Graham Lonsdale, a commercial agent in the shoe trade, sued a
former manufacturer, Howard & Hallam, after it terminated its
relationship with him because its own business was failing. It paid
Lonsdale his due commissions but refused to pay him the additional
compensation to which he believed he was entitled.
There was no written agreement between the parties and Lonsdale
sought to rely on special statutory rights to compensation,
contained in the UK's Commercial Agents Regulations of 1993. These
Regulations, which implement an EU Directive, imply certain terms
into commercial agency agreements. These terms generally cannot be
excluded by contract and apply to both individuals and companies
that act as agents.
The Regulations include a right of an agent to an indemnity or
compensation for damage suffered as a result of an agency contract
being terminated by the principal.
Where an indemnity is payable it is capped by the Regulations.
It cannot exceed a figure equivalent to one year calculated from
the agent's average annual remuneration over the preceding five
years. But where compensation is payable, neither the Directive nor
Regulations offer a formula for calculating the appropriate
sum.
Stefan Paciorek, a litigation partner with Pinsent Masons, the
law firm behind OUT-LAW.COM, said that omission has always been a
headache for companies that deal with agents.
"The Commercial Agent Regulations are badly drafted and
difficult to interpret," he said. "As a result, the courts
have struggled to interpret them, leading to a number of bad
decisions."
One of these decisions is criticised by Lord Hoffman in today's
judgment. The case was a dispute between cake-baker Tunnocks and a
former agent, a Mr King. In that case the Court of Session in
Scotland copied the approach of French courts in calculating
compensation. That calculation was calculated at two years'
commission.
Lord Hoffman ruled that that is the wrong approach for the UK.
The market conditions in each country are different, he said.
The key provision of the Directive is Article 17(3) which states
that an agent is entitled to "compensation for the damage he
suffers as a result of the termination of his relations with the
principal." The UK Regulations use similar wording.
Lord Hoffman said the courts would be acting consistently with
the Directive "if they were to calculate the compensation payable
under article 17(3) by reference to the value of the agency on the
assumption that it continued: the amount which the agent could
reasonably expect to receive for the right to stand in his shoes,
continue to perform the duties of the agency and receive the
commission which he would have received."
Accordingly, if sales have fallen, the appropriate compensation
figure for an agent may be significantly less than the commissions
earned in previous, more successful years.
Following the Tunnocks case, Lord Hoffman said it had become
"standard practice for the former agent to give evidence of what he
would have expected to receive for his agency."
Lord Hoffman said that what an agent expects to receive is not
necessarily what someone would give to him. More important, he
reasoned, is "what the earnings prospects of the agency were and
what people would have been willing to pay for similar businesses
at the time."
Paciorek said: "The Tunnocks decision became grossly and widely
misinterpreted. Agents assumed that they would be routinely
entitled to 'go French' and claim two years' commissions upon
termination of their agreements. Thankfully the House of Lords has
put an end to that."
"At least now there is a rational basis for calculating the
compensation that might be payable to an agent by basing it on the
value of the agency at the time of termination: the amount which
the agent could reasonably expect to receive for the right to stand
in his shoes," he said. "There will still be arguments over
the calculation of that figure but at least it is a step in the
right direction."
Lord Hoffman rejected a request for a referral to the European
Courts. It was unnecessary, he said. Scottish and English court
rulings have been inconsistent to date, "but what is uncertain is
not the meaning of the Directive."
"It is the way in which our domestic law should implement that
discretion which has been uncertain and the resolution of that
uncertainty is the task of this House and not the European Court of
Justice," he wrote.
Lonsdale had sought compensation of more than £20,000. Judge
Harris QC in the Oxford County Court awarded compensation of only
£5,000. The Court of Appeal approved of Judge Harris's approach.
Lord Hoffman agreed and praised Harris's initial judgment as "a
model of clarity and common sense."
Lords Rodger of Earlsferry, Carswell, Bingham of Cornhill and
Neuberger of Abbotsbury agreed with Lord Hoffman's decision.
