What is the value of an agent's compensation on termination?
When an agent's relationship with his principal ends, the agent is entitled to be compensated for damages caused by this termination.
Lonsdale (t/a Lonsdale Agencies) v Howard Hallam Ltd introduced the concept of a "hypothetical purchaser" for the purpose of deciding the value of an agency and in turn the value of the compensation.
Following this decision, must it be assumed when assessing the value of an agency that a hypothetical purchaser who would pay something for the agency always exists? The recent Court of Appeal case of Warren (t/a On-Line Cartons and Print) v Drukkerij Flach BV provides useful guidance on this point.
Mr Warren was working as a commercial agent in the UK, in September 2009 at the age of 69 Mr Warren decided to retire and provided three months' notice to terminate his agency. The agency ended in December 2009 on good terms.
In the six months following this termination, around £230,000 worth of orders were placed with the principal by two of the key customers Mr Warren had previously been maintaining. When Mr Warren discovered these orders had been placed, and that he had missed out on a large amount of commission, he brought claims under regulations 8 and 17 of the Commercial Agents (Council Directive) Regulations 1993.
Mr Warren was successful. In his claim for "pipeline commission" on the £230,000 orders placed after his retirement, he was awarded £5,771 under regulation 8. In addition, Mr Warren was awarded £18,800 under regulation 17 of the Regulations as compensation for the damage suffered by the termination of his agency.
In deciding on the sum of £18,800 as compensation for termination the Judge considered what a reasonable hypothetical purchaser would have paid for the agency.
The principal appealed the decision on the grounds that the Judge had made an error of law. The principal claimed that the Judge was wrong to state that he had to assume that there was a hypothetical buyer for the agency and that the agency should therefore be valued on the basis that a buyer existed who would pay something for the agency. The principal believed that there was in fact no buyer who would pay any sum for the agency.
The principal's appeal was dismissed and the decision to award the agent compensation for the end of the agency stood.
However, Longmore LJ in the Court of Appeal did agree that by not addressing the argument that the agency was in fact valueless, the trial Judge's references to the term "hypothetical purchaser" made it look like the Judge assumed there was a value for the agency and his task was to assess what that value was, which was wrong. When making a valuation, one does always assume a hypothetical purchaser exists, but this does not necessarily mean that there is a price the hypothetical purchaser would pay.
Although the principal's appeal was unsuccessful, this case provides a useful interpretation of the "hypothetical purchaser". In particular it demonstrates that the court will assume a hypothetical purchaser exists but the agent will have the burden of proving that the agency has a value of some kind. Equally the principal should put in clear evidence, where available, to demonstrate that the agency is worth less or indeed nothing. If the agent cannot show that the agency has some kind of value, then the agent's compensation will also have no value.
If you find yourself in a similar situation as Mr Warren or the principal in this case, Blake Morgan can assist you through our extensive experience of advising both principals and agents on termination disputes and the valuation of agencies.