The Law Relating To Commercial Agents (Pt. 2)

The Law Relating to Commercial Agents (Pt. 2)

Thank you very much indeed for joining me for the second in this series of talks on the subject of the law relating to commercial agents.

I hope that you’ve all had the chance to download my case and statute citator, which, as I’ve already indicated, forms the accompanying notes to these talks. If not, that document is available from the Commercial Chamber’s website the details of which are on the slide in front of you.

Last week we looked at the coming into force of the regulations, their interpretation, their territorial application and, in particular, the definition of a commercial commercial agent as that phrase is used for the purposes of the Regulations.

This week, I intend to look at the duties of a commercial agent; the duties of a principal; the rights the parties to a commercial agency agreement have to a written statement of the terms of their commercial agency, and also to some issues regarding the enforceability of restrictive covenants as they’re contained in commercial agency contracts. I’m then going to move on to some issues regarding remuneration and the minimum notice periods that apply to commercial agency contracts on their termination and then, towards the end of today’s talk, I’m going to consider the thorny issues of rights to indemnity and compensation payments following the termination of an agency arrangement. Then, finally, I’m just going to say one or two words about valuation issues as they arise in relation to commercial agency arrangements.

First, therefore, I’m going to start with a consideration of the duties that are owed on the one hand by an agent to his principal and, on the other hand, some duties that are owed by a principal to his commercial agents.

Before considering some particular duties imposed by the Regulations, I just want to make the, perhaps obvious, observation that the relationship between a commercial agent and its principal is a contractual one, and the principal and agent are therefore subject to any duties and responsibilities agreed between themselves. In other words, they must each fulfil the terms of the contract that they have either expressly or implicitly agreed between themselves.

Being an agency relationship, the general law imposes certain common law duties or equitable duties into the relationship and they are also important. So, for example, an agent must of course act in his principal’s best interests and an agent must not allow a conflict to exist between his interests and those of his principal, or indeed between two persons for whom he acts as an agent.

In addition to those contractual duties or those common law or equitable duties, the regulations themselves spell out certain specific duties owed between commercial agents and their principals, and it is those specific duties that I want to concentrate on.

Now, in some respects, the Regulations appear to simply restate common law or equitable duties. In other respects, they clearly go further and impose new duties. In many cases, the ambit of these new duties is far from clear in certain respects.

As I say, let me start with the duties that are imposed on a commercial agent in favour of his principal. These duties are the subject of paragraph 3 of the Regulations. That paragraph specifically provides that an agent must look after the interests of his principal, act dutifully and in good faith towards his principal. So far, these concepts have received relatively little judicial consideration, but it is clear, for example, that a commercial agent must act honestly towards his principal. And it’s clear that a commercial agent cannot act for those whose interests compete with those of his principal unless, of course, fully informed consent is forthcoming from both principals.

A commercial agent is also required to make proper efforts to negotiate or to negotiate and conclude contracts on behalf of his principal. Again, this obligation has received little consideration by the courts to date, but it seems to me that the concept of exercising proper efforts is likely, at least, to require reasonable efforts on the part of the commercial agent. But may it go further than requiring simply reasonable efforts though it’s unlikely, it seems to me, that the obligation to use proper efforts to negotiate or negotiate and conclude sales on behalf of this principal is going to involve an agent in having to do anything such as to exercise best endeavours in seeking to achieve that goal.

A commercial agent is also required by Regulation 3 to communicate all necessary information available to him to his principal. It’s to be noted that this obligation is restricted to a requirement to communicate that information which is necessary. What is necessary in this context is something of a mystery, but, to my mind, it is likely to include details of all contracts that are concluded by the agent on behalf of the principal. It seems to me that it may even extend to oblige the agent to notify the principal of sales leads, for example, that have been generated by the agent within his territory and of which he is aware.

Regulation 3 also obliges an agent to comply with the reasonable instructions of his principal. Reasonable instructions in this context is, of course, unlikely to include any instruction that might, objectively speaking, not be expected to be given by other principals to agents operating in similar markets and circumstances. It’s difficult, it seems to me, to see why any instruction contained within the express terms of the contract of commercial agency would be considered anything other than a reasonable instruction since, after all, those instructions form the basis of and have been accepted by the commercial agent when taking up his appointment as a commercial agent.

