The High Court issued a decision last week regarding the assessment of compensation for agents acting in accordance with the Commercial Agents Regulations 1993 ("Regulations").
The decision did not break any new ground as existing legal principles were applied to the facts of the case. However the case provides a helpful illustration of the factors courts will take into account when calculating the level of compensation payable to agents under the Regulations.
Background to the Commercial Agents Regulations
The Regulations came into force on the 1st January 1994 and govern the relationship between commercial agents and their principals. Under Regulation 17, a commercial agent is entitled to be compensated or indemnified, after the termination of the agent's contract. Compensation shall automatically apply, unless the parties specifically decide to take the indemnity route.
Compensation under the Regulations shall be granted to an agent if he suffers due to the termination of his contract with the principal. Damage is deemed to have occurred if, on termination, circumstances apply which either:
- deprive the agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the agent; or
- have not enabled the agent to amortise the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.
In Alan Ramsey Sales and Marketing Ltd v Typhoo Tea Limited [2016] EWHC 489 (Comm), the court took into account previous case law and existing legal principles set out by the House of Lords in Lonsdale v Howard & Hallam Ltd [2007] UKHL 32 but also took into account the evidence presented by the experts on both sides.
The experts agreed that compensation should be calculated on a future annual net earnings basis (looking at data on the price/earnings ratios from the FTSE on the day of termination) and multiplied by a multiplier. The multiplier was to be determined by a number of factors namely:
- the potential liability of investing in the agency;
- the stability of the principal's business;
- the position of the business in the market;
- the financial position of the business; and
- the volume of trading.
The greater the risk factor involved from analysing these factors the lower the multiplier would be.
The main issue for the legal experts was determining the costs that would have been incurred in earning the fixed retainer of £260,000 and which were to be deducted before applying the multiplier. The experts did not agree on the position of fixed cost, inflation and apportionment of costs to the agency.
In determining the costs allocated between different agents, the court referred to a statement by Lord Hoffman in Lonsdale that "in the case of an agent who has more than one agency the costs must be fairly attributed to each." The court concluded that Lord Hoffman's intention was that a fair proportion of the costs (fixed or variable) were to be distributed among all of the principals.
On inflation, the court was satisfied that the calculations made in accordance with the price/earnings ratios from the FTSE took inflation into account. Due to the current lower rate of inflation, any increase would have been included in the fixed retainer, thus no allowance was made for inflation.
The court concluded on a multiplier of 4 taking into account the factors noted above. The actual compensation figure that was decided was around £130,000 which the court determined was a reasonable measurement for the value of the agency, being the notional price that a hypothetical purchaser would be willing to pay for the agency as at the date of termination.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
