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Compensation - determining the amount payable

28 Feb 2011

The extent to which account is to be taken of factors extraneous to the agency in determining the compensation payable to an agent is at the heart of the recent McQuillan judgment. 

McQuillan concerned the distributor and one of his agents for the Danish Pandora jewellery brand.  A principal-agent relationship which had been broadly satisfactory deteriorated rapidly when the agent (on advice) refused to sign a new written agency agreement. 

Ultimately the situation resulted in the principal sending to the agent a three page letter terminating the agency with immediate effect on the basis that the agent had:

  • refused to follow instructions;
  • contacted the Danish brand owner;
  • discredited the principal with customers;
  • undermined attempts to organise the sale and marketing of the branded jewellery;
  • made inappropriate and rude comments to the customers and staff employed by a company associated with the principal. 

It is unclear from the judgment as to whether the principal took legal advice before sending the termination letter to the agent.  However, the fact that the judge described the allegations as “wild and wholly unsubstantiated” could only lead to the judge finding in favour of the agent. 

The agent was entitled to compensation under the Commercial Agents Regulations.  Following the House of Lords’ decision in Lonsdale in 2007, experts were appointed on behalf of each of the principal and agent to provide a valuation as to the amount which a notional third party purchaser would have been prepared to pay for the agency immediately before termination. 

Before trial, the experts were unable to agree a valuation.  However, when they arrived at court, they agreed both the methodology and the assessment of the value of the agency.  In doing so, they took account of the following:

  1. The annual income of the agency.  
  2. The costs attributable to the agency business in respect of the overheads including salaries.  
  3. They determined that the annualised commission income should be subject to a multiple of 1.5 to allow for the growth of the business.  
  4. They also agreed that there should be different multipliers on profits depending on whether the agency was found by the court to be exclusive or non-exclusive agency.  
  5. A discount was to be applied for:
    1. the lack of a written agency agreement; and
    2. the risk of termination. 

It was on this final factor that the judge decided to reject the joint expert valuation.  He considered that the risk of termination was critical in that the principal’s agreement with the Danish brand owner was capable of being terminated on one year’s notice if annual minimum sales were not achieved.  Further, this annual minimum was capable of being renegotiated every year with the default position being that the agreement then in place would continue only for a further period of 12 months in the event that the parties could not agree the new minimum sales. 

As such, the judge considered that the distributorship agreement was capable of being terminated on one year’s notice and determined that the value of the agency could not be more than one year’s worth of commission. 

Whilst the logic of the judgment is understandable, this does not make it correct.  Instead, this judgment is as much open to criticism as another given by the same judge concerning the Regulations some years ago.  It is doubtful that it was intended by the House of Lords in Lonsdale that a factor affecting the principal should play out in impacting on the valuation of the agency.  This is putting to one side the lack of any basis for saying that the value should be reduced to take account of the lack of a written agency agreement. 

However, it can be expected that a principal whose business is based on a licence or appointment as a distributor will seek to rely on the contractual ability of a supplier or licensor to give a specific period of notice so as to reduce the amount that is to be paid by way of compensation to a terminated agent. 

For further information please contact Stephen Sidkin

Written by Agentlaw Team

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