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Diamonds are forever – Court of Appeal rules in favour of diamond broker

In the case of W Nagel (a firm) v Pluczenik Diamond Company NV (2018) EWCA Civ 2640, the Court of Appeal has ruled that a diamond broker was entitled to compensation under the Commercial Agents (Council Directive) Regulations 1993 (the "Regulations"). This decision overturned the first instance judgement by Justice Popplewell in the High Court.

In the case of W Nagel (a firm) v Pluczenik Diamond Company NV (2018) EWCA Civ 2640, the Court of Appeal has ruled that a diamond broker was entitled to compensation under the Commercial Agents (Council Directive) Regulations 1993 (the "Regulations"). This decision overturned the first instance judgement by Justice Popplewell in the High Court.

Background

For a number of years, the claimant (Nagel) acted as a broker for the defendant (Pluczenik) in the purchase of rough diamonds from the international diamond company, De Beers. This was done at "sights" held ten times a year in London. Only De Beers accredited "sightholders" could purchase the rough diamonds. Following a relocation of the "sights" from London to Botswana, Pluczenik terminated the relationship in 2013. Nagel subsequently claimed compensation under the Regulations for failure to give notice and for termination pursuant to Regulation 17.

In the first instance judgement, Justice Popplewell awarded Nagel damages for breach of contract but rejected Nagel's claim under the Regulations and ruled that its activities fell outside the scope of the Regulations. Nagel cross-appealed that decision and contended that Justice Popplewell was wrong in reaching that conclusion.

In the event, the Court of Appeal did not make an order on this point. Nagel was not seeking a greater sum than it was awarded for breach of contract in the High Court ruling. The cross-appeal centred on Nagel's argument that the Regulations did provide an alternative justification for the award of the damages.

Judgement

Regulation 2(2)(b) provides that the Regulations do not apply to "commercial agents when they operate on commodity exchanges or in the commodity market".  Pluczenik sought to rely on this exception as a means of denying Nagel the right to compensation on termination of the agency relationship.

The Court of Appeal agreed with Justice Popplewell's interpretation of the terms "commodity" and "commodity sale". The term "commodity" would not reasonably be understood to denote any tangible goods and encompasses, for example, oil and gas products, some precious and industrial metals, grain and other agricultural or raw food stuffs such as coffee and sugar. A "commodity sale" will generally be "of generic goods in bulk, which are indistinguishable in origin or features from other goods of the same type". These interpretations covered the rough diamonds and their sale.

The Court of Appeal's consideration instead turned on whether the diamonds were sold on a "commodity exchange" or in the "commodity market". On these points, it disagreed with Justice Popplewell.

The Court of Appeal contended that a central tenet of a commodity exchange is the trading of commodities (or the rights to buy and sell commodities) which can be freely bought and sold among the participants. This went further than Justice Popplewell's interpretation as a place where sales take place. Quite rightly, the Court of Appeal used the example of a supermarket which we doubt many people would describe as an exchange.

The Court of Appeal used this interpretation to give meaning to the commodity market as a place where commodity exchanges are typical.  Put simply, the market covers all general trading in commodities that occurs in the open market.

On this interpretation, the Court of Appeal concluded that the sights held by De Beers were not commodity exchanges nor would sales at the sights be regarded as trading in the commodity market. Rather, they involved sales of rough diamonds from a single seller to a single buyer with prices often fixed in advance by the seller. It was more akin to a distribution outlet for De Beer's rough diamonds than an exchange where rough diamonds were freely bought and sold.

The Court of Appeal also noted that trading on a commodity exchange is not the sort of activity that generates goodwill for principals, the identity of the counterparty is irrelevant and the sales are made according to who is willing to pay the agreed price. This is not the activity carried out by Nagel as broker on behalf of Pluczenik. Justice Popplewell found that "the generation and maintenance of  Pluczenik's goodwill with De Beers was at the heart of the services which [Nagel] was engaged to perform".  This goes to the heart of the role of a commercial agent – the creation of goodwill for a principal.

To recognise that Nagel was a commercial agent in negotiating purchases of rough diamonds from De Beers but to then bring his activities inside the commodity exchange exception undermined the purpose of the Regulations. Nagel's activities are exactly the type that the Regulations seek to protect and the Court of Appeal ruled on this basis.

Conclusion

This was decided on the particular facts of the case and it is clear that this decision will not affect all sales of diamonds. For example, jewellery agents selling cut and processed diamonds to retailers would not be considered a commodity sale and would likely enjoy the protection of the Regulations.

Businesses that operate on commodity exchanges or appoint brokers and agents to buy commodities on their behalf should review their existing agreements with these third parties. This case shows that the Regulations can apply in such instances and principals can not necessarily rely on the exclusion in regulation 2(2)(b).

This case also illustrates the importance of properly documenting the agency relationship, particularly in respect of termination notice periods and grounds for termination. To limit their potential liability, principals should ensure that the agency document makes clear that any payments on termination are calculated on an indemnity basis rather than compensation (where no cap applies).

For more information on this topic, please contact Gordon Drakes and Larry Coltman or your usual contact within Fieldfisher's Brand Development Team.

Co-authored by Dominic Tyler.

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