Lonsdale (t/a Lonsdale Agencies) (Appellant) v. Howard & Hallam Limited (Respondents)

Compensation payable to a commercial agent under article 17(3) of the Council Directive 86/653/EEC represents the value of the agency relationship lost on termination. It is ordinarily the present value of the agency’s prospective net commission stream.

The court must assess what a hypothetical purchaser would have paid at the termination date for the right to continue performing the agency and receiving commission. Assignability is assumed, but real market conditions remain relevant. These include declining demand, expenses, workload, competition and the likelihood of retaining customers. A fixed award based on twice the agent’s historic gross commission is neither required nor generally appropriate.

The claimant must prove the agency’s value using evidence of a suitable valuation methodology. Expert evidence may assist but is not invariably necessary.

The appellant was a self-employed commercial agent selling the respondent shoe manufacturer’s Elmdale products. The agency generated a modest and declining commission. When the respondent ceased trading, it terminated the unwritten agency on six months’ reasonable notice and paid all contractual commission due.

In default of an agreed indemnity, regulation 17(2) of the Commercial Agents (Council Directive) Regulations 1993 entitled the appellant to compensation corresponding to article 17(3) of the Council Directive 86/653/EEC. The Oxford County Court valued the lost agency at £5,000. The Court of Appeal, [2006] EWCA Civ 63, approved that approach.

The appeal concerned whether compensation should ordinarily equal twice the agent’s historic gross commission, following French practice, or should reflect the market value of the agency and its prospective income at termination. The appellant also sought a reference to the Court of Justice of the European Communities.

1. Appeal dismissed unanimously. Lord Hoffmann delivered the leading opinion. Lord Bingham, Lord Rodger, Lord Carswell and Lord Neuberger agreed with it. The House also declined to refer a question to the Court of Justice of the European Communities.

2. Per Lord Hoffmann, article 17(3) of the Council Directive 86/653/EEC compensates the agent for the value lost through termination of the agency relationship. The relevant asset is the right to perform the agency and obtain the future commission which proper performance would have produced. Compensation is not a discretionary reward for service, nor a share calculated mechanically from the principal’s goodwill.

3. The agency must be valued at the termination date by asking what a hypothetical purchaser would reasonably have paid for the right to stand in the agent’s shoes. The agency is assumed to continue and to be transferable for that purpose, even if it was contractually unassignable or no market in such agencies existed. Other real-world conditions remain unchanged. Prospective income must therefore be discounted, and allowance made for market decline, operating expenses, the work required, competition and the security of the customer base.

4. Net earnings are ordinarily more relevant than gross commission. Where an agent conducts several agencies, shared expenses must be fairly attributed. The prospect that customers will follow the former agent or another supplier reduces the value of the terminated agency. The assessment concerns expectations at termination, although later events may provide evidence of what was then likely.

5. The Directive did not import the French practice of awarding twice average gross commission. The Commission’s implementation report did not endorse that formula as Community law. Honeyvem Informazioni Commerciali Srl v De Zotti [2006] ECR I-02879 confirmed that Member States retain discretion over methods of calculation within article 17’s framework. The difference between French and English practice could reflect different markets rather than different legal rules.

6. The claimant bears the burden of proving value. Some evidence of recognised valuation methodology or comparable businesses will ordinarily be required if the claim is litigated, although a full expert valuation is not essential in every case. A court may eventually take judicial notice of the going rate for a standard, stable agency, but adjustments remain necessary for unusual conditions such as a declining or vanished market.

7. Judge Harris QC had correctly treated the agency as a modest, declining business and could properly have found that no loss was proved. His award of £5,000 therefore disclosed no error, and the Court of Appeal was right to uphold it.

1. House of Lords — [2007] UKHL 32: Dismissed the appeal unanimously and declined to make a reference to the Court of Justice of the European Communities.
2. Court of Appeal — [2006] EWCA Civ 63: Approved the County Court’s market-valuation approach and upheld the compensation award.
3. Oxford County Court: Judge Harris QC assessed compensation at £5,000 for the loss of a modest and declining agency.