Since the Commercial Agents Regulations came into effect more than twelve years ago various courts and commentators have wrestled with how to calculate the compensation payable to a terminated agent. The difficulty lies in the Regulations’ failure to provide any method for quantifying compensation. The existence of this difficulty and the need to reduce uncertainty lay at the heart of the Court of Appeal’s judgment earlier this month in the case of Lonsdale v Howard & Hallam Limited.
Mr Lonsdale had been a footwear agent for thirteen and a half years when notice was given to terminate the agency as a result of the closure of the defendant’s business due to rising costs and falling sales.
Following termination the defendant paid the agent £7,500. However, the agent began County Court proceedings seeking an amount roughly equal to two years’ gross commission (calculated by reference to the average of the last five years of his agency) less the amount he had already received.
The Regulations provide that an agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal. Although the County Court judge’s attention was drawn to the approach adopted by the French courts and previous decisions of the English and Scottish courts, he concluded that the agent was entitled to be compensated for the value of the agency of which he had been deprived. He declined therefore to follow the approach adopted in other jurisdictions and held on the facts that the agent was entitled to no more than £5,000. The agent appealed.
In looking at the language used in the Regulations the Court of Appeal pointed to the fact that the agent is given a right to receive compensation for any damage he has suffered as opposed to payment of an amount that is fair and reasonable having regard to all the circumstances of the case.
After undertaking a review of a number of previously decided cases, the Court of Appeal considered that the correct interpretation of the damage suffered by the agent is normally the loss of the agency business, including whatever goodwill attaches to it, which passes to the principal. As such the compensation which the agent is entitled to receive in such cases is to reflect the value of the business at the date of the termination, in other words what a third party would pay for it. Consequently the Court of Appeal cast aside the two years’ compensation rule which had previously been used as a broad guideline.
But given an earlier Court of Appeal decision, a way had also to be found to deal with the compensation payable when a fixed term agency agreement comes to an end. The Court of Appeal decided that in such an agreement the agent built up a business to which goodwill attached in the ordinary way and which, if the relationship had continued, would have continued to produce profits in the form of commission. Accordingly when a fixed term agency ends the benefit of that goodwill will pass to the principal and if he is continuing in business it is likely to be of value to him.
The legal somersaults which the Court of Appeal went through so as to arrive at its judgment in Lonsdale cannot be ignored. But until this judgment is distinguished or overturned, the focus will be on the value of the agency business, including whatever goodwill attaches to it, which is lost by the agent as a result of termination of the agency contract. In this respect the fact that the principal’s business is in serious decline or has closed down will inevitably affect the value of the goodwill attaching to the business of the agent. At the same time, it would seem from this judgment that the fact that agencies are rarely bought and sold in the UK can correctly be ignored.
But how to value the agency business? In one case in which we have been involved, our client’s auditors came up with a figure of five times earnings. Other values may be more conservative. What is likely is that expert witnesses will now be used to try and persuade the court of the agency’s value. Accordingly how far has uncertainty been replaced by flexibility?
For further information on this topical issue, please visit hrlaw’s sister website: www.agentlaw.co.uk