The spinning pendulum

Written by Jane Elliot
11 April 01

During the 1970's and early 1980's employment law swung from being pro-employer to pro-employee and back again.  In comparison the pro-agent decision last year of the Scottish Court of Session in King -v- T Tunnock Limited was followed earlier this year by the English High Court judgment in Barret McKenzie -v- Escada.  That decision has been taken to be generally pro-principal.

At first sight the recent decision in Ingmar GB Limited -v- Eaton Leonard Inc swings the pendulum back in favour of agents.  But on a closer examination it leaves the determination of the compensation to be paid to a terminated agent even more confused.

From 1989 Ingmar acted as Eaton Leonard’s exclusive agent for the sale of its tube and pipe bending machines and associated equipment in the United Kingdom and Ireland.  The products were mainly designed for the aircraft and automotive industries.  Before Ingmar’s agency commenced, Eaton’s sales and marketing of its products in the territory had been moribund.  Ingmar achieved a successful volume of sales as a result of its engineering and selling expertise together with a thorough knowledge of the principal's products. 

Eaton Leonard terminated the agency agreement in 1996.  As a result Ingmar issued proceedings against it in 1997.  Ingmar claimed unpaid commission and compensation determined in accordance with the French method of calculation

The principal tried to rely on the fact that the applicable law of the agency agreement was that of the state of California.  In this way it sought to avoid the Commercial Agents Regulations.  But the attempt failed last year when the European Court of Justice decided that reliance on the law of a non-EEA member state would not prevent the application of the European Self-employed Agents Directive and, therefore, the Regulations.

After the European Court's decision the case was eventually returned to the High Court which had to assess the amount of compensation under the Regulations.  Unfortunately the judgment given on this issue can only be described as being very odd.

The judgment was given by Mr Justice Morland.  He claimed that he was bound by the principles of law which had been stated by the Court of Session.  He considered that it would be undesirable that different principles of law were applied in relation to compensation in England and Wales from Scotland.  Accordingly, the courts of England, Wales and Scotland should all seek to achieve the purpose of the Regulations in a uniform manner.

However, he then sought to distinguish between what he saw as the principles of law stated by the Scottish court and the guidelines given by it as to the appropriate methods of calculating compensation.  Despite this claimed distinction, he was of the opinion that, unless the guideline was inappropriate on the facts and circumstances of the particular case, the guideline should be followed!

Mr Justice Morland then referred back to certain principles of law laid down in King by the Court of Session.  However, he pointed out that the judgment of the Scottish court went on to adopt the French method of calculating compensation by reference to a “2 year benchmark".  This he considered was a guideline and not a principle of law.  Nevertheless he also considered that in many cases the benchmark of 2 years' average gross commission might be appropriate.

But how appropriate was seen when he attempted to contrast the facts of King with those of Ingmar.  In particular he pointed out that the annual average gross commission received by Ingmar was more than 7 times greater than that achieved by King.  Although unstated by Mr Justice Morland, this may be of significance in terms of providing a justification for his eventual decision to exceed the 2 year benchmark.  It is clear, however, that he was influenced also by the fact that Ingmar was seeking orders for sophisticated products, including specialist equipment.  Unfortunately, to contrast commission levels and the sophistication of products for which agents are to seek orders is to read into the Directive and Regulations matters of principle which are simply not there.

Further, and extremely confusing, Mr Justice Morland stated that to apply the French method of calculating compensation based on 2 years of gross average commission calculated over the last 3 years would result in this case in an excessive windfall for the agent.  He considered that this windfall would exceed significantly the value of Ingmar's agency at the time of termination and would result in an injustice to Eaton Leonard.  In short, and despite what he had said earlier, the French method of calculating compensation would be inappropriate.

Accordingly, he decided to take account of the following factors:

• • the duration of the agency;
  • the inevitable lack of profitability in the earlier years;
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• • the high degree of engineering and sales expertise required and put into the agency in generating the customer base; and
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• • the degree of profitability of the agency at the time of termination. 
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In view of these factors Mr Justice Morland considered that it would be fairer and more realistic to aggregate the remuneration and pension paid to Ingmar’s full time executive director and the management charge taken by its parent company (in return for seconding one of its own employees) and to apply a multiple of 3.  No reasoning was given for use of a multiple of 3.  The end result was that Mr Justice Morland awarded the agent almost 87 per cent. of the amount that had been claimed originally by way of compensation (and ostensibly the value of the agency to Ingmar).  It was an amount which he had condemned as being an excessive windfall!  Further, by not deducting expenses he appeared to award 3 years’ gross worth of income.

The difficulty is in knowing where this leaves the calculation of compensation under the Regulations.  Mr Justice Morland referred to the decision in Escada but failed to distinguish it.  On the other hand, his was a judgment that was considered for some time before being delivered whilst the decision in Escada was given at the time of the hearing.  Furthermore, the Ingmar decision was given by a more senior judge.  There again, it relies on virtually unreasoned argument, and, in contrast, there were clear arguments given in the Escada judgment.

Overall, it is likely that the courts will seek to apply a 2 year multiple as a benchmark, although the figure against which it will be applied is far from clear.  What is needed is a clear judgment which, irrespective of the way it sends the pendulum swinging, at least stops it from spinning.

This briefing note is for general information.  For advice in applying this general information to your specific circumstances, please contact Steve Sidkin t or any member of the Fox Williams’ agentlaw team. (www.agentlaw.co.uk).

© Fox Williams LLP 2010