In 1990 Howard & Hallam Limited, a shoe manufacturer, appointed Mr Lonsdale as its sales agent for their Elmdale brand of shoes.
By 2000 the Elmdale brand was in decline: sales, and, consequently, Mr Lonsdale’s commission, fell year by year. In 2003 Howard & Hallam ceased trading and sold the goodwill in the Elmdale brand to a competitor. Howard & Hallam gave Mr Lonsdale six months’ notice and paid him commission on the sales which he had generated during the term of the agreement.
Under the terms of the agency agreement between Mr Lonsdale and Howard & Hallam the parties had not chosen between an indemnity or compensation payment upon its termination, therefore, the default position of an entitlement to compensation applied. Mr Lonsdale was paid £7,500 by Elmdale as compensation. Mr Lonsdale argued that this was an insufficient amount, and he began proceedings claiming £19,670 (which was equal to the equivalent of two years’ gross commission averaged over the last five years of his agency less the amount he had already received). The calculation of this compensation became the ultimate subject of the dispute between the parties claimed for a greater sum.
Lonsdale argued that where an agency had persisted over a reasonable period of time and the agent had performed his functions competently throughout the period, he should, as a general rule, receive by way of compensation under the Commercial Agents (Council Directive) Regulations 1993an amount equal to two years’ gross commission.
First instance decision
At first instance, Judge Harris QC had held that Mr Lonsdale should receive an amount representing the value of the agency at or immediately before the time of termination. Judge Harris found that net commission was running at approximately £8,000 a year at the date of termination. “This was an agency producing a modest and falling income in a steadily deteriorating environment. There is no evidence that anyone would have paid anything to buy it…..”. Judge Harris considered that it would therefore be logical to conclude that no damage had been established and thus award no compensation should be awarded. However, despite this he “compromised” by awarding £5,000 compensation.
Appeal to the Court of Appeal
Lonsdale appealed to the Court of Appeal, arguing that the judge had failed to:
- apply the two year commission guideline; and
- give sufficient weight to the duration of the agency or the fact that Lonsdale had satisfactorily performed the terms of the agency agreement.
The appeal was dismissed. The Court of Appeal held that the damage suffered by the agent as a result of the termination of his relations with his principal was normally the loss of the agency businesses, including whatever goodwill attached to it.
Lonsdale appealed to the House of Lords. The House of Lords was asked to consider the following questions:
- For what the agent should be compensated upon the termination of an agency agreement?
- How such compensation should be calculated?
The decision of the House of Lords
The House of Lords found that The Commercial Agents (Council Directive) Regulations 1993 (as amended) (“the Regulations”) give a clear answer to the on the first question: the agent is compensated for “the damage he suffers as a result of the termination of his relations with the principal”. The agent is regarded as having had a share of the goodwill in the principal’s business and therefore he is entitled to be compensated for the loss of that goodwill.
The Court then went on to consider the critical question of how this goodwill should be valued and attributed to the agent.
Mr Lonsdale sought to argue that the court should adopt the method of valuation used by the French courts, the so-called ‘French Tariff’. This values agencies at twice the average annual gross commission earned over the previous three years. The House of Lords disagreed with Lonsdale that it was required to follow the French system. Its reasoning was that:
- the European Court of Justice has made it clear that the method of calculation of compensation is to be decided by each Member State; and
- commercial agencies in England and France operate in very different market conditions.
The House of Lords considered that valuing goodwill involves assessing the value of the agency (and, in particular, the value of the right to future commission) to a notional third party purchaser at the date of termination. This will principally be assessed by reference to the right to future commission and is not limited to what is fair and reasonable.
The House of Lords set out various points which must be taken into account when assessing the value of an agency. In particular, they held that it is necessary to assume that:
- the agency would have continued;
- the hypothetical purchaser would have been able to properly perform the agency contract; and
- the agency was able to be sold by the agent to the hypothetical purchaser.
All other assumptions made by the valuer have to reflect reality. For example:
- The House of Lords stated that the value of the agency should be set by reference to the net earnings of the agent (and not the gross earnings) because that is what would matter to a hypothetical purchaser. “If the agent had to incur expenses or do work in earning the commission, it cannot be assumed that the hypothetical purchased would have earned it gross without having to do anything.”
- If the agent has more than one agency, the costs must be fairly attributed to each agency (and not, necessarily, equally).
- The health of the agency at the time of termination is critical; if the market for the products is in decline, this will affect what a hypothetical purchaser would be willing to pay.
- If the agreement is stated to be non-assignable, then this must be taken into account in valuing the asset as this will affect the value to a hypothetical purchaser.
- If it appeared that all customers would be likely to defect to the former agent or to another party, the hypothetical purchaser would be unlikely to pay much for the agency.
The House of Lords therefore agreed that the Court of Appeal had been correct to dismiss the appeal and went on to add that the first instance judge would not have been wrong in dismissing the claim altogether (with no award for damages) on the basis that no loss had been proven in Lonsdale’s case.
In summary, compensation is not limited to what is fair and reasonable but is calculated by reference to the value of the agency to a third party hypothetical purchaser at the date of termination, taking into account all of the facts of the case.
Written by Agentlaw Team