The Court of Appeal determined the issue of compensation under the Commercial Agents Regulations in the case of Lonsdale v Howard & Hallam.
In the case, the agent had worked for a shoe manufacturer for 13 years. Their performance had never been an issue, but, through no fault of his own, the business declined and the manufacturer sold the business to a competitor, who later closed the factory down.
The agent was paid £7500, but took the case to court as the commissions earned in their last three years of employment generated between nine and 12 thousand pounds.
In the original trial, the court awarded compensation of only £5000 in the absence of loss of goodwill for the agency.
In the Court of Appeal, the amount awarded was upheld, and binding guidelines were set down for future cases of a similar nature, which state:
- Compensation is for actual loss suffered as a result of the termination, which means that the valuation of goodwill of the agency is crucial.
- The date that should be used for the valuation is the date on which the agency agreement is terminated.
- There is no concept of a sum on a "fair and reasonable basis".
- New factors will be considered, including the state of the principal's business at the time.
- Other damages that can be claimed include the expenses to set up the agency and lost commissions that would otherwise have been earned.
In summation, agency compensation payments are likely to be minimal where the business is struggling, but high if the business is going well. However, the Court did state that using an indemnity cap to protect principals from having to make large payouts was lawful in principle, as there is a distinction of indemnity payments from compensation payments.
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