Lonsdale (t/a Lonsdale Agencies) v. Howard & Hallam Ltd

The claim concerned statutory compensation under Article 17 of Council Directive 86/653/EEC (implemented in the United Kingdom by the Commercial Agents (Council Directive) Regulations 1993) on termination of a commercial agency. The House of Lords held that Article 17(3) entitles an agent to compensation for the damage he suffers as a result of termination, that is, the loss of the value of the agency (principally the future commissions which proper performance would have procured). The correct method of calculation is to value the agency as a marketable asset at the date of termination — what a hypothetical purchaser would have paid for the right to stand in the agent's shoes and earn the future net commissions, properly discounted and having regard to real-world features such as assignability, market decline and costs incurred to earn commission.

The court rejected the submission that Community law required adoption of the French practice of awarding twice gross commission as the normal measure of compensation, emphasising that Member States have discretion as to the method of calculation and that domestic courts must apply an evidence-based valuation reflecting local market conditions. The court also noted that an indemnity under Article 17(2) (where applicable) would be nil where the principal derives no continuing benefit from customers (for example, where the principal has ceased trading).

Background and parties:

• Mr Graham Lonsdale was a self-employed commercial agent selling the Elmdale brand for Howard & Hallam Ltd and also selling another brand for a German principal.
• Howard & Hallam ceased trading in 2003 and sold the Elmdale goodwill to a competitor. There was no written agency agreement; the agency was terminable on reasonable notice and six months' notice was given and accepted. The claimant had been paid commissions due on past sales but sought statutory compensation under Article 17(3) of the Commercial Agents Directive.

Procedural history:

• The claim was heard in the Oxford County Court by Judge Harris QC. The defendants appealed to the Court of Appeal ([2006] EWCA Civ 63). The matter proceeded to the House of Lords.

Nature of the claim and issues:

• (i) The claimant sought compensation under Article 17(3) for loss caused by termination.
• (ii) The principal issues were (a) what the agent is entitled to be compensated for under Article 17(3) and (b) how that compensation should be calculated.

Court's reasoning:

• The House of Lords held that Article 17(3) compensates the agent for the damage resulting from termination, principally the loss of the benefit of the agency in the form of future commissions.
• Valuation must assume the agency continued and be made by reference to what a hypothetical purchaser would pay at the date of termination for the right to perform the agency and earn the commission stream, taking into account real-world facts: whether the agency was assignable in practice, prospects of the market (rising or declining), likely costs to earn the commission, and discounting of future income to present value.
• The court rejected the contention that the Directive requires the French practice of valuing compensation at twice gross commission. The Court of Justice has recognised that Member States enjoy a margin of discretion as to the method of calculation; the Commission's report did not transform French practice into binding Community law. Differences in national market practice may explain divergent domestic outcomes.
• Where there is no evidence that a hypothetical purchaser would have paid anything (for example where the principal has ceased trading and the goodwill has gone), the court may find no compensatable loss; valuation evidence is ordinarily required if the matter proceeds to contested hearing.

Other observations:

• The court commented on practicalities: valuation evidence will often be necessary and the court may in future take judicial notice of standard cases where appropriate. It declined a reference to the Court of Justice of the European Communities.

Appeal dismissed. The House of Lords held that Article 17(3) entitles an agent to compensation for the damage resulting from termination — principally the loss of the agency's value measured by the expected future net commissions — and that the proper method is an evidence-based valuation reflecting what a hypothetical purchaser would have paid at the date of termination. The court rejected the submission that Community law requires a presumption that compensation equals twice gross commission, and declined to refer questions to the Court of Justice.

Appeal to the House of Lords from the Court of Appeal ([2006] EWCA Civ 63). The claim was originally heard in the Oxford County Court by Judge Harris QC.