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commercial agents - what price termination?

11 July 2007

The House of Lords has finally settled the question of how a commercial agent should be compensated for the termination of an agency agreement under European legislation. In a decision likely to be welcomed by principals, the Lords have rejected the French approach of automatically awarding two years gross commission. In Lonsdale v Howard & Hallam Ltd [2007] UKHL 32, handed down on 4 July 2007, the Lords held that compensation should instead reflect the true market value of the agency business at the date of termination.

The Commercial Agents (Council Directive) Regulations 1993 (Regulation 17) require a principal to compensate its agent if the agency agreement is terminated. The question that has vexed principals, agents and their advisers for some time, is how the correct level of compensation should be calculated under the Regulations. Before Lonsdale there were in essence two main strands of case law. The first strand adopted the French position of awarding agents two years gross commission regardless of the reasons or circumstances surrounding the termination. Agents tend to prefer this approach. The second strand of case law, favoured by principals, requires setting the level of compensation by reference to a long list of factors, including the length of the agency, whether the agent is free after termination to continue with the same customers, the nature of the client base and so on.

In Lonsdale, the Court of Appeal rejected both of these methodologies and the House of Lords agreed. Mr Lonsdale was a commercial agent for a footwear manufacturer. The business was failing and his commission earnings fell year by year until the manufacturer stopped trading and sold the brand to a competitor. The manufacturer paid Mr Lonsdale his contractual entitlement comprising the commission due on sales he had generated but disputed his statutory entitlement under the Regulations. Mr Lonsdale argued that the Court should apply the French approach which, he contended, had been adopted as Community law. The House of Lords affirmed the Court of Appeals earlier decision and firmly rejected this argument.

The House of Lords held that it is necessary to ascertain what value could reasonably have been obtained, at the date of termination, for the rights which the agent had been enjoying. It gave some useful guidance as to what should be taken into account:

  • Compensation should reflect the value of the agency business; not some attributed share of the total goodwill of the brand
  • The valuation should be based on the net rather than gross earnings of the agent and apply a discount
  • If the agent is operating more than one agency the costs should be properly apportioned amongst them
  • It will always be assumed that the agency is assignable for valuation purposes
  • If the business is failing, the valuation of the agency should reflect this. If the relevant market is either rising or declining, this would affect what a hypothetical buyer would be willing to pay
  • If it is likely customers will defect to another principal, the valuation should reflect this

The Lonsdale case makes clear the approach to be taken in valuing compensation, but one concern parties have in this kind of case is the cost of expert evidence to value the business. Often agencies are simply too small to warrant the cost of an accountancy expert. The Lords suggest that it should be possible for the Court to have regard to the "going rate" for buying and selling comparable businesses but to give greater certainty, one option might be to include a valuation clause in the agency agreement setting out the basis for the valuation on termination.

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