Disputes about the assessment of compensation following termination of a commercial agency continue to keep the High Court fairly busy.
Should it be assumed that the agency will continue indefinitely?
A case reported in our last update on this topic held that when valuing a commercial agency for compensation purposes it must be assumed that it will continue indefinitely in the hands of the hypothetical purchaser – the producer’s right to give notice of termination should be disregarded.
The same point has arisen in two subsequent cases, both High Court, but different judges. In the first* the judge rejected the above approach. He held that it was necessary to take account of the possibility that the agency might be terminated by the principal exercising a right to give notice. The valuation requires all “real world” circumstances to be taken into account, including that possibility where relevant. The judge in the second case** essentially agreed – the possibility that the agency could be terminated on notice should be taken into account in the valuation, as should all relevant uncertainties.
Regulation 8 of the Commercial Agents Regulations entitles an agent to claim commission for a reasonable period after termination of the agency. Agents often put in substantial claims under this head, as well as claiming compensation for termination based on the value of the agency.
Since the House of Lords’ 2007 ruling in the Lonsdale case, it has been arguable that a Reg 8 award of post-termination commission should reduce the amount of any compensation for termination. If the principal will have to continue paying some commission to the former agent after termination, surely the hypothetical purchaser of the agency, when valuing the income stream he would be taking over, would not pay anything for commissions he would not receive? This makes sense commercially, and avoids the potential double counting to which the combination of Lonsdale and Reg 8 gives rise.
In both The Software Incubator* and Monk v Largo** the agent claimed both substantial compensation (see below) and post-termination commission for 18 months. In both cases it was held that 18 months was too long: and, more importantly, that a significant Reg 8 commission award could materially reduce the value placed on an agency for compensation purposes.
In Monk v Largo the Reg 8 commission amounted to £74,280 on sales to Tesco, which formed a major part of the agency the hypothetical purchaser would be acquiring. The fact that commission on those sales would go to Mr Monk would clearly affect the amount a hypothetical purchaser would pay for the agency, said the judge. However, a “pound for pound” reduction was not appropriate. A reduction of half the amount – £37,000 – would be fair.
Exaggerated claims won’t wash
In the Software Incubator* the agent claimed c £6.15m by way of compensation for termination. The judge awarded £475,000. In Monk v Largo**, the agent claimed £1.8m and was awarded £275,000. In both cases the same QC represented the agent, and expert valuation evidence was put forward to support the claim.
These cases both show:
- that lawyers and valuation experts representing agents often put forward exaggerated – sometimes wildly exaggerated – claims for compensation; and
- that judges are striving to ensure that commercial realism and common sense prevails.
As the judge in Monk v Largo pointed out, unrealistic awards of compensation will simply deter principals from using commercial agents at all. Legislation brought in to protect a species apparently considered in need of protection will, ironically, tend to lead to its extinction.
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