04 August 2014 #Dispute Resolution
For many years after the Commercial Agents Regulations came into force in 1994, there was uncertainty over how a commercial agent should calculate the value of the "compensation" they were owed under Regulation 17 following the termination of their agency agreement. Some argued for the French model of awarding agents compensation equivalent to two years gross commission and others applied a complicated checklist of points to take into account when valuing compensation.
That all changed in 2007 following the House of Lords decision in Graham Lonsdale v Howard Hallam Limited. The Court clarified that compensation is calculated by valuing the future income stream of the agency business. In other words, you need to value what someone would have been prepared to pay to buy the commercial agency on the date the agency agreement was terminated. In practice, when a commercial agency agreement is terminated, there is usually no one who actually purchases the business. Instead, the customers of the commercial agent often go on to deal directly with the principal or the principal appoints a new agent to take over the former agent’s customers.
To value compensation, therefore, a legal assumption is made that there is a “hypothetical purchaser” who is able to purchase the agency business, irrespective of whether the agency agreement would allow it, for example because there is a clause prohibiting assignment of the agreement.
In the recent Court of Appeal decision in Warren (T/A On-Line Cartons and Print) v Drukkerij Flach B.V. 2014, the Court provided further guidance on what the valuer should assume about the hypothetical purchaser when valuing the agency business. The case involved a commercial agent who sold cardboard packaging in the UK. The principal terminated the agency agreement and a dispute arose about how much compensation the commercial agent was owed under Regulation 17.
When the matter was first heard by the Court, the Judge made two assumptions about the “hypothetical purchaser”. First, that there was a hypothetical purchaser who was able to purchase the agency business. This assumption is correct and follows the rule in Lonsdale.
The Judge also assumed that the hypothetical purchaser would have been prepared to pay an actual price for the business and noted that his function was to determine that price. That part of the judgment was incorrect. It was quite possible that a hypothetical purchaser would not have been prepared to pay any price for the agency business. This may happen where the business of the principal is in terminal decline and no sensible purchaser would pay anything for the privilege of taking on the agency business. Although the judge did get this point wrong, it made no difference to the overall result as the Court of Appeal held that, on the valuation evidence, there was every reason to believe that a hypothetical purchaser would have been prepared to pay a price for this business.
Although this case does not mark any change to the law, it is a useful practical reminder that actual evidence of what someone might have been prepared to pay for the agency business is relevant material the Court can take into account when determining compensation under Regulation 17. If, for example, there is evidence that the commercial agent had tried unsuccessfully to sell their agency business in the period leading up to termination of the agency agreement, this will be relevant evidence for working out what a hypothetical purchaser would have been prepared to pay.