House of Lords rules on approach to commercial agents’ compensation

United Kingdom

The House of Lords has conclusively laid to rest the argument that commercial agents’ compensation on termination should (or must) be based on the French courts’ approach of awarding two years’ average annual gross commissions over the previous three years. Instead, compensation should be calculated to reflect the loss of the value of the agency, had it continued, in accordance with normal English law principles.

In Lonsdale v Howard & Hallam, following years of declining sales, the defendant principal ceased trading and terminated the claimant’s commercial agency. There was no written agency agreement, but regulations 17(2) and (6) of the Commercial Agents (Council Directive) Regulations 1993 gave the claimant a statutory entitlement to compensation for "the damage he suffers as a result of the termination of his relations with his principal". The only question in dispute was how the compensation should be calculated.

The claimant argued that the court was bound to follow the French approach in order to harmonise the method of calculating compensation across the EU. It cited the Scottish Court of Session decision in King v Tunnock as persuasive authority. That case endorsed the generous French approach and is often relied on by commercial agents when seeking compensation payments. The decision has not been followed in some English first instance decisions, however, and the House of Lords has now settled the matter conclusively; they rejected the approach and were critical of the judgment.

The House of Lords found that the method of calculating the damage to be compensated was a matter for each member state and that this was consistent with ECJ case-law. The correct approach under English law was to compensate the agent for the loss of the value of the agency adopting normal common law principles, on the assumption that the agency would have continued and was transferable.

Lord Hoffmann actually endorsed the first instance decision in King v Tunnock, that the agent was not entitled to any commission because the principal had gone out of business. Nobody would have paid anything for the agent’s rights in those circumstances. Lord Hoffmann went so far as to say that even if one assumed "commission would have continued at the same rate, it is hard to see why anyone should have paid for the privilege of a full time job which earned him less than he would have been paid as a bus conductor". This may offer principals an argument that commercial agents earning modest incomes are not entitled to any commission on termination.

All of this is good news for principals who have commercial agency contracts that contain no indemnity provision on termination. The balance has clearly shifted - a commercial agent’s bargaining position in negotiating compensation on termination has been significantly weakened.

Case references:

Lonsdale (trading as Lonsdale Agencies) v Howard & Hallam Ltd

[2007] UKHL 32

King v T Tunnock Ltd

[2000] IRLR 569, (2000) Times, 12 May, 2000 SC 424, 2000 SLT 744