Brand Studio Ltd v St John Knits, Inc

Where an agency agreement purports to select indemnity rather than compensation on termination, the court must consider whether an invalid proviso can be severed before deciding whether the agreement otherwise provides for indemnity under the Commercial Agents Regulations.

The common-law test for severance asks whether the invalid term can be removed without adding to or modifying the remaining wording, whether the remaining terms retain adequate consideration, and whether removal changes the character of the contract so fundamentally that it is no longer the sort of contract made by the parties. Mere alteration of the agreement is insufficient. The court must assess the substance, structure and language of the contract. A valid election to accept indemnity remained enforceable after removal of an invalid proviso which required acceptance of compensation where that was the lesser sum.

The claimant, a UK sales agency, acted for the defendant, a Californian fashion company, under an English-law agency agreement. On termination, the agreement purported to provide for indemnity under the Commercial Agents (Council Directive) Regulations 1993, but also required compensation where that produced the lesser payment.

It was common ground, following Shearman v Hunter Boot Ltd [2014] EWHC 47 (QB), that the contractual wording did not amount to a valid agreement otherwise under regulation 17. The preliminary issue was whether the offending proviso could be severed, leaving a valid agreement for indemnity rather than compensation.

1. The court should consider severance before finally deciding whether the agency agreement “otherwise provides” for the purposes of regulation 17. This was particularly so because clause 7.5 expressly contemplated severance of an invalid or unenforceable provision.

2. Following Beckett Investment Management Group v Hall [2007] 1 ICR 1539, the applicable threefold test, formulated in Sadler v Imperial Life Assurance [1988] IRLR 388, required consideration of whether:

   • the unenforceable provision could be removed without adding to or modifying the remaining wording;
   • the remaining terms continued to be supported by adequate consideration; and
   • removal would so change the character of the contract that it became no longer the sort of contract entered into by the parties.

3. The first two conditions were satisfied. The third required an assessment of substance rather than form, while treating the structure and language of the contract as important. Mere change to the agreement was insufficient.

4. The first part of clause 6.3(a) was a valid concession by the agent to accept indemnity instead of compensation. The proviso was an invalid and unenforceable further concession. Although the proviso affected the operation of the indemnity provision, removing it did not change the character of the agreement. The reasoning concerning substance over form in Marshall v NM Management [1997] 1 WLR 1527 was accepted and applied.

5. Kenyon v Darwen Cotton Manufacturing Company [1936] 2 KB 193 did not assist. That case concerned a statutory prohibition extending to the whole arrangement, so no question of common-law severance arose.

6. After severance, the agreement otherwise provided for indemnity under regulation 17. The answer to the preliminary issue was No.