Agents under the Commercial Agents Regulations 1993 (the Regulations) are entitled to compensation for loss of profits even if the contract between the parties has not been breached but has been lawfully terminated by the Principal. However, if the contract has been breached then the agent may also become entitled to an award for loss of profits under common law.
The purpose of an award for damages under common law is to put the party which has suffered the breach in the position which it would have been had the contract been properly performed. This principle means that the party which has suffered the breach should not make a profit from the breach nor should they be compensated twice for loss that they had suffered.
In the recent judgment in Green Deal Marketing Southern Limited (“GDM”) v Economy Energy Trading Limited (“EE”) having decided how much compensation the agent would be entitled to under the Regulations (see here), the judge was asked by the agent whether it would be entitled to an award of loss of profit for the breach of contract (“Heads of Terms”) by the principal (see here).
The principal put forward three arguments against the award for loss of profits due to the breach of contract.
The first argument was that the Heads of Terms would have only made commercial sense if they could have been terminated by either party on notice. Its reasoning was that Ofgem could have shut down EE’s doorstep selling business for reasons other than a fault on GDM’s part. Therefore, it would be commercially unrealistic for EE not to be able to terminate the Heads of Terms and remain liable to pay GDM damages based on the remaining term of the contract.
The judge decided this was a bad argument as even if the meaning of the Heads of Terms is not commercially desirable, it does not mean the interpretation is wrong. Previous case law has shown that commercial common sense should not be applied retrospectively, and a contract should only be interpreted to mean what the parties agreed to and not what the court thinks they should have agreed. The judge therefore concluded that the parties could have provided for termination on notice for convenience in the Heads of Terms (but which they did not), and so the Heads of Terms were not interpreted in the more commercially favourable manner that EE put forward.
The second argument by EE’s lawyers was that the Heads of Terms should be read as leaving unaffected the limitation of liability provisions of the Partnering Agreement (the original agreement between the parties which was superseded by the Heads of Terms, see here) or contain an implied term that EE’s liability was subject to the same limitations of liability as those in the Partnering Agreement. The limitations of liability in the Partnering Agreement were that any claim for loss of profits were excluded and there was limited recovery to £50,000 for other heads of damage.
Again, the judge decided that this was a bad argument as if the parties intended the Heads of Terms to have provisions limiting liability they would have been reproduced in the contract.
The third argument that EE’s lawyer put forward was that if GDM was entitled to compensation under the Regulations (see here) then an award of damages for loss of profits would be to give double recovery and therefore not be allowed.
The judge commented that compensation is a different remedy from common-law damages and the Regulations do not exclude the right to common-law damages. However, as stated above, compensation can be awarded to an agent who has not suffered a breach of contract. Therefore, the judge thought what should be considered is whether the loss resulting from the breach had already been compensated by the award under the Regulations. If it had then any additional award of damages would result in double recovery.
The judge thought that in line with previous case law the loss for which compensation under the Regulations is awarded is the loss of the further income stream that proper performance of the agency contract would have provided, included the loss for which compensation is provided by common-law damages for premature termination. This, according to the judge, indicated that an award of compensation and an award of damages for loss of profit would tend to result in two awards of compensation for the same loss.
Therefore, the judge decided that the award for loss of profits and compensation under the Regulations would be double recovery and so would not be awarded.
Even so, the judge did put forward an opinion as to how – if damages had been awarded for loss of profits – such loss should have been calculated. In this case he decided that the award would have been based on the scenario that the regulatory interference by Ofgem would not have had a significant adverse impact on GDM’s business, but that there would have been some reduction in the profits of the company.
The judge did think that when calculating loss of profit that the amount of directors’ fees and management remuneration at the time of the breach should not be reduced to market rate costs if they were in reality higher. This is because, as a limited company (with separate legal identity from its shareholders) the amount of profit that the company makes depends on how it arranges its affairs. Reducing their actual renumeration to market rate would increase the loss of profit that the company would have incurred from the breach of the contract which would lead to the over payment of any loss suffered by the company.
Additionally, the judge considered that when calculating loss of profit that a party could not calculate the loss as if there would be an increase in the price for the remainder of the term contract, unless one is provided for in the contract. In this case the judge (if he was going to award an amount for loss of profit) would not have allowed for the amount of loss to be calculated as if there would have been a price increase and there was no price increase permitted under the contract.
Take home points:
- An agent will not be entitled to an award for loss of profit for breach of contract if the amount would already have been compensated for by a compensation claim under the Regulations.
- That commercial common sense will not be inferred into a contract by the courts.
- If an award for damages were to be made the status quo at the time of the breach should be replicated to calculate any loss of profits, including the amount of renumeration earned by key players in the business and details of the contract about the price of the service.