Competitive Advantage

Commercial agents are not entitled to two years' commission as compensation

Commercial agents are entitled to compensation on the termination of a commercial agency agreement for loss of the right to future commissions which the proper performance of the agency contract would have procured the agent.

The House of Lords decided today in its judgment in the case of Lonsdale v. Howard & Hallam Limited that the value of this compensation is the amount which the agent could reasonably be expected to receive for the right to continue to perform the duties of the agency and receive the commissions arising from the agency.

Lord Hoffman emphasised that the value of the compensation was not what the agent expected to receive but what an agent would be given in return for the goodwill of the agency. The House of Lords rejected the suggestion that the French method of calculating compensation by valuing an agency at twice the average annual gross commission over the previous three years was the appropriate method of calculating compensation.

The decision of the House of Lords ends the uncertainty about how to calculate the amount of compensation to be paid to a commercial agent on the termination of a commercial agency which gives rise to a right to compensation under the terms of the Commercial Agents (Council Directive) Regulations 1993.

Mr. Lonsdale was a commercial agent for Howard & Hallam Limited, a shoe manufacturer based in Leicester, from 1 January 1990 until 30 June 2003 when his principal ceased trading and Mr Lonsdale’s agency terminated on reasonable notice. As there was no written agency agreement between Mr Lonsdale and Howard & Hallam Limited, Mr Lonsdale had a statutory entitlement to compensation under the Commercial Agents (Council Directive) Regulations 1993. Howard & Hallam Limited paid Mr. Lonsdale £7,200 compensation. Mr Lonsdale claimed additional compensation valued at £19,670, in total roughly equal to two years' gross commission calculated by reference to the average of the last five years of his agency. In the Oxford County Court Judge Harris QC awarded Mr. Lonsdale additional compensation of £5,000. The Court of Appeal and now the House of Lords dismissed Mr. Lonsdale’s appeals and Mr. Lonsdale’s request that the matter be referred to the European Court of Justice has been declined.

The practical points of note arising from the case are:

1. The amount of compensation to be paid to a commercial agent on termination of an agency is to be valued by determining what could have reasonably been obtained for the agency at the date of termination;

2. The amount of compensation is to be valued on the assumption that the agency would have continued and the hypothetical purchaser would have been able to properly perform the agency contract;

3. The present value of the future income of the agency must be discounted by an appropriate rate of interest when valuing the agency;

4. Principals and agents should be able to agree on an appropriate valuation of an agency with the benefit of professional advice and without necessarily obtaining a full scale valuation involving the checking of income and expenditure.

It is also worth noting Lord Hoffman’s comment that a principal would be entitled to pay no compensation to a commercial agent on termination of his agency if the agency was worth nothing for example because, as in the present case, the business of the principal had closed.

Finally, it is worth noting that if the parties had entered in to a written agency agreement, the litigation may never have arisen.

A PDF of this article is available for download here.

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4 July 2007