The domestic energy retail market is a competitive one.
There are around 70 active suppliers and the Big Six (the six largest suppliers) hold around 75% of the market. Ofgem the energy regulator encourages consumers to switch energy supplier and shop for a better deal. But the flip side to this is a rise in doorstep selling and a risk of mis-selling to - often vulnerable - consumers.
This is what happened to Economy Energy, which has now gone bust, but which is also liable to pay over £1 million in compensation to the doorstep selling company that it used to try and persuade customers to switch to it. The facts of the case, Green Deal Marketing Southern Limited v Economy Energy Trading Limited and others  EWHC 507 (Ch), contain lessons for any energy company that uses another company to carry out energy mediation services on its behalf.
Know your contract
Economy Energy (EE) was a rapidly-growing energy supplier who entered into an initial Partnering Agreement with Green Deal Marketing (GDM) for GDM to persuade energy customers to switch to EE as their energy supplier. This Partnering Agreement was superseded a year later by a Heads of Terms which began "This document sets out the heads of terms that will form the basis of agreement between EE and GDM and that both parties will work together to agree a formal contract within 90 days of commencement." However, once the Heads of Terms had been signed, neither party made any effort to agree a formal contract but proceeded on the basis that the Heads were binding. Unsurprisingly, the court held that the Heads of Terms formed a binding contract.
Know your contractual rights
The Heads of Terms contained some KPIs ("Targets") that GDM agreed to adhere to. If GDM failed to achieve the KPIs and did not remedy such failure within a reasonable period of time, EE was entitled to terminate the agreement. Elsewhere there were references to a right for EE to terminate the contract in the event of a breach that cannot be remedied by GDM, having been given 14 days' notice of such breach, in writing, stating clear reasons for the termination.
Remember your licence obligations
Even before GDM was brought on board, EE started to find itself under investigation from Ofgem for mis-selling, in breach of its energy supply licences. GDM didn't help matters, as its sales techniques led to an increasing number of complaints. Not long after the Heads of Terms were signed, Ofgem opened a formal investigation into alleged non-compliance by EE with Standard Licence Condition 25 (which essentially is an obligation to take all reasonable steps to ensure that it or its representative (GDM) does not mis-sell its products). That investigation is separate to the court case, but the judge referred to it in his judgment.
It seems that EE did try to make sure that GDM sales agents were properly trained and it had previously got GDM to dismiss 66 agents who had the most cancellations or complaints. However, the complaints continued and Ofgem kept up the pressure on EE. This led to EE making its £1 million mistake.
Don't act in haste
EE felt that, despite all its efforts to improve its selling techniques, Ofgem still did not think it was doing enough. So EE panicked and telephoned GDM suspending all field sales. It confirmed this by text two days later. GDM (having instructed its lawyers) considered this to be a wrongful termination of the contract which meant that EE itself was in repudiatory breach. This breach entitled GDM to terminate the contract.
In layman's terms, depending on how the contract is drafted, one party can only end a contract for the other's fault if that fault is sufficiently serious. We've already established that the contract in question was the Heads of Terms. These contained a set of KPIs that GDM had to adhere to. GDM had always been in breach of the complaints KPI but EE had never asked it to remedy that breach. Remember, the contract said that EE could only terminate for breach of a KPI if it had asked GDM to remedy it and GDM had not done so within a reasonable time. So EE was not entitled to terminate without notice. In law this counts as a repudiatory breach of contract by EE, which gave GDM the right to terminate the contract. Ideally EE should have contacted its lawyers before "suspending" the contract with immediate effect.
Beware the Commercial Agents Regulations
What made this hasty (wrongful) termination so costly for EE was that the Commercial Agents (Council Directive) Regulations 1993 were deemed to apply to the contract, and these set out that an agent is entitled to compensation if the contract is terminated for a variety of reasons. This includes where the principal terminates for the agent's breach, but not a breach that is serious enough to justify summary termination (as in this case). Effectively the compensation is an award for loss of the income stream that proper performance of the agency would have provided, capitalised in the business valuation at the date of termination. In this case it amounted to just over £1 million.
Why did the Commercial Agents Regulations apply in this case?
A "commercial agent" means "a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the 'principal'), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal": (Regulation 2(1).) The court held:
- "negotiate the sale or purchase" had a wide meaning and included persuading a customer to switch supplier
- electricity was "goods" for the purposes of the Regulations. This follows other cases such as Computer Associates Ltd v The Software Incubator Ltd and Commission v Italy C-158/94
What does this mean for energy suppliers and intermediaries?
Energy suppliers who use another party to help them win more customers need to look closely at their contracts. Are the obligations on the agent clear? Do you have a right to terminate for a serious breach? Is there a set procedure to follow before you can serve notice to terminate the agreement for the agent's breach? Also, given that we now know the Commercial Agents Regulations are likely to apply, consider whether you are comfortable with the idea that the agent might be entitled to compensation. It may be prudent to deal with this in the contract.
Addleshaw Goddard can check your agency contracts for you to make sure you have the best possible legal protection.