What Price 'Compensation'?

Author:Ms Victoria Leigh

The House of Lords revises the way in which Commercial Agents' compensation is calculated.

Commercial agents

When the Commercial Agents (Council Directive) Regulations 1993 (the Regulations) were first introduced, the legal profession and clients at large held their breaths as they waited to see how these regulations would be applied and interpreted. Over the years there have been a number of cases before the courts looking at terminology and interpretation of how to recompense an agent for the loss of their agency, through no fault of their own. Last week the House of Lords drew a line under the issue of how to calculate compensation payable to the agent. We look at the decision and its practical application.

A "commercial agent" is a self-employed intermediary who negotiates the sale or purchase of goods (but not services) on behalf of another party (the principal) within the European Union. Commercial agencies are common in the manufacturing industry, where agents rather than employees, sell the products in the market place.

Under the Regulations, an agent is entitled to be compensated on the termination of the agency contract. Termination not only includes on notice, but also the end of a fixed term, on retirement, ill health or death. The compensation takes one of two forms, either an indemnity, which will be agreed from the outset, or in default of any agreement, "compensation".

An indemnity is subject to a cap of one year's remuneration calculated as an average of the last five years remuneration. At the time the agency contract is entered into both sides can only estimate the amount of an indemnity based on sale forecasts, but once into the agency, the principal will have a much better idea as to how much this indemnity could equate.

Calculating compensation was no easier. There was no cap, no certainty and little guidance. Over the years, when calculating compensation, the courts have followed the French approach of a "two-year guideline" in relation to gross or net commission.

The House of Lords decision last week in Graham Lonsdale v Howard & Hallam Limited [2007] UKHL 32 ("the Lonsdale case") has changed this.

The Lonsdale case

Mr Lonsdale was a commercial agent for Howard & Hallam Ltd (H&H), shoe manufacturers, which appointed him to sell its brand of shoes in southeast England. He was later appointed by another manufacturer to sell a different brand in a slightly larger territory, which sold well and by 2000 accounted for...

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