Lonsdale (t/a Londsdale Agencies) v Howard & Hallam Limited
The Commercial Agents (Council Directive) Regulations 1993 give self-employed agents, who sell on behalf of a “principal”, a statutory right to compensation if the agency is terminated.
In Lonsdale (t/a Londsdale Agencies) v Howard & Hallam Limited, the House of Lords said that courts should calculate the compensation by valuing the income stream which the agency would have generated, had it continued.
Mr Lonsdale worked as a commercial agent selling shoes and in 1990 was appointed by Howard & Hallam Ltd to sell their Elmdale brand. In 1997/8 his gross commission was almost £17,000 but by 2002/3 this had fallen to just over £9,500. In 2003, the company ceased trading.
Mr Lonsdale made a claim for compensation under article 17(3) of the 1993 regulations. The House of Lords said it had to decide two issues - what exactly he should be compensated for, and how the compensation should be calculated.
Article 17(3) says that:
“The commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with the principal.
Such damage shall be deemed to occur particularly when the termination takes place in circumstances:
- depriving the commercial agent of the commission which proper performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the commercial agent's activities,
- and/or which have not enabled the commercial agent to amortize the costs and expenses that he had incurred for the performance of the agency contract on the principal's advice.”
Compensation for what?
The court said that under French law (on which article 17 is based), agents are entitled to a share of the goodwill of the principal's business, given that they played a part in building it up.
As the goodwill is an asset which the principal keeps when the agency comes to an end, the agent must be entitled to compensation for having been deprived of future commissions. But how should courts calculate the loss of that goodwill?
How much compensation?
Mr Lonsdale argued that the court should take the gross profits from the agency and multiply them by two and a half. As his gross commission was £12,239.34 for the last year before closure, he therefore valued the business at £30,598.35.
He also pointed to the approach of the French courts which routinely value agencies at twice the average annual gross commission over the previous three years.
However, the House of Lords rejected both approaches, saying instead that the way to calculate the compensation was by valuing the income stream which the agency would have generated, had it continued.
In this case, it agreed with both the county court and the Court of Appeal which said that the value of the agency was “what someone would pay for it.” In this case, about £8000 (the net commission that Mr Lonsdale had been earning from it).
It quoted at length the county court judge who said: “Commonsense would indicate that few people wanting the opportunity to earn what the claimant was earning would be prepared to pay well over £20,000 for the privilege of doing so, still less would they do so in an industry in remorseless decline, and in which the likely buyers would be men of modest means…
Given the absence of evidence about how commercially to value goodwill, or evidence about what price in practice might have been available, the court might be thought to be justified in simply finding that the claimant has failed to prove his case…
This was an agency producing a modest and falling income in a steadily deteriorating environment. There is no evidence that anyone would have paid anything to buy it…I am strongly tempted to find that no damage has been established…But perhaps that conclusion, though I regard it as logical, is a little over rigorous given that the defendant has already made a payment. Doing the best I can, I find that the appropriate figure for compensation is one of £5,000."