Until very recently, it has been the case that two years’ earnings was thought to be the correct benchmark for the assessment of the compensation to be awarded to a commercial agent whose agency had been terminated. Although the Commercial Agents (Council Directive) Regulations 1993 (as amended) do not give any specific guidelines as to the amount of compensation which an agent is entitled to receive, the ‘two year rule’ has been applied in several cases, and is derived from the French courts’ approach to the assessment of compensation.
However, in February 2006, the Court of Appeal handed down its judgment in Lonsdale v Howard & Hallam Ltd. This case has clarified the law on the compensation to be awarded to a commercial agent on the termination of his agency, and has rejected the ‘two year rule’.
According to Lord Justice Moore-Bick, the ‘two year rule’ “does not involve any reasoned attempt to ascertain the true extent of the agent’s loss”. The court found that the correct measure of damages for compensation is the value of the agency business (including goodwill) at the date of termination of the agency.
The value of the agency business will obviously depend on many factors, one of which being the state of the principal’s business at the date of the termination of the agency.