Commercial Agents' Termination Payments - Two Year Benchmark Finally Gets The Boot

In a landmark ruling last month, the House of Lords has, after almost 15 years of uncertainty, clarified the appropriate method for calculating the amount of compensation to which commercial agents in the UK are entitled on termination of their agency agreements.

The decision, in Lonsdale v Howard & Hallam Ltd1, will affect most businesses (whether based in the UK or overseas) who use agents to market and sell goods in the UK, and is likely to have a significant impact on the amount of compensation which those businesses must pay to agents on termination of their agency relationships.

Legal background

Under the Commercial Agents (Council Directive) Regulations 1993 ('Regulations')2, commercial agents selling goods in the UK are entitled to a lump sum payment on termination of their agency agreements. Two alternative methods exist for calculation of this lump sum: the indemnity method (which has its origin in German law); and the compensation method (which has its origin in French law).

In the UK, the parties to an agency agreement are free to choose which of the two alternatives apply but, in the absence of an express choice, the compensation method will apply by default3. This is significant, as the amount which an agent can recover under the indemnity method is capped at a maximum of one year's commission; the amount which can be recovered under the compensation alternative is uncapped.

The UK courts have struggled with the application of both alternatives, and the (uncapped) compensation method in particular. In some cases, the UK courts have looked to French law for guidance, under which a commercial agent can typically expect to receive twice the average annual gross commission earned under the agreement4. Other UK courts have considered that this approach gives agents an unfair windfall, and have sought to bring awards under the compensation alternative into line with the maximum amount recoverable under the indemnity alternative5.

This lack of consistency has made it difficult for the parties to a UK agency agreement to agree the amount of compensation to be paid to the agent on termination, with the result that many cases have been ended up before the UK courts.

The decision in Lonsdale removes much of this uncertainty, and provides principals and agents in the UK with a commercial basis for agreeing compensation payments without the need to resort to the courts for resolution.

Lonsdale: facts

Mr Lonsdale was a commercial agent in the shoe industry. In...