Judgement heard in case of Lonsdale vs Howard & Hallam Ltd

The House of Lords today (4 July) handed down judgment in a landmark case which clarifies the law on compensation rights for sales agents, an area which has been uncertain for years.

The case of Lonsdale v Howard & Hallam has major repercussions for all self employed sales agents in the UK (of which there are estimated to be around 16,000) and any company which employs them. It determines how the compensation rights in the Commercial Agents (Council Directive) Regulations 1993, which derives from an EU directive, should be assessed.

The case revolves around the financial awards that are, or should be, involved when a contract is terminated between a self-employed sales agent and the company using its services.

The Claimant, Graham Lonsdale, was seeking to overturn a Court of Appeal judgement which said that compensation should be assessed by doing a valuation, usually by a professional valuer, of the open market value of the agency. The Court of Appeal judgement last February 2006 was itself a surprise, as previously compensation had been assessed by taking into account the French practice of awarding two years average earnings.

The House of Lords today dismissed the Appeal, upholding the Court of Appeal judgement. Giving the leading judgement, Lord Hoffman also refused to refer the case to Europe, ruling this was not needed because the UK court had discretion over how the damage to the agent was to be calculated, and the way the domestic law should implement that discretion was a matter for the UK alone. The Lords ruled that the French 'two year rule' had no relevance in UK law.

The case means that in future compensation cases it is likely to become the norm for those claiming compensation to have to seek a professional valuation of the open market value of the goodwill of the agency they have lost. Lord Hoffman stated: "I do not see how, if the matter does go to court, the judge can decide the case without some information about the standard methodology for the valuation of such businesses."

Stephen Schneider of Morgan Cole, solicitor for the claimant, commented: "This case brings a great deal of clarity to what was a very uncertain area of law. Both agents and principals who employ them would be well advised to dust down their contracts, whether or not they're in writing, and consider whether they need looking at again in the light of this judgement."

"The judgment means that there will be winners and losers on both sides of the fence - among both self-employed agents and the companies who use them to market their goods."

"On the one hand, very successful agents who find their contracts terminated could be in for a substantial windfall, because the open market value of their agencies might be considerable. That's why representatives of the wine industry in Australia intervened in the appeal, because there are a lot of wine agents selling New World wines to UK supermarkets who will make very substantial money if their contracts are terminated early."

"On the other hand, smaller agents, those in declining industries, or those (like the claimant Mr Lonsdale) who work for companies who decide to restructure or sell their business will find themselves worse off. It may well be more onerous for less well-paid agents, who perhaps aren't members of a union or don't have insurance funding, to fund the costs of expensive litigation."

For further details about this ruling, please contact Stephen Schneider.

An explanation of Indemnity, Compensation and the change in law brought about by Lonsdale vs Howard and Hallam Ltd:

The Commercial Agents (Council Directive) Regulations 1993 were introduced to give agents statutory rights to certain payments if their contracts were terminated. Under the regulations, there are two ways of determining a payout – indemnity or compensation. If the agency contract does not specify indemnity, the agent is entitled to compensation, unless there has been a fundamental breach of contract by the agent.

Indemnity payments are usually easier to calculate as they are capped at one year’s commission and an agreement is often reached for an indemnity payment of between 9-12 months’ commission.

Until the Lonsdale case compensation payments were usually based on the ‘two-year rule’ (i.e. taking two year’s commission as a starting point). The final award would be subject to adjustments for factors including performance, length of service and, in some cases, expenses.

The Lonsdale case overturned the ‘two-year’ approach, with judges initially ruling that compensation awards should be calculated by assessing the market value of the agency (that is, deciding what someone might pay to buy the agency). Factors such as length of service and how competent the agent was were deemed to be irrelevant.

As a result many companies and agents involved in these types of dispute have been instructing independent experts to give valuations, but evidence from practitioners in this area of law suggests that different experts are producing remarkably different valuations. The battleground therefore shifted to one over expert valuation.

This has meant that companies who use self-employed agents may face major liabilities to agents, particularly if written contracts do not give them the protection they had hoped. For some agents, in growing markets, this can mean a potential bonanza, though others working for companies which are re-structuring or which have falling sales are finding themselves with little reward when contracts end.

Today’s judgement means that all parties should check whether their contracts allow for indemnity or compensation, how calculation of the latter has changed and the potential impact this may have on contract termimations.