The calculation of Commercial Agents compensation – it’s important to be practical!

Commercial agents are entitled to compensation and/or indemnity if the agency contract between them and their principal is terminated (The Commercial Agents (Council directive) Regulations 1993).

The case of Graham Lonsdale v Howard & Hallam Ltd [2007] laid down guidelines for the calculation of the compensation. The court must look at the value of the agency at the time of termination (effectively the potential profit or net income available).

A recent High Court decision has given further guidance on how to approach the compensation calculation. The case of Berry v Laytons [2009] EWHC 1591 QB involved the termination of an agency agreement. The principal gave the agents one years’ notice to terminate the agreement. The agent brought a breach of contract and negligence claim against a law firm in regard to advice they had given on the Commercial Agents Regulations, as part of the case expert evaluations were made on the value of the agency.

Following the approach laid down in Lonsdale, each party instructed an expert to value the agency. The experts differed in their approach, one applied a practical method of looking at the specific facts and issues surrounding the agency itself (Ms Nelder), whist the other adopted a theoretical approach (Mr Lazarevic). The court favoured the practical approach of Ms Nelder.

The experts looked at two main factors.

First the price someone would pay for the income stream which the agency would have generated net of costs. The court endorsed Ms Nelder’s practical assessment of the issue. To ascertain the past pattern of commission and costs incurred she had reviewed the actual management accounts and other company information supplied to her.

The second factor was the likely costs a hypothetical purchaser would need to incur to maintain the agency. Again, the court preferred the practical approach of analysing the agency itself, together with the market place and industry at the time. In particular the court dismissed the notion that the threat of competition from the former agent would narrow the principal’s customer base, and so make a potential purchaser cautious about taking on the agency.

Going forward it seems that the courts will be encouraged to adopt a practical stance when evaluating the compensation available to agents. Therefore it is important for an agent to maintain clear accounting records.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

Back to news