Finally, in this regard, I think it’s probably worth just observing that a breach of the duties imposed by Regulation 3 upon a commercial agent will, of course, give the principal a right to a claim in damages but presumably, in an appropriate case, it will also present the opportunity for interim and final injunctive relief to prevent breaches or threatened breaches if damages would not be a sufficient remedy for the breach or threatened breach concerned.

It is to be noted that there is authority to the effect that a breach of the duties imposed by Regulation 3 will not necessarily permit the principal to terminate the contract of agency. In other words, it appears that the terms imposed by Regulation 3 are not necessarily conditions of the contract and are more likely to be regarded as intermediate terms meaning whether a breach of these terms gives rise to a right to terminate the contract with or without notice is likely to be dependent on the seriousness of the breach and the seriousness of the consequences of the breach for the principal.

Finally, it ought to be just recognised that Regulation 5 provides that these duties imposed upon a principal cannot be delegated from. In other words, they cannot be contracted out of.

Let’s turn to look at the other side of it. The question of duties imposed on a principal in favour of the agents. These are the subjects of Regulation 4. A principal, similarly, is required to act dutifully and in good faith to his commercial agent. So, for example, it’s been decided that a principal probably cannot solicit orders through other agents or from customers where that commercial agent has been given exclusivity in a particular area or market. Similarly, acting in any manner that is likely to damage the trust and confidence between the principal and the commercial agents is, it seems to me, likely to involve a breach of this duty.

Regulation 4 also imposes upon a principal a duty to provide his commercial agent with necessary documentation. Again, it’s unclear what would comprise necessary documentation for this purpose but it seems to me that it is an obligation that probably obliges the principal to provide such things as operating manuals in respect of the goods that the agent is authorised to sell. Whether it would extend to impose an obligation to provide, for example, point of sale materials is another unanswered issue.

A principal must also provide his commercial agent with the information necessary for the performance of the agency. This obligation seems to me to extend to requiring the principal to provide details of inquiries received directly by the principal from customers in a territory in which the commercial agent has exclusive rights to sell the principal’s goods. The principal is also required to notify his commercial agent within a reasonable period of any anticipated decline in the volume of transactions. Once again, it’s not entirely clear what the ambit of this obligation is remembering, of course, that these obligations are derived from European legislation and may have received greater consideration in other Member States of the European Union. But whilst it’s not entirely clear what it means for the purposes of legislation within this jurisdiction, it does seem to me that it’s probably imposed to enable a commercial agent to make adjustments to his working practices if the demand for goods of his principle are likely to suffer significant falls. In other words, the principal, it seems to me, is obliged to alert the commercial agent of an anticipated fall in demand so as to enable that agent to reduce or limit his expenses in the operation of the commercial agency if that is a sensible course to adopt.

Finally, Regulation 4 imposes an obligation on the principal to notify the commercial agent within a reasonable period of an acceptance or, indeed, of a refusal by the principal of any transaction procured by the commercial agent. This would seem probably to extend to an obligation requiring the principal to notify an exclusive sales agent of all sales in his exclusive territory. It’s worth noting that this duty expressly contemplates that a principal can refuse to accept an order from a customer in the commercial agent’s territory that has been procured by that commercial agent. However, it seems to me pretty clear that that principal must only do so in good faith, in accordance with his duty to act dutifully and in good faith towards his commercial agent. So, for example, a principal might possibly be justified in refusing an order for goods if he holds, say, insufficient stock, or if he perceives that a customer is not good for the price. But he may not be permitted, in accordance with his duty to act dutifully and in good faith, to simply frustrate his commercial agent from reaching a sales target by denying or refusing to accept an order that is placed by a customer simply with a view to avoiding a commercial agent’s entitlements to, say, commissions at a greater rate.

As with the duties imposed on commercial agents, these duties imposed on a principal will give rise to a claim for damages and, in an appropriate case, similarly ought to give rise to the opportunity for interim and final injunctive relief to prevent breaches or threatened breaches of these duties.

Again, just like the duties imposed on a commercial agent, these duties are, it seems to me, likely to be regarded as duties of an intermediate nature, the consequences of which depend upon the seriousness of the breach and of the consequences of that breach.

