Diamonds are not a Commercial Agent’s best friend

The Commercial Agents (Council Directive) Regulations 1993 provide important rights for commercial agents who sell or negotiate the sale or purchase of goods on behalf of others, including the right to receive compensation or an indemnity on termination of the agency relationship.

Some types of agent are however excluded from the Regulations, including those who sell services and those whose activities selling goods are only secondary to their main activities. One of the lesser known exclusions is agents who operate on commodity exchanges or in the commodity market. The High Court recently had to consider, in the case of W Nagel (A Firm) v Pluczenik Diamond Co NV, whether a firm of diamond brokers were commercial agents for the purpose of the Regulations, or whether they were excluded because they operated on a commodity exchange.

The claimant, W Nagel (“WN”), arranged for the purchase of diamonds by the defendant, Pluczenik, from De Beers. The De Beers sale process is highly exclusive. Rough diamonds are sold to wholesalers at events called “Sights”, held in London approximately ten times a year. Only accredited “Sightholders” can purchase diamonds at the Sights, and historically each Sightholder was required by De Beers to be represented by an accredited broker. Diamonds were sold at the Sights by the box, in categories sorted by colour, shape, size and quality.

WN was an accredited De Beers broker, and acted for a number of Sightholders, including Pluczenik. In July 2013, following changes to the sales process by De Beers, Pluczenik decided to enter into a direct relationship with De Beers rather than use a broker (which was no longer required). It terminated the commercial relationship with WN in August 2013 without notice, and WN subsequently issued a claim seeking outstanding commission, notice pay, and compensation under the Regulations. Pluczenik argued that diamonds were a commodity, and that WN traded in diamonds on a commodity exchange; therefore WN was excluded from the protection of the Regulations.

After examining the evidence in some detail, the court agreed. The Regulations do not define a commodity exchange, but the judge looked at the everyday use of the words, and how they would generally be understood by commercial parties. He decided that the key characteristics of a commodity exchange are:

• The nature of the goods sold. Generally, commodities are thought to include oil and gas products, precious and industrial metals, grain and other raw foods such as coffee. Often commodities will be subject to futures and options trading.
• The manner and place of sale. A commodity sale, the judge said, will generally focus on generic goods bought in bulk, which are indistinguishable from other goods of the same kind, and the sales will take place in an organised marketplace (which may be physical or virtual) subject to some kind of regulation.

In this case, De Beers sold large boxes of diamonds wholesale, by reference to a generic category by description, and generally at a fixed price. The Sights were regular organised events, at which only accredited parties were able to purchase. Sightholders could sell on boxes to third parties unopened and unseen, without subjecting them to manufacturing processes. The court decided that these were all features of a commodity exchange, and accordingly WN was excluded from the protection of the Regulations (although it succeeded in other claims it brought against Pluczenik).

Although WN was not found to be a commercial agent in this case, it is important for agents and principals to consider their own circumstances. The court’s decision in this case was based on the particular facts of the case, and it is clear that not all sales of diamonds will constitute commodity sales. The sale of individual diamonds by jewellery agents into the retail market would typically fall within the Regulations, for example. Any agents or principals who are unsure about their status should seek legal advice, particularly if considering termination of their relationship.