Compensation and non-compete restrictions

November 12, 2012

The entitlement of a commercial agent on termination of the agency agreement to compensation under the Commercial Agents Regulations is well known.  Less well known is the decision of the House of Lords in Lonsdale that compensation needs to reflect the value of the agency in terms of the agent’s expectation that performance of the agency agreement will provide him with a future income stream. 

For this purpose, the House of Lords envisaged that there would be a hypothetical (or notional) purchaser who would take over and perform the agency agreement.  In other words, he would be deemed to stand in the shoes of the terminated agent for the purpose of valuing the future income stream.   

In Lonsdale, the House of Lords also had to consider a third party intervention concerned with the position where the terminated agent is not subject to a non-compete restriction.  

The House of Lords briefly considered the possibility that the absence of non-compete restrictions would impact adversely on the amount of compensation payable by the principal.  This was on the basis that the hypothetical purchaser would pay a reduced amount for an agency business where the terminated agent could compete for his former customers.  

Whilst this consideration was not a core part of the House of Lords’ judgment, it is likely that the existence or otherwise of non-compete restrictions in an agency agreement will play a part in the amount of compensation payable by the principal to the terminated agent.  Where there are such restrictions, the amount of compensation is very likely to increase.  Conversely principals whose agency agreements do not contain post-termination restrictions may find themselves with small compensation amounts to pay but facing competition from terminated agents.  

Essentially, everything has a price!


Related pages:

Agency, Distribution and International Trade more

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