Finally, as far as duties are concerned, again, note that Regulation 5 also applies to the duties imposed upon a principal. In other words, these duties cannot be delegated from by agreement between the parties.

Let me quickly consider the issue of entitlement to a written statement of terms. It’s pretty straightforward. It’s governed by Regulation 13. That Regulation provides an entitlement to both parties. That is, both the commercial agent and the principal are entitled to a written statement of the terms of contract agreed between them. Generally, contracts of commercial agency don’t need to be in writing, but if one or other of the parties to that contract requires a written statement of its terms, that entitlement is provided by Regulation 13.

Let me move on to consider the enforceability of restrictive covenants within the terms of a commercial agency arrangement. I’m talking here about restrictive covenants, of course, that apply or are expressed or apply following the termination of a commercial agency. Regulation 20 provides certain restrictions on the enforceability of such restrictive covenants. In particular, Regulation 20(1) provides that any such restrictive covenant shall only be enforceable if and to the extent that it’s concluded in writing. In that regard, a memorandum setting out the clause is seemingly sufficient and it doesn’t seem as though there’s any requirement that that written memorandum needs to be signed by the parties in any fashion. Secondly, such a restrictive covenant is only enforceable insofar as it relates to only the geographical area or group of customers entrusted to the commercial agent by the terms of his commercial agency arrangement with the principal. And finally, such a restrictive covenant is only enforceable insofar as it relates only to goods the subject of the commercial agency agreement that he has with his principal. In other words, the agent can only be restricted in relation to his post termination activities insofar as they relate to the goods that he was previously authorised to sell.

Even if the conditions for enforceability of such restrictive covenants, as I’ve just described them, are satisfied, Regulation 20(2) contains a further limitation on the enforceability of restrictive covenants. That is, it imposes a limit as to the duration of such covenants. A restrictive covenant of this nature is only enforceable for a maximum of two years following the termination of the commercial agency. That is, as I say, a maximum duration, not a prescribed duration. Though Regulation 20(2) two does not specifically say so, presumably, if the restrictive covenants is expressed to apply for longer than two years, it will be considered at least potentially enforceable only up to a maximum of two years rather than being considered unenforceable in its entirety.

I have said that such restrictive covenants are potentially enforceable up to a maximum of two years, that is because Regulation 20(3) provides that such restrictive covenants are still subject to all the other restrictions as to their enforceability. So, for example, under the general law as to the enforceability of terms considered in restraint of trade, such restrictive covenants will still have to satisfy a test of being reasonable in all the circumstances for the protection of the principal’s legitimate commercial interests. Therefore, in the particular circumstances of a case, a two year restrictive covenant against solicitation of customers might be considered an unreasonably long period of restriction and so it may not be enforceable for that two year period. Indeed, it seems to me somewhat dangerous to consider the two year period as any sort of rule of thumb. In my experience, generally a two year restriction of this sort will need considerable justification if it is to be enforceable. Likewise, a restrictive covenant expressed to restrict a former agent from dealing with clients in a wide geographical area or as regards a wide subject matter may need considerable justification if they’re to be considered reasonable.

Let me move on to consider the remuneration of commercial agents and the provisions contained within the Regulations that relate to the remuneration of these commercial agents.

Fundamentally, the rate of remuneration payable by a principal to a commercial agent is really a matter for negotiation and agreement between the commercial agent and his principal. But the regulations do, however, seek to regulate the position if there should, for any reason, be no such agreement. To my mind, it’s pretty hard to conceive of a situation in which a commercial agent; that is, by definition, a person with continuing authority to negotiate or negotiate and conclude contracts on behalf of this principal, will not have agreed rates of remuneration. Ordinarily, of course, that’s the first thing in the agent’s mind. But if they haven’t, for some reason, then Regulation 6 provides that a commercial agent is to be entitled to either the remuneration customarily allowed in the place where the agent operates or to a reasonable remuneration. Of course, evidence of what is paid to other commercial agents customarily in the place where the agent operates or what is a reasonable rate of remuneration for the services provided by that agent are likely to be the subject of expert evidence though it seems to me that this is seldom likely to arise in practice, as in most cases, it seems to me, as I’ve already said, that the agreement will detail the commercial agent’s right of remuneration.

