Commercial Agents and Compensation

Commercial Agents and Compensation

David Kirkpatrick, a Partner in the firm's Litigation Department, discusses the latest Court of Appeal decision on the Commercial Agents Regulations.

Commercial Agents

The Commercial Agents Regulations came into force in Northern Ireland on the 13th January 1994. There have been no reported decisions on the application of the Regulations in Northern Ireland. A body of case law has, however, been developed by the Courts in Great Britain on the application of the GB Regulations, which largely mirror the provisions of the local Regulations. Much of that case law has been concerned with the amount payable to an agent upon termination of the agency relationship. Under the Northern Irish and GB Regulations, the parties can agree an indemnity in advance, capped at one year's annual remuneration, averaged over a period of five years or, an agent can be paid compensation upon termination. No guidance is provided by either set of Regulations about how compensation should be calculated upon termination.

Case Law

The Courts in Great Britain have attempted to lay down guidelines for the calculation of compensation in the following decisions:

• King & Tunnock (1997): a long serving agent was given two years gross commission aafter his principal terminated his contract;
• Ingmar G.B. Limited (2001): the Court declined to follow the two year benchmark laid down in King & Tunnock and awarded compensation equivalent to three years net income; and
• Tigana -v- Decoro (2003): the Judge found that he was not bound by King & Tunnock regarding the two year benchmark, holding the correct approach was to employ a "balance sheet" of 14 non-exhaustive factors to be considered when assessing compensation under the Regulations.

Lonsdale -v- Howard & Hallam (2006)

The Court of Appeal in Lonsdale -v- Howard & Hallam has recently clarified the often contradictory guidance on how commission on termination of the agency relationship is to be assessed under the GB Regulations.

Mr. Lonsdale was a self-employed shoe salesman. In 1990 he entered into a contract with Howard & Hallam, who manufactured a brand of ladies shoes. He was given the exclusive agency territory of the south-east of England. He successfully served Howard & Hallam as agent until 2003, when the company terminated his agency. The Court of Appeal held that a commercial agent should be entitled to compensation assessed on the basis of any damage that he has actually suffered as a result of the termination of his relations with his principal, rather than a right to receive a payment that is fair and reasonable, having regard to all the circumstances. The Court of Appeal said that compensation was to be assessed on the value, at the date of the termination, of:

• The goodwill of the Agency;
• The state of the principal's business;
• The value of commissions and potential future commissions; and
• Such other method of valuing a business as may be appropriate.

In his Judgment - Bick L.J. concluded "in most cases the Court is likely to benefit from having the assistance of an expert witness (ideally a joint single expert) who can give evidence about the appropriate way of valuating a business of this kind". He accepted, however, that in some cases the amounts would be too small to make the appointment of such an expert a sensible or proportionate course, in which case it would be a matter of putting all the relevant material before the Court and inviting the Judge to make what he considered to be the appropriate Order.

The logic of the Lonsdale Judgment is that there will be very low and very high compensation awards, depending on the specific circumstances. Where you have a successful agency and the principal's business is in good financial health, the compensation award is likely to be more significant than under the previous two year rule. However, agents may well fear that principals will seek to close or significantly run down part of their business in order to reduce any compensation award which an agent might recover on termination. Mr. Lonsdale is currently seeking leave to appeal to the House of Lords, so the Court of Appeal's decision may not be the end of the matter.

David Kirkpatrick is a Partner in the firm's Litigation Department specialising in commercial litigation. He is currently advising a number of agents and principals on the implications of the current case law.

David can be contacted at: david.kirkpatrick@lestrangeandbrett.com

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