Calculating compensation

November 11, 2013

Almost 20 years after the Commercial Agents Regulations first came into force, issues continue to arise as to how to calculate the compensation payable to the agent on termination of the agency agreement.

Although the House of Lords’ decision in Lonsdale v Howard & Hallam made clear that compensation is the amount which a notional third party purchaser would pay for the agency if the agency had continued and was available for sale on the open market, there is no definitive formula that is applied in calculating compensation.

Usually the amount of compensation is determined by reference to expert evidence put forward by each of the agent and the principal. But even then issues can arise, as was shown in the most recent case to come before the courts.

In Invicta UK v International Brands, the experts could not agree the indirect costs that should be deducted from the profits of the agency in order to ascertain the annual net income stream.

Although the agent held a portfolio of agencies that was grossing approximately £1m a year, the terminated agency had generated only £60,000 annual commission and, as such, amounted to only a small proportion of the agent’s total annual commissions. This led the agent’s expert to argue that the majority of the agent’s overheads were to be regarded as fixed costs – they would continue to be incurred to support the other agencies held by the agent. In contrast, the expert appointed by the principal suggested a method of “absorption costing” by which all overheads (including fixed costs) were to be apportioned to costs centres/income streams using pre-determined rates.

The agent’s expert was preferred by the court. However, a small deduction of £500 on account of fixed costs was still made by the judge. In turn, this represented a victory for the agent as the principal’s expert had proposed a deduction of £8,658.

But having sorted out the apportionment of the agent’s overheads, what was the multiplier to be applied to the annual net income stream? The principal argued that a multiplier of 2 times should be applied. In contrast the agent claimed that a multiplier of 7 times was the correct multiplier to apply.

Was it, therefore, a surprise that the judge applied a multiplier of 4.5 times!?


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