There are then a series of regulations that detail a commercial agent’s rights in respect of his remuneration where that remuneration takes the form of commissions on sales effected. These are the regulations contained at Regulations 7 to 12. These Regulations do not apply if the commercial agent is remunerated in another way, such as through a fixed retainer. These Regulations only apply where the commercial agent is remunerated through commissions and commissions for this purpose is, perhaps unsurprisingly, defined by Regulation 2(1) as meaning any part of the remuneration of a commercial agent that varies with the number or value of business transactions. In practice, these provisions, that is the provisions of Regulation 7 to 12, are regularly relied upon by commercial agents in their claims against principals alongside of their claims to indemnity or compensation payments arising out of the termination of a commercial agency arrangement. They therefore, it seems to me, deserve some further attention.

Regulation 7 deals with a commercial agent’s entitlement to commissions in respect of transactions that have been concluded during the term of the commercial agency arrangement, i.e. it considers entitlements to commissions on transactions concluded before the termination of the commercial agency. Regulation 7(1) provides that a commercial agent is entitled to his agreed commission where a transaction is concluded with a customer during the term of the commercial agency and either is concluded as a result of the agent’s actions or is concluded with a customer that was acquired by the commercial agent for the principal for transactions of that kind. Regulation 7(2) I should say provides that where a commercial agent has an exclusive territory or an exclusive right to handle a specific group of customers on behalf of the principal then, if a transaction is entered into during the term of the agency with a customer from that territory or with a customer from that group of customers to which the commercial agent is entitled to sell then that commercial agent is entitled to his agreed commission on that transaction.

Regulation 8, on the other hand, deals with the entitlement of an outgoing commercial agent to commissions on transactions that are concluded after the end of the commercial agent’s period of agency. An outgoing commercial agent is entitled to commissions if the transaction was mainly attributable to the efforts of the agent during the term of the agency and that sale was concluded within a reasonable period of the end of the commercial agency. In this context, what is mainly attributable and what comprises a reasonable period are clearly going to be matters of fact to be determined in all the circumstances of the case. Mainly attributable appears to impose a requirement that the commercial agent was an effective cause but not necessarily the only effective cause of the transaction.

Regulation 8 also entitles the outgoing commercial agent to his commission if the order for the goods reaches the principal before the end of the agency but is not actually accepted and so the contract of supply is not actually concluded between the principal and the customer until after the end of the agency.

As far as Regulation 8 is concerned it’s also worth noting that where there are competing claims to commissions in respect of a sale as between an outgoing commercial agent and a new incoming commercial agents, the outgoing commercial agent generally takes precedence and receives the commission and the principal is generally alleviated from any obligation to make double commission payments.

Moving on from the provisions that govern the remuneration of a commercial agent, let me turn to the issue or an issue concerning the termination of a commercial agency. And this is the minimum period of notice required for the termination of a commercial agency. Regulation 15 provides such minimum periods of notice for the termination of a commercial agency where that commercial agency is entered into for an indefinite term. The periods provided are, of course, minimum periods. The parties to the agency agreement may, of course, expressly agree longer periods of notice than the minimum required by the regulations but they may not agree lesser entitlements.

Essentially, either party must give at least one month’s notice for each year of the term of the agency up to a maximum of three months notice. So for example, if the commercial agent has held this position for five years, he will be entitled to three months notice.

The period of notice is also required to coincide with the end of a calendar month. In other words, the notice must expire at the end of a calendar month and not in the middle, for example, of a calendar month.

If a principal fails to give the required period of notice then, of course, he will have an action for damages for any losses suffered if his principal chooses to terminate without providing the required notice period. Generally, those losses will comprise the profits, that is after deduction of costs and expenses, that would have been made from the operation of the commercial agency during the required period of notice.

That being said, it’s to be remembered that Regulation 16 ensures that the provisions as to minimum periods of notice will not prevent a party terminating without notice if the other party has been guilty of a breach of contract that entitles that other to terminate the arrangement summarily without notice. So it almost goes without saying, no notice of termination would be required by Regulation 15 if, for example, the commercial agent was guilty of a breach of a condition or of a serious breach of an intermediate term such as failing to act honestly, for example, towards his principal.

