Commercial agency case clarifies calculation of compensation

In Lonsdale v Howard & Hallam the Court Of Appeal (CA) determined for the first time the issue of “compensation” under the Commercial Agents Regulations. 

The decision will be of interest to businesses that use independent commercial agents who build up business in an area or sector and who then are terminated from their agency agreement.  

The CA judgement has introduced a new test for the valuation of an agency with new factors coming into play. 

The Agent (A) in this case had worked for 13 years for a shoe manufacturer(S). A’s performance was not in question but the business declined and S sold the concern to a competitor, which later closed the factory. 

A was paid £7,500 but felt more was due since commissions earned for the last three years were £9-12,000. 

At the trial the court awarded compensation at only £5,000 in the absence of loss of goodwill for the agency. 

The CA upheld this amount awarded and provided binding guidelines for future cases: 

 

• Previous case law was insufficient;
• Compensation is aimed at actual loss suffered as a result of the termination so the valuation of goodwill of the agency is critical here;
• The relevant date of the valuation is the date of termination of the agency agreement;
• The French law approach of 2 year compensation should be rejected;
• There was no concept of a sum on a “fair and reasonable basis”;
• New factors would come into play in the actual valuation including the strength of the principal’s business at the time and
• Other damages that could be claimed would include set up expenses for the agency and lost commissions that would have been otherwise earned.

In future agency compensation payments are likely to be low where the business is struggling but high in a thriving entity though the court did say that the use of an indemnity cap to protect principals from such high payments was lawful in principle as it distinguished indemnity payments from compensation payments. 

If you are a business that uses agents or conversely are an agent with concerns feel free to give us a call for a free discussion of your legal risks and a discussion of how this landmark judgement affects you.

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.