Written by Steve Sidkin
1 November 01

When a Judge commences his judgment by explaining that he is giving it with some trepidation and that the area of law is not one in which he considers himself to be “over-practised”, it is unsurprising that his judgment may raise more questions than it answers. The situation will be exacerbated when the issue in question concerns the calculation of the compensation to be paid to a terminated agent under the Commercial Agents (Council Directive) Regulations 1993 (as amended). Unfortunately Judge Bowers opened his judgment in Barret McKenzie –v- Escada (U.K.) Limited in exactly this way.

The claimant commenced proceedings in 1999 following the termination of its agency agreement in 1998. At the time of termination the agreement had been in existence for about 9 years. The principal amount claimed by the claimant was for compensation under Regulation 17(6) and represented 2 years’ commission payments based upon the average of the last 3 years prior to termination.

In this respect the claim was consistent with the judgment which was later given by the Scottish Court of Session in King V T Tunnock Limited in March 2000. Unfortunately that judgement did not appeal to Judge Bowers.

He pointed out that the Regulations fail to provide a formula to enable compensation to be calculated. This absence was contrasted with the calculation of an indemnity where the Regulations provide some detail.

Attention was drawn also to the difference between indemnity and compensation in that the former is subject to a one year cap and will only operate if the parties have so agreed. But in raising this point, it ignored the fact that the idea of a cap is set out in the provisions of the German law on which the indemnity concept is based. The fact that the compensation concept under French law does not provide a cap is of no great import.

The application of a tariff or benchmark system established in King was also attacked as being unfair. An attempt was made to demonstrate that it would result in injustice. However, the example used by the court showed an uncertain understanding of how agency agreements operate in the United Kingdom.

What then is to be used to determine the amount of compensation under the Regulations? The court referred strongly to the value of the agency and connections established by the agent at the time at or immediately before termination. On this basis a number factors are to be taken into account. But it would appear that there is no question of their being applied systematically against a calculation of compensation arrived at by the Court of Session’s benchmark approach. Instead the judge mentioned as factors to be taken into account the duration of an agency and it’s history. Equally relevant are the agency agreement’s precise terms and whether it was in writing or oral or whether there was “any security of the agreement”. However, why the form of the agreement should be important is unclear as is the significance of security.

Whether the agency was dealing with a regular repeating client base or with one-off transactions with different persons was also considered to be relevant. It was envisaged that there was a strong argument for a larger compensation for the former. Certainly such an argument can be made out. But curiously the value and volume of the transactions did not obtain mention in the judgment.

In seeking to justify the application of these factors to the value of the agency at or immediately before termination, Judge Bowers was in danger of arriving at a calculation of an indemnity under the Regulations. It is also uncertain whether the court intended these factors to be exhaustive.

From the amount determined by these uncertain means, it was his view that there is to be deducted the expenses incurred by the agent in earning the commission on which compensation is calculated.

Ultimately the tone of the decision is that the Regulations are to be applied in what can only be described as an “English” or “fair way”. The underlying intent is that this should result in reducing the amount that would otherwise be awarded by the benchmark or tariff system to terminated agents. But the irony is that it may have the opposite effect. This decision may well encourage terminated agents to rely on valuations based on multiples of net earnings that result in claims considerably greater than those that would result if the King decision had been followed.

This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any members of the Fox Williams’ agentlaw team. (www.agentlaw.co.uk).

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