Much uncertainty over the rights of self-employed commercial agents to compensation upon termination of agency agreements has been ended by the recent House of Lords judgment in Graham Lonsdale v Howard & Hallam Limited.

Background

The Commercial Agents (Council Directive) Regulations 1993 provide protection to self-employed commercial agents should their agency contracts be terminated. Unfortunately, the Regulations do not specify exactly how the payment to be made to the commercial agent upon termination is to be calculated. This uncertainty has been exacerbated because, in the UK, two different types of termination payment exist.

Compensation and Indemnity

Under Regulation 17, the contract between a commercial agent and the principal must expressly state that the commercial agent is entitled to an indemnity payment upon termination. Otherwise, the commercial agent is automatically entitled to compensation.

It is not possible to contract out of the Regulations if the various conditions contained therein are fulfilled. However, many businesses faced with potential liabilities under the Regulations have opted to make arrangements which take them outside the Regulations, for example entering distributorship agreements or employing salaried agents.

In practice, indemnity provisions in agency contracts have proved easier to apply than compensation provisions and have led to significantly less litigation. Crucially, indemnity payments under the Regulations are capped at one year’s commission (usually calculated with various deductions for expenses and to reflect the relative success of the agency).

By contrast, compensation provisions have led to numerous high profile Court cases and, until the Lonsdale decision, there was no certainty about how compensation payments should be calculated. Lonsdale confirmed that compensation payments are to be calculated according to the open market value of what a hypothetical purchaser would be prepared to pay for the privilege of standing in the shoes of the commercial agent. The House of Lords also confirmed that expert valuation evidence as to the open market value of the agency will often be required.

Mr Lonsdale’s application to take the case further to Europe was refused by the House of Lords, so Lonsdale is the key authority on determining an agent’s rights to compensation.

The future

The Lonsdale case has important implications for both principals and self-employed commercial agents and there will be winners and losers in both groups.

Where sales are declining and the commission payments being made to the commercial agent are also on the wane, the principal is likely to be better off as a result of the Lonsdale judgment.  This is illustrated by the fate of Mr Lonsdale himself.  Mr Lonsdale was a shoe salesman for the Defendant’s Leicester business.  He was denied substantial compensation because the Defendant sold its brand name to a competitor, in a climate of declining sales and increased competition. Mr Lonsdale’s agency was deemed to be worth very little, on the basis that nobody would pay much for the privilege of selling shoes for a company which no longer manufactured them.

In future, businesses might seek to exploit this apparent loophole to avoid paying compensation to commercial agents altogether.  If a company sells its assets and trading name to another company but continues to exist as a legal entity, it could argue that no compensation is payable to its commercial agent as the company is no longer trading. There may be instances in the future where companies restructure with the specific object of avoiding liabilities under the Regulations.  It remains to be seen whether the Courts will clamp down on unscrupulous attempts to try to circumvent the Regulations.

At the other end of the spectrum, successful commercial agents in expanding sectors could be significantly better off as a result of the Lonsdale judgment.  We have already come across some instances where expert valuers of successful agencies have concluded that the open market value can be four to six times annual earnings.

Following the Lonsdale judgment, principals and commercial agents themselves are strongly advised to seek early legal advice to review their contracts and consider their potential rights if the agency relationship has to be terminated.

The Dispute Management team acted for Mr. Lonsdale and has taken scores of agency cases to successful resolution at trial or mediation. In addition, our Business Services team regularly advises on all aspects of agency contracts.

Stephen Schneider can be contacted by telephone on 01865 262624 or by email.