Author Matthew Potter

Issue Autumn 07

Pub IoD

For companies unaware of the Commercial Agents Regulations 1993 and their effect, ignore them at your peril.

When introduced in 1993, the regulations caused a storm in that, to a certain degree, genuinely self-employed agents who were contracted specifically to avoid any posttermination responsibility were offered an element of protection similar to that of an employee.

Since the introduction of the regulations, the issue of compensation on termination of an agency has been fiercely debated and contested. Indeed, since 2000 and the Scottish Court of Session case of King v T Tunnock Ltd, the approach has been to follow the French approach which was to award the equivalent of the last two years’ gross commission without any deduction for mitigation by the agent or acceleration.

The English Courts (apart from the fact this was the French approach!) have been less than comfortable about proceeding with such an approach. At last, the House of Lords in Lonsdale v Howard & Hallam Ltd have rejected the argument that an award of two years’ gross commission is not the correct approach for awarding compensation under the regulations, but that the correct approach is to calculate compensation by reference to actual damage and loss suffered as a result of the termination – one might say the traditional ‘English approach’ to damages.

It is, therefore, important that when terminating an agency and trying to reach agreement with regards to financial settlement with the agent, that the actual loss of the value of the agency relationship is considered. The Lords found that this value could be determined by considering the income stream a commercial agent would expect to earn from that agency, had it continued and not been terminated by the principal.

This judgment not only, therefore, provides guidance for financial settlements at the end of the agency relationship, it also gives appropriate guidance for principals and agents when entering into agency agreements with regard to how compensation can be provided for in agency agreements at their outset. Appropriate drafting can account for the appropriate mechanism to be put in place to deal with compensation on termination, whether amicable or otherwise.

When entering into an agency agreement with a commercial agent, it would be advisable, therefore, to attempt to establish the agency value from the outset. Indeed, if you are giving to an agent an already established agency of considerable value, then you may wish to consider provision whereby that initial value is taken into account when compensation on termination comes to be considered. After all, arguably, it may be you as the principal or a previous agent who has been responsible in building up the agency, not the incoming agent.

Agency relationships are not as trouble-free as many companies might expect. In addition to any contractual promise, you will also need to consider the legislative framework such as the Commercial Agents Regulations legislation that may have a sting in the tail. Tempering an agency contract to suit and being prepared for that sting is half the battle to ensure a smooth and painless ride.

Matthew Potter, Solicitor

Tel: 01473 232425

Email: matthew.potter@ashtonkcj.co.uk

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