Commercial Agents - Brand New Uncertainties
Tuesday, April 11, 2006
by
Douglas McLachlan
If there’s one thing that lawyers can’t stand, it’s when an easily memorable and easily explainable legal rule is thrown into doubt! If there’s one thing that clients can’t stand, it’s when lawyers fudge the advice they give to their clients. Clients hate hearing “it depends” almost as much as lawyers hate saying it. But when it comes to The Commercial Agents (Council Directive) Regulations (the “Regulations”), it’s nigh on impossible to give a straight answer to a straight question.
The question is simple enough: “If I appoint a commercial agent what will I need to pay him when the agency arrangement comes to an end?” It’s the nature of the answer that can sometimes be maddening.
The Regulations provide two options for calculating payments payable on termination of a commercial agency. Those are compensation and indemnity. Not to be confused with the ordinary (legal) concepts of compensation and indemnity, these come from French law (for compensation) and German law (for indemnity).
The indemnity approach is based on the extent to which the commercial agent significantly increased the volume of his principal’s business and comes with a handy cap of one year’s commission payments. This is calculated with reference to the commercial agent’s average earnings in the previous five years.
The compensation approach is intended to make recompense to the commercial agent for the damage suffered as a result of the termination of the loss of the commercial agency. It is well established in French law that this generally amounts to a payment of approximately two years’ worth of gross commissions.
The EC Directive on which the Regulations are based allowed Member States to choose whether to use the compensation or indemnity approach. France, opted for compensation whilst Germany and most other EU Member States opted for indemnity. Just to make things clear as mud the UK opted for both. Compensation is the default option in the UK, but commercial agents and their principals can agree to use the indemnity basis, usually in the agency agreement.
In 2000, the Scottish Court of Session in the case of King v Tunnock gave lawyers a nice, simple, easily explainable rule of thumb to use when advising clients about the compensation option: the amount payable under the compensation should, as a guide, be the equivalent of the last two years’ worth of gross commissions to the agent. Okay, in truth it was never quite that simple but, after all, that’s why they called it a rule of thumb!
Unfortunately for those lawyers and clients who yearn for the simple life the English courts’ were always reluctant to follow the decision in King v Tunnock, perhaps due to the fact that an award of two years’ gross commission was simply thought to be too generous to the commercial agent, or perhaps because of the general dismay at Court of Session’s overt willingness to be guided by the practice of the French courts. After a succession of cases chipping away at the decision in England, the English Court of Appeal has finally held in Lonsdale v Howard & Hallam Ltd that there is not, nor should there be, any general rule that in the ordinary case compensation should be assessed at two years’ commission.
The Court of Appeal went on to say that the two year’s compensation rule should not even be supported as broad guidance! Instead the Court of Appeal ruled that the damage suffered by the agent as a result of the termination of his relations with his principal is normally the loss of the agency business, including whatever goodwill attaches to it and so the compensation which the agent is entitled to receive in such cases should reflect the value of the business at the date of the termination.
Of course this new approach leads to all sorts of new questions about how to put a valuation on the agency. In practice, the courts in England will primarily rely on the evidence given by expert witnesses when determining the value of the commercial agent’s business and the goodwill attached to it. Well, so much for the easily explained rule of thumb!
Of course the purpose of law is not, and should never be, to make life easier for the lawyer. So does it make life easier for the commercial agent or his principal?
Well … it depends!
The judgment has been broadly welcomed by principals who have long taken the view that the two years’ gross commissions rule of thumb was unfairly generous to the commercial agent. However, it is worth remembering that while there is a cap on the amounts payable under the indemnity basis under the Regulations, there is no such cap under the compensation basis. This could lead to parting payments to the commercial agent that are well in excess of those that might apply under the indemnity basis, and also to payments amounting to more than two years’ gross commission, depending on the value of the agency. In practice, the French approach, as approved by King v Tunnock, had acted as a sort of informal cap on compensation. Without it principals may be keener than ever to opt for the relative certainty afforded by selecting the indemnity basis in their agreements with their commercial agents.
Nevertheless, it is worth remembering that the rule of thumb in King v Tunnock still applies in Scotland, although considerable doubt now must be cast over whether it will survive a reference to the House of Lords. Given that commercial agents and their principals have historically preferred to negotiate the amount of the compensation payment with reference to the guidelines set out by the Courts, it is likely that those negotiations will become even more contentious than ever.
The information contained in this article is given for general information only and does not constitute legal advice on any specific matter.