The compensation to which commercial agents are entitled on the termination of agency relationships can be significantly less than many agents currently expect, following a landmark ruling by the House of Lords today.
Graham Lonsdale, a commercial agent in the shoe trade, sued a former manufacturer, Howard & Hallam, after it terminated its relationship with him because its own business was failing. It paid Lonsdale his due commissions but refused to pay him the additional compensation to which he believed he was entitled.
There was no written agreement between the parties and Lonsdale sought to rely on special statutory rights to compensation, contained in the UK's Commercial Agents Regulations of 1993. These Regulations, which implement an EU Directive, imply certain terms into commercial agency agreements. These terms generally cannot be excluded by contract and apply to both individuals and companies that act as agents.
The Regulations include a right of an agent to an indemnity or compensation for damage suffered as a result of an agency contract being terminated by the principal.
Where an indemnity is payable it is capped by the Regulations. It cannot exceed a figure equivalent to one year calculated from the agent's average annual remuneration over the preceding five years. But where compensation is payable, neither the Directive nor Regulations offer a formula for calculating the appropriate sum.
Stefan Paciorek, a litigation partner with Pinsent Masons, the law firm behind OUT-LAW.COM, said that omission has always been a headache for companies that deal with agents.
"The Commercial Agent Regulations are badly drafted and difficult to interpret," he said. "As a result, the courts have struggled to interpret them, leading to a number of bad decisions."
One of these decisions is criticised by Lord Hoffman in today's judgment. The case was a dispute between cake-baker Tunnocks and a former agent, a Mr King. In that case the Court of Session in Scotland copied the approach of French courts in calculating compensation. That calculation was calculated at two years' commission.
Lord Hoffman ruled that that is the wrong approach for the UK. The market conditions in each country are different, he said.
The key provision of the Directive is Article 17(3) which states that an agent is entitled to "compensation for the damage he suffers as a result of the termination of his relations with the principal." The UK Regulations use similar wording.
Lord Hoffman said the courts would be acting consistently with the Directive "if they were to calculate the compensation payable under article 17(3) by reference to the value of the agency on the assumption that it continued: the amount which the agent could reasonably expect to receive for the right to stand in his shoes, continue to perform the duties of the agency and receive the commission which he would have received."
Accordingly, if sales have fallen, the appropriate compensation figure for an agent may be significantly less than the commissions earned in previous, more successful years.
Following the Tunnocks case, Lord Hoffman said it had become "standard practice for the former agent to give evidence of what he would have expected to receive for his agency."
Lord Hoffman said that what an agent expects to receive is not necessarily what someone would give to him. More important, he reasoned, is "what the earnings prospects of the agency were and what people would have been willing to pay for similar businesses at the time."
Paciorek said: "The Tunnocks decision became grossly and widely misinterpreted. Agents assumed that they would be routinely entitled to 'go French' and claim two years' commissions upon termination of their agreements. Thankfully the House of Lords has put an end to that."
"At least now there is a rational basis for calculating the compensation that might be payable to an agent by basing it on the value of the agency at the time of termination: the amount which the agent could reasonably expect to receive for the right to stand in his shoes," he said. "There will still be arguments over the calculation of that figure but at least it is a step in the right direction."
Lord Hoffman rejected a request for a referral to the European Courts. It was unnecessary, he said. Scottish and English court rulings have been inconsistent to date, "but what is uncertain is not the meaning of the Directive."
"It is the way in which our domestic law should implement that discretion which has been uncertain and the resolution of that uncertainty is the task of this House and not the European Court of Justice," he wrote.
Lonsdale had sought compensation of more than £20,000. Judge Harris QC in the Oxford County Court awarded compensation of only £5,000. The Court of Appeal approved of Judge Harris's approach. Lord Hoffman agreed and praised Harris's initial judgment as "a model of clarity and common sense."
Lords Rodger of Earlsferry, Carswell, Bingham of Cornhill and Neuberger of Abbotsbury agreed with Lord Hoffman's decision.