The recent decision of the House of Lords in Lonsdale v Howard & Hallam Ltd [2007] UKHL 32 is a significant development in the area of commercial agency law. Article by Paul O'Brien, Axiom Advocates.

13 August 2007

Under the Commercial Agents Directive of 1986 and the Commercial Agents (Council Directive) Regulations 1993, commercial agents can claim a payment if their agency is terminated. The parties can choose between two different regimes, derived from French and German law, and somewhat arbitrarily termed "compensation" and "indemnity." If the agency agreement is silent, then the compensation rules apply.

In theory, "compensation" is supposed to compensate the agent for the damage he suffers when his agency is terminated. But the legislation only explains this in general terms, and gives little guidance as to how the payment should be calculated. Last year, the European Court of Justice declined to lay down any hard and fast rules.

The previous leading case in the UK was King v Tunnock 2000 SC 424, a decision of the Inner House of the Court of Session. In King, the court was heavily influenced by the fact that the compensation regime was derived from French law. They noted that the established practice of the French courts was to award two years' commission (based on the average commission earned in the final three years). Reasoning that the Directive was intended to create harmony with French law, the Inner House adopted the same methodology.

But in Lonsdale, the House of Lords has rejected that approach. According to their Lordships, the true measure of compensation is the price that the agent would have received for his agency business, upon a notional sale to a third party. They drew comparisons with the principles used to value shareholdings in private companies for tax purposes.

The agent argued that this approach would bring out much lower awards than the French system. In answer to that point, their Lordships observed that in France, agencies are in fact regularly bought and sold, and that the conventional price is indeed two years' commission. Thus, in the House of Lords' view, the legal principles are the same. The French approach simply reflects the way in which agency businesses are valued in the French market.

In practice, this decision means that compensation awards to commercial agents are likely to go down. It also means that the courts can no longer take the broad-brush approach of King v Tunnock - any claim for compensation will have to be supported by proper valuation evidence.

Article by Paul O'Brien, Advocate, Axiom Advocates.

Lonsdale v Howard & Hallam Ltd [2007] UKHL 32

http://www.publications.parliament.uk/pa/ld200607/ldjudgmt/jd070704/lons-1.htm