Regulation 16 also provides that the minimum periods of notice will not be required if exceptional circumstances exist. Again, I’m not quite sure what was contemplated by the use of the phrase exceptional circumstances. And again, the courts have not given any guidance as yet in this regard. But it seems to me that the phrase might possibly be construed by the English courts as one referring to events that might be considered as frustrating events. So, for example, an exceptional circumstance might involve an outbreak of war, or perhaps as we’re currently undergoing, a global pandemic. It seems to me, in the face of these sorts of circumstance, it may be that no notice may be required to be given to terminate a commercial agency agreement by the terms of the regulations themselves although, perhaps, the contract may require otherwise.

Finally, I want to come on and consider the issues of indemnity and compensation payable to commercial agents. Regulation 17 provides an entitlement to a commercial agent to either an indemnity or to compensation on the termination of his commercial agency where that termination is effected by the principal. This is where the vast majority of cases that come before the courts have focused their attention and I think it’s fair to say that, historically, there was considerable doubt as to what principles should be applied in determining entitlements to indemnity and compensation, in particular, in determining the extent of any entitlements to an indemnity or compensation. That being said, thankfully, the position is now very much clearer.

The first thing to note is that entitlements to indemnity or compensation arises irrespective of any breach of contract by the principal. In other words, somewhat unusually in our legal system, the agent is entitled to his indemnity or to his compensation even where the principal has acted entirely in accordance with the term or the terms of the contract when terminating the agency.

Generally there is no entitlement, however, on the part of the commercial agent to an indemnity or compensation payment where the commercial agency is terminated by the agent himself. I say generally, however, because, as we shall see, there are, nevertheless, still some circumstances in which a commercial agent may actually terminate the commercial agency himself and yet still be entitled to indemnity or compensation.

Regulation 18 is important in the context of entitlement to compensation or indemnity. Regulation 18 provides that a commercial agent’s entitlement is lost if the commercial agent has acted in such a way as to justify immediate termination without notice and the principal has terminated the commercial agency in reliance upon that justification. In other words, the agent will lose his right to an indemnity or compensation payment if he’s acted in breach of a condition of the agency arrangement or in serious breach of an intermediate term of the agency agreement that justifies summary dismissal and the principal has in fact terminated the agency in reliance upon that behaviour.

There is clear authority to the effect that, if the agent is to be denied his entitlements to indemnity or compensation, the principal must actually terminate the agency arrangements because of the breach of condition or the serious breach of the intermediate term. In other words, it’s not sufficient to deny the agent his entitlement to indemnity or compensation if the principal terminates for another reason but later finds out that his commercial agent had been in breach of a condition or serious breach of an intermediate term. So, for example, if the principal terminates the commercial agency arrangement but later finds out that, in fact, his commercial agent had been secretly acting for a competitive principal, then, in those circumstances, the principal will not be considered to have terminated the commercial agency because of that breach of condition or serious breach of intermediate term on the part of the commercial agent and so the commercial agents, despite having acted in this fashion, will still be entitled to an indemnity or compensation payment.

Similarly, it’s not sufficient for Regulation 18 to operate so as to deny the commercial agent his entitlement to an indemnity or compensation if the principle simply allows the stated term of the agency to expire. He must actually terminate the commercial agency by reason of the breach justifying the immediate termination of the commercial agency.

In passing, just let me remind you that once again that the duties imposed on a commercial agent by Regulation 3 seem to me to be intermediate terms so that a breach of those terms will not necessarily entitle a principal to summarily terminate the agency. Rather, all will depend on the seriousness of the breach and the consequences of the particular breach in question.

It’s also worth noting that it’s been determined that a commercial agency contract cannot be effectively drafted to define certain breaches as being breaches permitting immediate termination so as to deny a commercial agent an entitlement to an indemnity or compensation payment. Clever draftsmen have attempted to identify, for example, the achievement of sales targets or the failure to achieve sales targets as a circumstance upon which the principal is entitled to rely on to justify a right to immediate termination. They seek to argue that, in these circumstances, Regulation 18 ought to apply to deny the commercial agent a right to indemnity or compensation. The courts have held quite clearly that such clever drafting techniques are not effective to deny the agent his entitlement to indemnity or compensation under Regulation 17.

