Member Article

Compensation Payments for Commercial Agents Upon Termination

With Watson Burton LLP Law Firm

Since 1993 the Commercial Agents (Council Directive) Regulations (“the Regulations”) have given Commercial Agents statutory protection with regards to the ability to recover compensation, following the termination of an agency agreement. The idea is to compensate the Agent for losses suffered as a result of that termination. In all but very limited circumstances the agent will be entitled to some compensation, but the question is how much?

The Regulations do not contain any guidelines on how to calculate the potentially unlimited compensation. Consequently, the Courts have failed to adopt a consistent approach in this regard. Two main approaches have emerged. Firstly, compensation based on two years commission. Two years is generally seen as the time it will take for the Agent to build up a comparable base with another Principal. This has been the most commonly followed route, although there is no real logical reason for it, simply following the decisions of the French and German Courts. Secondly, the ‘Balance Sheet’ approach, where ‘relevant factors’ are considered and the court arrives at a decision that is fair and proportionate. Each approach is problematic. The first approach is too rigid and inflexible, whereas the second, although compensating for loss suffered (as the Regulations envisage), can lead to unpredictable results.

Last year, the issue was considered by the Court of Appeal for the first time, in Lonsdale v Howard & Hallam. Lord Justice Moore-Blick stated that the aim of the Regulations was to compensate the Agent for the loss of goodwill and the Court is to assess the value of the goodwill at the date the agreement is terminated. This was a significant shift in approach. In previous cases the trend was to look at past performance, but now there is a consideration of the present state of the business, therefore accounting for situations where the business is in decline.

However, the future of this approach is uncertain. Last month Lonsdale was appealed in the House of Lords. The Lords reserved their decision, which is expected to be given in mid July or early October, however, it is anticipated that the appeal will be dismissed and the goodwill valuation approach will prevail. Due to the unpredictability of the Lonsdale approach, Principals may want to consider adopting a specific indemnity provision in agreements, to avoid the default compensation position. Indemnities produce greater certainty, as compensation will be capped at one year’s commission.

If you have any queries in relation to this article, or any other commercial litigation matter, please contact Caroline Rye at Watson Burton LLP (email caroline.rye@watsonburton.com or telephone 0191 244 4444).

This was posted in Bdaily's Members' News section by Ruth Mitchell .