15/01/2008

Lords rule on debate over compensation payments to commercial agents on termination of contract.

Andy Brian, corporate solicitor

The House of Lords recently ruled that the level of compensation payable to a commercial agent on termination of an agency arrangement should be calculated by valuing the agency business as at the date of termination (Lonsdale v Howard & Hallam).

Background

Under The Commercial Agents (Council Directive) Regulations 1993, commercial agents can claim a payment for compensation or indemnity on termination of an agency agreement, regardless of whether or not the principal (i.e the party who appointed the agent) was in breach of contract.

The better option for the principal is generally thought to be the indemnity alternative. This is because the Regulations put a “cap” on the amount payable under the indemnity alternative, but not under the compensation alternative.

However, in English law, unless the indemnity option is specifically chosen in the agency contract, the compensation alternative will apply.

What has changed?

Prior to Lonsdale the courts had followed the approach of the French courts in awarding compensation to commercial agents of an amount equal to two years’ gross commission. However, in Lonsdale, the Lords unanimously rejected that argument. They held that the damage for which the agent must be compensated under English law is the value of the right to be an agent going forward, assuming that the agency would have continued and that the agent would have been able to properly perform the agency contract.

The agency business should be valued on the basis of what a buyer could reasonably have been expected to pay, as at the date of termination, for the rights the agent had been enjoying.

Factors affecting the value of the agency

  • A decline in the principal’s business will reduce what a buyer would be prepared to pay.
  • A rise in the market for the product should increase what a buyer would be prepared to pay.
  • The former agent enticing customers away to a competing principal will have a negative impact on the value of the agency business. This can be prevented if the agency contract includes a provision preventing the former agent from competing with the principal following termination.
  • The expenses of the agent in earning the commission should be taken into account.
  • The amount of compensation payable should be discounted by an appropriate rate of interest to reflect the fact the the agent will benefit from accelerated receipt of future earnings.

What does this mean for principals and agents?

At first glance the decision looks like one which strongly favours commercial agents. However, principals can take comfort from the fact that the courts will consider all the circumstances of the agency arrangement as at termination, rather than awarding a flat level of compensation in all cases.

On balance, it does seem that the Lonsdale decision provides a clear commercial basis for assessing compensation payable to agents on termination, although it may leave principals wondering whether engaging a distributor or employing a dedicated salesperson may ultimately be a less expensive alternative.

For further information please contact Andy Brian, Solicitor in Gordons Corporate department on 0113 227 0100 or email andy.brian@gordonsllp.com