I said that generally the entitlements on the part of the commercial agent to an indemnity or compensation only arises in circumstances where the principal terminates the commercial agency but I indicated that that’s not always the case. In particular, entitlements to an indemnity or to compensation also arise on the expiry of a fixed term commercial agency unless perhaps the commercial agent is offered a new agency on the expiration of the old agency. It also arises on the death of the commercial agent. So beneficiaries of the estate of a commercial agent would do well to remember that the commercial agent’s estate might well have a valuable claim to indemnity or compensation as a result of the termination of that commercial agency by reason of the agent’s death.

Entitlements can also arise where the agency is actually terminated by the commercial agent himself in certain limited circumstances. For example, a commercial agent can terminate his own commercial agency and still be entitled to an indemnity or compensation payment if he does so on grounds of age or infirmity or illness such that he cannot reasonably be expected to continue with his commercial agency. So an agent might, for example, be entitled to an indemnity or compensation payment upon his terminating his commercial agency arrangement because, say, he had reached retirement age. Similarly, a commercial agent may be entitled to an indemnity or compensation payments even though he terminates the commercial agency arrangement if circumstances exist which identify that termination as, in substance, involving an effective constructive dismissal by the principal even though it was actually the agent who formally terminated the commercial agency arrangement himself.

So let me turn to what a commercial agent is entitled to on the termination of his commercial agency in the appropriate circumstances as I’ve identified them. As I’ve said, he’s entitled to either an indemnity or to compensation. Generally, but not always, an entitlement to an indemnity in this context is less generous than an entitlement to compensation. That’s because, as we’ll see under Regulation 17(4), there is a statutory cap imposed on the extent of any indemnity that might be payable equal to the average commissions earned by the commercial agent in a year that average being calculated over the last five years of the commercial agency.

So, in circumstances where the entitlement to an indemnity is less generous than an entitlement to compensation, thankfully, as far as commercial agents are concerned at least, Regulation 17(2) provides that the default position is that a commercial agent is entitled to compensation rather than an indemnity. In other words, an agent is only restricted to an entitlement to an indemnity if the contract of commercial agency specifically provides that the agent is to be entitled only to an indemnity.

Regulation 17(9) is important. This imposes a requirement that notice be given to the principal by the commercial agent of an intention on his part to pursue either an indemnity or a compensation entitlement. That notice has to be given within 12 months of the termination of a commercial agency. There is no particular form of notice of intention that is required, though clearly it should be given in writing and it’s quite clear that the entitlement to indemnity or compensation is lost unless such a notice of intention to pursue that entitlement is given within one year of the actual date of termination.

On top of that requirement, ordinary principles of limitation of statutory claims clearly apply to claims under the Regulations which means that any claim for indemnity or compensation must be brought within six years of the termination of the agency. Otherwise, it will be barred by limitation.

Once again, Regulation 19 provides that there can be no derogation from a commercial agent’s entitlement to indemnity or compensation.

So let me look at some guidance that has been given as to the method of ascertaining the extent of any indemnity payment that may be payable where the agent’s entitlement is to an indemnity; in other words, where the contract of agency specifically limits the agent’s entitlements to an indemnity.

The leading case in this area is case of Moore v Piretta. It’s a relatively early case brought under the Regulations. It was decided in 1999 and in that case it was determined that the assessment of the extent of any indemnity is one that’s to be conducted under a three stage process. That three stage process was described in the following ,albeit pretty general, terms. The first stage is that there needs to be an assessment of the value of additional and continuing new business that the agent has brought to his principal. In other words, what has the agent brought to the party? Secondly, there needs to be an assessment as to what level of indemnity is equitable having regard to all the circumstances of the matter. In other words, what’s fair? It seems to me that that may be judged in light of the conduct of the agent even if his conduct is not sufficient to deny him entitlement as a result of an immediate termination under Regulation 18. And the final stage in that three stage process is the application of the statutory cap equal to the average annual remuneration earned by the commercial agent from the principal over the last five years, which, as I say, needs to be applied by virtue of regulation 17(4). It is, in practice, it seems to me, that often the level of indemnity is determined by or conditioned by the application of that cap. Agents tend, in practice, to get an indemnity payment equal to their average annual remuneration over the last five years or so but theoretically, at least, it seems to me that it might be possible to argue that a commercial agent’s indemnity should be in a lesser sum than his average annual commissions. If, for example, the principal gave the agent his clients rather than the agent bringing those clients or if, unbeknownst to the principal, for example, the agent is found to have been acting in breach of duties owed then those sorts of factors might well justify the level of indemnity payments being assessed on an equitable basis as something less than that which would be identified by the application of the statutory cap.

