Q’s and A’s on Agency Law – November 2012

You are obviously asking me this question having understood that, pursuant to the House of Lords’ decision in the case of Lonsdale, the amount of your entitlement to compensation on termination of your agency (and assuming that your entitlement on termination isn’t instead to an indemnity) is based on the hypothetical sales value of the agency, as at the date of its termination. On that basis, it must be correct that that hypothetical value may potentially be enhanced where any prospective purchaser of your agency can know that, for a significant period of time after he is deemed to have acquired it, you would not be in a position to compete with what you are deemed to be selling (i.e.:- because of the existence of the restrictive covenant) which, in turn, and logically, must potentially increase the prospective amount of your compensation entitlement. So, yes, I agree with you that the existence of the restrictive covenant (and although a negative in obvious other respects) may at least work to your advantage, in assessing the amount of your entitlement to compensation. In making the above points, I would also add a couple of additional comments, as follows:- First of all, the process whereby agents’ entitlements to compensation is nowadays assessed is still - as a concept - unfamiliar and, to many agents, unclear - i.e.:- why are we required to talk in terms of “hypothetically valuing an agency as at the point of termination” in circumstances where there is in fact and of course no actual transfer of an agency from one agent to another, and, instead, merely a termination (and in circumstances also where, up until recently, the way in which compensation was generally assessed was simply to take the average of a number of years’ earnings and multiply that by, perhaps, two)? The answer to this is maybe best reflected in the words of one of the Law Lords in the Lonsdale case, when he stated (part quoting Judges from other cases), as follows:- Compensation should henceforth be assessed:- “by reference to the value of the agency on the assumption that it continued:- The amount which the agent could reasonably expect to receive [from another agent] for the right to stand in his shoes, continue to perform the duties of the agency and receive the commission which he would have received ….one is valuing the agency and its connections that have been established by the agent at the time at or immediately before termination, and it is a question of compensating for the notional value of that agency in the open market …. All that is notional is the assumption that the agency was available to be bought and sold at the relevant date. What it would fetch depends upon circumstances as they existed in the real world at the time:- what the earnings prospects of the agency were and what people would have been willing to pay for similar businesses at the time”. It is also worth bearing in mind that, potentially, the amount of an agent’s entitlement to compensation in the post Lonsdale era may in certain circumstances work out more beneficially from the agent’s point of view compared with the old (pre Lonsdale) methodology. The second additional comment I would make is that even if the basis of compensating you in this instance was an indemnity as opposed to compensation, the existence of the restrictive covenant may also potentially enhance the amount which you may recover as the termination payment, as the fact of that restrictive covenant would likely be deemed to protect the “ongoing benefits” which you will have left your principal with, as a result of your efforts over the duration of the agency.

My initial reaction to what you have described is that this appears to maybe have been an isolated “one off” incident which you had, and also that you appear perhaps to have been provoked. Moreover, for the company to be able to establish that, by your actions, you had thereby repudiated your contract (i.e.:- acted to such an extent in breach of your duties of good faith so as to thereby lose your rights to any form of compensation), they would have to establish that your actions were sufficiently serious and, as I say, and without further information from you and assessing the situation in greater detail, I am not clear that they could establish that. In taking this approach, I am mindful of the recent decision of the Court of Appeal in the case of Crocs Europe BV -v- Spectrum Agencies (2012), where it was held that, notwithstanding that the agent in that case was found to have been in breach of its duties under Regulation 3 (of the Commercial Agents (Council Directive) Regulations 1993) [by having set up a website (which was promptly taken down) which supposedly “jokingly” criticized the principal for its supposed poor level of service], it was nevertheless further held that that breach was not however sufficiently serious to have entitled the principal [Crocs Europe BV] to treat the agency contract as repudiated. In the Crocs case, the Court of Appeal stated that the correct question for the Judge in the first instance to have decided (and which question the Judge did duly decide) was how serious, in all of the circumstances, had been the agent’s conduct (i.e.:- the conduct leading to the termination of the agency), and whether that conduct had moreover been sufficiently serious to amount to a repudiatory breach. In other words, as to whether a breach by an agent of any of his obligations to his principal was a repudiatory breach or not was “highly fact sensitive”, and what therefore a Court would need to consider in your case is the extent of its seriousness. Subject to the above, I definitely consider that it could very much be worth your while pursuing a claim for compensation and establishing your case, although I would stress to agents that the Crocs Europe BV -v- Spectrum Agencies (2012) case does not mean that agents can liberally have disputes with their principals or act badly towards them, and expect necessarily still to have a claim for compensation, in the event of termination - every case will clearly depend on its own facts, and my advice would always be to hold your temper and offer any criticisms of your principal at the right time, and in a constructive way.

First and foremost, I need (a) to see a complete copy of your agency agreement with the company (i.e.:- and to not therefore base my advice on one isolated clause, maybe taken out of context), and (b) to have a full understanding from you as to what has been the custom and practice over the years with the principal in question, in respect to this type of scenario. Subject to my points (a) and (b) above, I would otherwise comment that you perhaps have entered into a very bad contract, the fact of which may now be coming back to haunt you. Basically (and to be clear:- always subject to my further considering this situation in the light of whatever information you provide to me in response to my points (a) and (b)):- Firstly, if the clause which you have extracted and quoted in your question typifies the nature of the contract overall, then it may of course have other nasty provisions in it. Secondly, please be clear that even if any contract clause appears unfair on an agent that that does not then mean that it is not nevertheless perfectly binding and enforceable. Thirdly, and for future reference, even if when you are presented with a draft agency agreement you are relaxed enough with the owners of the company to not then take proper or any advice (and so that you just sign the contract, notwithstanding the inclusion within it of any number of very disadvantageous clauses), you should at the same time be aware that the existence of such nasty provisions will at the very least potentially severely bite back at you when your agency is terminated, as a significantly disadvantageous contract (i.e.:- a contract heavily in favour of the principal) may then render your agency hypothetically less valuable as an asset, which then equates to an appropriately substantially reduced compensation entitlement.

There is now case law on this point (Berry -v- Laytons (2009)) with the relevant provision of the Regulations being Regulation 19, which sets out as follows:- “The parties may not derogate from Regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires” Basically and following on from the above, the position is this:- Where an agent enters into a contract (obviously) pre termination of an agency (such as, and again, obviously) at the outset of the relationship with the principal, and that contract sets out an agreement between the parties that, whenever the relationship[p terminates, the agent is (only) then entitled to a sum of money where that sum of money actually works out as being for a lesser amount than the agent would otherwise have been entitled to (and so that that agreement was to the agent’s “detriment” - see wording of Regulation 19, above) his agreement to that particular provision on the part of the agent (and fortunately from his point of view) would then be null and void, and unenforceable against him. The above said, agents need to be very careful never to enter into (similarly) bad compensation settlements deals after the agency has ended - in that scenario, any such bad deal then struck would be outside the ambit of Regulation 19, and therefore likely perfectly well enforceable in favour of the principal.