How compensation is assessed
Under the UK Commercial Agents Regulations, a commercial agent may be entitled to “compensation” on termination of the agency contract. The amount payable will be the value of the agency business upon termination – the amount a hypothetical purchaser would have paid for the right to take over the agency and receive the income stream from it.
A recent High Court decision provides guidance on a question which has caused some uncertainty in practice about how the necessary valuation should be approached.
What if the hypothetical purchaser would have the right to terminate the agency by giving notice?
If the terms of the agency contract entitled the producer to terminate it by giving notice to the agent, should you – for the purposes of the valuation exercise required as above – assume that the agency would continue indefinitely under the ownership of the hypothetical purchaser, and value it on that basis? Or should the producer’s entitlement to terminate by giving notice be taken into account? If the latter, the assessed value will be reduced, because a rational hypothetical purchaser would offer less for an agency that could be ended at any time by the producer giving him notice of termination.
Lonsdale v Howard & Hallam, the leading case on the assessment of compensation in this situation, left this question open to argument. Now, in recent High Court case*, it has been held that it must be assumed that the agency will continue indefinitely in the hands of the hypothetical purchaser: the producer’s right to give notice of termination should be disregarded in valuing the agency for this purpose.
There is a caveat, namely that if there is evidence that the agency would have had only a limited future duration, that should be taken into account in the assessment of its value. For example, where the producer is in serious financial difficulty and/or its trade is in terminal decline.
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