Turning from indemnity payments to compensation payments. This is, as I say, the default position. After considerable doubts, the principles behind the assessment of the extent of any compensation payable have now been settled by the courts. There were considerable doubts. There was considerable conflicting judicial guidance as to how compensation ought to be calculated. The House of Lords, as it then was, in the Lonsdale v Howard and Hallam decision gave its judgement in 2007 and has now, conclusively, determined the nature of the assessment of compensation payable under the Regulations. In that case, the Court decided that the amount of compensation that a commercial agent was entitled to was a sum equal to that which the commercial agent could reasonably expect to receive on a hypothetical sale of his agency on the date of its termination. That is, the House of Lords held that what was required was an exercise in determining the sum that the commercial agent might receive in return for an assignment of the right to stand in his shoes, the rights to continue to perform the duties of the agency and the right to receive the commissions which he would have received from the proper performance of that agency.

Essentially, that value is identified as the market value of the agency that might be realised on a hypothetical sale of that agency as at the date of its termination. The value of that agency is assessed, importantly, on the assumption that the agency is at least going to continue for the short to medium term.

The courts in Lonsdale v Howard and Hallam and in subsequent cases have indicated a number of factors relevant to the assessment of that value. So, for example, the prospects for the agency as they exist at the date of termination will be important. The future anticipated earnings that might be derived from that agency will clearly be key, albeit discounted at an appropriate discount rate. Whether or not the agency would have been assignable in the future may be important in ascertaining its value as at the date of termination. The costs of operating the agency will obviously be of significant importance. Those costs will, if necessary, be apportioned between any different agencies that the commercial agent may run where he holds multiple agencies and incurs costs that are not distinctly incurred in respect of each particular agency. Those costs of operating the agency will also, importantly, always include a notional market cost in respect of the services of the individual agent himself.

Interestingly, the House of Lords also identified that the actual performance of the principal’s business following termination of the commercial agency is also relevant to determining the value as at the date of the termination of that agency. For my part, I’m not sure why, logically, that should be the case. Why, I ask, should the performance post termination be actually relevant to a determination of the value that a person might pay for the agency to be determined as at the date of termination when that post termination performance is not to be known to that purchaser?

Finally, again relevant to the question of determination of the market value of the agency will also be the question of whether the commercial agent has an ability or lacks an ability to take customers with him away from his principal.

Generally, of course, expert evidence is required from valuation experts as regards the value of the commercial agency and that’s often provided by a single, jointly instructed expert. Often the approach adopted by such experts is one that involves the identification of future maintainable profits after deduction of all expenses, including the notional cost of employing someone to conduct the agency, and the application of a suitable multiplier to those future maintainable profits.

Lastly, I just want to say a brief word about the importance, in practice, of valuation of commercial agencies for the purposes of compensation payments. Very often these valuation issues form central issues within cases brought under the Regulations and those issues can be complex. I have sought to provide an introduction to the valuation principles applicable in this area but the subject really justifies its own detailed further consideration and I’m happy to say that that is precisely what I am going to be doing in some forthcoming seminars towards the end of this month. I’m running a couple of seminars in conjunction with an eminent valuation expert in the form of Roger Isaacs from Milsted Langdon accountants. As I say, we’re going to be taking a detailed look at both the legal and accounting issues that arise, both in this context, in the valuation of commercial agencies and also when considering sums that might be ordered as payable in return for a transfer of shares or interest in partnerships in the face of unfairly prejudicial conduct of companies and partnerships. You’re all, of course, very welcome to join us for those seminars and I hope that some of you do.

Now that brings me to the end of these seminars. I hope you found them interesting. I’ve certainly enjoyed delivering them. As I’ve said, it’s a relatively self contained area that I find interesting. If you have any commercial agency cases that are crossing your desks then please feel free to call me anytime to discuss any issues that they may raise. Please do not hesitate in calling me if you would like to bounce any problems off me regarding these sorts of matters.

Until then, I thank you very much indeed for joining me and I wish you all well and good bye.