Lonsdale v Howard & Hallam Ltd [2007] UKHL 32

Case Summary of Lonsdale v Howard & Hallam Ltd [2007] UKHL 32

Background

Upon termination of their agency, qualifying self-employed commercial agents may be entitled to compensation or an indemnity under regulation 17 of the Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) which brought into effect Council Directive 86/653/EEC concerning the co-ordination of laws relating to self-employed commercial agents (the “Directive”). The UK regulations provided for compensation unless the agency agreement opted for an indemnity.

The first, “indemnity”, is adopted from the German approach, ¹ which caps recovery at one year’s average annual remuneration, calculated over the previous five years or the actual period if shorter.² It is less favourable to agents as stringent qualifications apply – “not only does the payment have to be equitable, but the sum is also only payable if and to the extent that the agent has brought in new customers or significantly increased the volume of business with existing customers, and the principal continues to derive substantial benefit from these trades.”³

The second, “compensation” is akin to the French approach, under which French courts commonly awarded twice the average annual gross commission over the preceding three years, with discretion to award less if the loss was lower.⁴ The compensation option was subject to different conditions and could produce a different result from an indemnity.

Issues in the case

In Lonsdale v Howard & Hallam Ltd,⁵ the parties had not opted for an indemnity. The dispute concerned what the agent had lost on termination and how to value that loss for the purposes of compensation.

Facts

The claimant, Lonsdale, was a commercial agent for the defendant, a shoe manufacturer which ceased trading and terminated the claimant’s agency by reasonable notice. There was no written agreement of agency, and the claimant had already been paid commission for sales generated, so he had no contractual entitlement to further remuneration. The defendant nevertheless accepted his statutory entitlement to compensation under the Regulations, and paid him £7,500.

However, the claimant brought a claim for £19,670, a sum roughly equivalent to two years’ gross commission based on the average annual remuneration of the last five years after deducting the amount already paid. The first instance judge, taking into account the value of the failing business at the time of termination, assessed compensation at £5,000, and the claimant’s appeal was dismissed by both the Court of Appeal and House of Lords. The House also declined to refer the question to the European Court of Justice.

Decision

Lord Hoffmann, with whom the remaining Law Lords agreed, rejected using the French courts’ usual commission multiplier as a rule for UK compensation in a relatively succinct leading speech. The issue of the subject-matter for which the agent was to be compensated was quickly dealt with – the agent was to be compensated for “the damage he suffers as a result of the termination of his relations with the principal” as per the Directive.⁶ The method by which such compensation was to be calculated, on the other hand, was given a much lengthier discussion.

In rejecting the French approach, Lord Hoffmann refused to accept a submission that the European Commission had endorsed the approach in its report on Article 17 of the Directive by commenting favourably on it.⁷ As the report merely summarised the positions in existing laws of member states, it did not, and could not, contain any endorsement.

Furthermore, while both French and English courts are in agreement that the object of Article 17(3) is to allow recovery for damage suffered upon termination of the agency, they differ with regard to the method of calculation by which that objective is to be achieved. Following the decision of the European Court of Justice in Honeyvem Informazioni Commerciali Srl v De Zotti,⁸ that is a matter for each member state.

Thirdly, as the market conditions in France differ from those in England, a variation in judicial methods of dealing with termination is justifiable.

In light of the above factors, Lord Hoffmann held that compensation could be assessed by asking what a hypothetical purchaser would have paid for the agency at termination, based on its prospective net earnings. These were that the agency would be continued, and that the hypothetical purchaser remained able to properly perform the agency contract, even if the agency was not assignable.⁹ Any other assumptions made must be in accordance with commercial reality, including the expectation that a lesser value would be attached to an agency which was in its decline at the time of termination.¹⁰

Commentary

While Lonsdale departs from the tendency in some preceding authorities to follow the French approach to valuation, the move is by no means unprecedented. The Scottish Court of Session in King v T Tunnock Ltd notably favoured the French system,¹¹ but judges in Ingmar GB Ltd v Eaton Leonard Inc,¹² Tigana Ltd v Decoro Ltd¹³ and PJ Pipe & Valve Co Ltd v Audco India Ltd¹⁴ chose to depart from these principles.

Lonsdale remains the leading case in this area, and has thus far provided some clarity – the courts in both Warren v Drukkerij Flach BV¹⁵ and McQuillan v McCormick,¹⁶ for instance, applied and found Lord Hoffmann’s guidelines to be helpful when assessing quantum. While the guidelines make it more difficult for agents to prove actual loss when claiming the amount to which they are statutorily entitled, it also has the added benefit of filtering undeserving cases, bearing in mind that the regime does not affect agents’ contractual entitlement to remuneration upon termination.

The decision will no doubt have significant cost implications, as it is now more likely that expert evidence will be required for an accurate valuation of the sum claimed, but these sums might not justify the costs of obtaining such valuations in many cases. This concern was recognised by Lord Hoffmann himself,¹⁷ who tempered the criticism by surmising that relatively few cases will make their way to court once the basis for valuation is firmly understood. However, some academics have urged caution, claiming that the reduction in compensation for failings of the business “blurs the distinction between compensation and indemnity,” as compensation is primarily for the loss of the agent’s quasi-proprietary interest, and not the principal’s.¹⁸ Others are concerned that valuations will be overly speculative, as the proposed method is based on the assumption that a market exists for the purchase and sale of commercial agencies, but such a market can only ever be fictional as such agencies are not usually assignable, “because they are by their nature personal to the agent.”¹⁹

Reported citations [2007] 1 WLR 2055, [2007] 4 All ER 1, [2007] ICR 1338, [2007] IRLR 825, [2008] Bus LR 788. Read the judgment on BAILII.

Footnotes

¹Lonsdale v Howard & Hallam Ltd [2007] UKHL 32 (HL) [5]

²Commercial Agents (Council Directive) Regulations 1993 (Regulations), reg. 17(4)

³Regulations, reg.17(3)

⁴Lonsdale (n1)

⁵Lonsdale (n1)

⁶Lonsdale (n1) [8]; Directive, art. 17(3)

⁷Commission, ‘Report of the Application of Article 17 of Council Directive on the Co-ordination of the Law of the Member States Relating to Self-employed Commercial Agents’ COM (96) 364 final

⁸(Case C-465/04) [2006] ECR I-2879

⁹Lonsdale (n1) [12]

¹⁰Lonsdale (n1) [13]

¹¹2000 SC 424

¹²(Case C-381/98) [2000] ECR I-9305

¹³[2003] EuLR 189

¹⁴[2005] EWHC 1904 (QB)

¹⁵[2014] EWCA Civ 993 (CA)

¹⁶[2010] EWHC 1112 (QB)

¹⁷Lonsdale (n1), [35]

¹⁸Séverine Saintier, ‘Final Guidelines on Compensation of Commercial Agents’ (2008) 124 LQR 31, 36

¹⁹Andrew McGee, ‘Termination of a Commercial Agency: The Agent’s Rights’ [2011] 8 JBL 782, 792