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Compensation for commercial agents – the perils of valuation disputes

A commercial agent is entitled, by way of compensation on termination of the agency, to the value of the future commission income stream he would have derived from the agency but for the termination: the amount he could reasonably expect someone else to pay him for the right to stand in his shoes immediately after termination, assuming that the hypothetical purchaser would continue to perform the agency and receive the future income stream.

Calculating the level of compensation

There is no rule of thumb for calculating the amount of such compensation.  An assessment is required of the value of the agency at the date of termination: a business valuation, therefore, which must take into account the prospects and likely profitability of the agency assuming the hypothetical purchaser took it over and continued it, and all other relevant circumstances.

Valuing an agency in this way can throw up a whole raft of issues on which the parties and their valuers may disagree, and which the court would therefore have to decide. A valuation dispute can therefore become a costly and protracted affair.

A cautionary tale

Quite how costly and protracted is graphically illustrated by a recent case.  A company was owned by two shareholders. In 2005 they fell out. One (N) wanted the other (C) to buy him out. C refused. In 2010, after a lengthy battle, the High Court ordered C to buy N’s shares at their fair value in 2005. The parties could not agree on the value. In May 2011 the High Court gave directions for a valuation hearing. C challenged that order before the Court of Appeal, unsuccessfully. In July 2011 the case returned to the High Court for a four day hearing, at the end of which the Judge ruled on valuation. Again, C appealed. In March 2012 his appeal was dismissed.

So after seven years of litigation, and two trips to the Court of Appeal, this argument about valuation was finally concluded. How much was involved? N had argued that his shares were worth £883,000, C that they were worth nothing at all. The Judge decided they were worth £500,000. The legal costs on each side probably approached that amount, perhaps exceeded it.  Insofar as there was “a winner”, it appears to have been N.  But it would be interesting to know how much, if any, of the £500,000 he ended up with net of irrecoverable costs.

How to avoid a similar legal battle 

It could be in both parties’ interests to agree that if and when the agency comes to an end, any compensation due will be calculated by a simple formula (e.g. X percent of A’s average gross commission, or of P’s average sales in the UK, for the last two or three years).  Although the Commercial Agency Regulations prohibit agreements which exclude or reduce an agent’s entitlement “to his detriment”, if the agent was prepared to abide by the agreed formula in order to avoid litigation, both parties would know where they stood and there would be much less potential for dispute.

Even where there is no agreed formula, it will be sensible to try to avoid a nightmare like this – see Compensation on termination of agency – assessment – what happens in practice.

Case: Crabtree v Ng, Court of Appeal, March 2012