7 September 2007

Commercial agents fall foul of Lords ruling

A recent decision by the House of Lords has settled the issue of commercial agents’ compensation claims and, in particular, the way in which the courts used to decide how to calculate compensation following the termination of an agency. 

Commercial agents had previously been disadvantaged in that, being self-employed, they had often seen their services terminated without recompense and in unfair circumstances (e.g. after they had taken on a poorly-performing business and turned it around).

The Commercial Agents (Council Directive) Regulations 1993 gives an agent the right to receive compensation in a variety of circumstances, including those where the agent terminates the agreement (e.g. because they want to retire).

The difficulty with the Regulations was a lack of detail. As a result, there was a run of cases which tried to decide how to calculate the value of compensation due.  The authoritative Scottish case of King v Tunnock Ltd in 2000 seemed to provide certainty, at least until the Lonsdale v Howard & Hallam case in 2006.  That decision was appealed and has just gone to the House of Lords for a ruling.

The bad news - if you are an agent - is that the House of Lords has firmly laid to rest the notion that an agent can recover substantial compensation on termination. 

Previously you would expect to receive about two years’ average gross commission earnings based on the last three years of the agency. The new decision has taken matters one step further, based on the premise that the agency would have continued, the business was transferable and you could assign a value to it.  Therefore, all you need to do is conduct a simple valuation exercise.

Herein lies the problem. Although the buying and selling of commercial agencies does happen quite frequently elsewhere in Europe - France in particular - in England it is rare.  There really is no market as such.

Bearing this in mind, the House of Lords in the Lonsdale case favoured the first decision in the Scottish case of King.  That case decided that an agent was not entitled to any compensation where his principal had gone out of business.  The Lords felt nobody would buy an agency in those circumstances and went on to comment “it was hard to see why anyone should have paid for the privilege of a full time job which earned him (i.e. the agent) less than he would have been paid as a bus conductor”. 

We seem to be moving towards a situation where commercial agents on modest incomes are unlikely to receive much, if indeed any, compensation on termination. This decision is clearly good news if you are a principal wishing to take on an agent. It means you can adopt a robust negotiating position when discussing compensation on termination.  However, if you are an agent, the Lonsdale case is nothing but bad news.  Your negotiating position on compensation has now been significantly weakened.