as a commodity, but whether they were sold on a “commodity exchange” or in “the commodity market”. A key component of a “commodity exchange” is that the commodities (or rights to buy and sell commodities) which are traded on the exchange can be freely bought and sold among the participants. A “commodity market” then covers any general trading in commodities that takes places in the open market.

Applying that reasoning to the sale of rough diamonds by de Beers, the Court concluded that Nagel was not operating on a commodity exchange or in the commodity market and that its activities were therefore within the scope of the Regulations. The purchases from de Beers involved sales of rough diamonds from a single seller to a single buyer, with prices often fixed in advance by the seller. The Court also noted that trading on a commodity exchange does not generate goodwill for principals and this is a key element of the role of a commercial agent (and indeed was a key element of the services that Nagel performed for Pluczenik).

The Court of Appeal’s narrow construction of the meanings of “commodity exchange” and “commodity market” will be welcomed by agents and brokers who deal in commodities and may lead their principals to review their contracts to check that they deal with the potential application of the Regulations.

Disputes under the Regulations involving commodities are likely to be quite rare, but given the nature of commodities (eg, precious metals, grain, electricity, oil, natural gas) and the quantities involved the value of these disputes could be highly significant for both the agent and the principal.

Kevin Manship, Legal Director 
Blake Morgan Solicitors LLP, One Central Square, Cardiff, CF10 1FS
Email: kevin.manship@blakemorgan.co.uk

Direct Tel: 029 2068 6126

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