26-07-2007
Compensation to commercial agents
A legal expert has advised that businesses using sales agents look set to pay less in compensation when terminating a contract after a recent House of Lords' decision.
John Beevor, who acts for scores of businesses using sales agents, says that businesses employing agents are breathing a sigh of relief after news that they are likely to have to fork out less in compensation to sales agents on termination.
"When terminating an agent’s contract, it is usual for a business to pay compensation to the agent unless termination is due to the agent’s default. For more than 10 years the English courts had loosely adopted the French-based approach of ordering the principal business to pay compensation based on two years’ commission," said John.
"Now, however, following the case of Lonsdale v Howard & Hallam Ltd, the House of Lords has rejected that approach, and decided that compensation should be based upon the value of the agency. This decision is likely to bring welcome relief to principal businesses and an end to windfall payments on termination," he added.
The latest ruling indicates that the compensation payable to an agent on termination should now be calculated on the basis of the amount that a third party would have paid to acquire the agency – typically significantly less than two years' commission.
"Expert evidence is now likely to be required to settle disputes over compensation as the agent and principal business argue over valuation issues. This may mean that, for modest compensation claims, some agents may decide it is uneconomic to pursue certain claims.
"The financial merits of drafting agency contracts on the basis of an indemnity payment not exceeding one years average annual commission, rather than compensation, will continue to require careful consideration, and it would appear a somewhat prudent time for principals and commercial agents in all sectors of industry to review the terms upon which they operate, particularly with respect to the financial consequences of termination," added John.
John Beevor, who acts for scores of businesses using sales agents, says that businesses employing agents are breathing a sigh of relief after news that they are likely to have to fork out less in compensation to sales agents on termination.
"When terminating an agent’s contract, it is usual for a business to pay compensation to the agent unless termination is due to the agent’s default. For more than 10 years the English courts had loosely adopted the French-based approach of ordering the principal business to pay compensation based on two years’ commission," said John.
"Now, however, following the case of Lonsdale v Howard & Hallam Ltd, the House of Lords has rejected that approach, and decided that compensation should be based upon the value of the agency. This decision is likely to bring welcome relief to principal businesses and an end to windfall payments on termination," he added.
The latest ruling indicates that the compensation payable to an agent on termination should now be calculated on the basis of the amount that a third party would have paid to acquire the agency – typically significantly less than two years' commission.
"Expert evidence is now likely to be required to settle disputes over compensation as the agent and principal business argue over valuation issues. This may mean that, for modest compensation claims, some agents may decide it is uneconomic to pursue certain claims.
"The financial merits of drafting agency contracts on the basis of an indemnity payment not exceeding one years average annual commission, rather than compensation, will continue to require careful consideration, and it would appear a somewhat prudent time for principals and commercial agents in all sectors of industry to review the terms upon which they operate, particularly with respect to the financial consequences of termination," added John.
