Shine bright like a diamond? What commercial agents need to know about commodity exchanges

When a judge begins his judgement with the words "Diamonds are not forever", you know the case he was dealing with was without doubt a fascinating one.

It involved a claim by family run diamond broker, Willie Nagel (WN, a firm), against its client, Pluczenik Diamond Company, one of the world's leading players in the field, for termination of an agency relationship involving the purchase by Pluczenik of rough diamonds from De Beers.

Probably the first case to consider the scope of the exemption under the Commercial Agents (Council Directive) Regulations 1993 for commercial agents who operate on commodity exchanges, it is also of interest and has broader implications for all UK businesses using agents.

So what happened?

WN was appointed by Pluczenik as its broker in the 1960s and continued to act as its agent for the purchase of rough diamonds from De Beers, a world famous international corporation which has used the advertising slogan 'A diamond is forever' since 1948.

Rough diamonds were historically sold to wholesalers at highly exclusive sales events known as "sights" held in London about ten times a year with only accredited "sightholders" allowed to buy the diamonds using accredited brokers, which included WN.

But in 2013, following changes to the De Beers sales process negating the need to use an accredited broker, Pluczenik decided to deal directly with De Beers and terminated its commercial relationship with WN without notice.

WN then issued a claim seeking commission, notice pay and more than £3.5 million in compensation.

Countering this, Pluczenik argued that diamonds were a commodity, that WN traded in diamonds as a commodity exchange and was therefore not protected by the Regulations.

What did the court decide?

Mr Justice Popplewell agreed that WN did not have Regulation protection and was therefore found not be a commercial agent in this case.

In doing so, he decided that the key characteristics of a commodity exchange are:

• The nature of the goods sold. As a general rule, commodities are thought to include oil and gas, precious and industrial metals, grain and other raw foods like coffee and are often subject to futures and options trading;
• The manner and place of sale. The judge said that a commodity sale usually focuses on goods indistinguishable from other goods of the same kind and bought in bulk, in an organised marketplace subject to some kind of regulation.

The court also decided that rough diamond selling at sights sales had all the features of a commodity exchange on which it based its decision that WN was excluded from the protection of the Regulations.

Success for WN in other claims

However, WN's claims for unpaid commission, expenses and breach of contract were valid, the court agreed, and it also won compensation on a similar basis to a claim under the Regulations. Damages for breach of contract (rather than a claim under the Regulations) were calculated on the same basis as they would have been if the Regulations had applied.

As the terms of an agent's contract may change over time, the date for assessing the relationship was the termination date and therefore WN would only have been entitled to compensation under the Regulations if it had been a commercial agent at the date of termination.

Broader implications

This court case dealt with specific facts, and it is important for agents and principals to look at their own particular circumstances.

It's not necessarily clear that all sales of diamonds will be considered commodity sales. For example, the sale of individual diamonds by jewellery agents into the retail market would typically fall within the Regulations.

For more detailed legal advice in this area, or for agents or principals considering termination of their relationship, please contact Wards Solicitors' business disputes and business employment specialist, James Taylor.