UK: Commercial Agents’ Compensation Claims – Two Year Benchmark Finally Gets The Boot

Last Updated: 6 September 2007
Article by Paul O'Hare

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 1990, he was appointed by Howard & Hallam (H & H) to sell their brand of shoe. H & H found themselves unable to compete on price and quality, and in 2003, due to rising costs and falling sales, they ceased trading and sold their brand to a competitor. Lonsdale’s agency agreement was terminated on six month’s notice.

The parties were unable to agree the amount of compensation payable, and Lonsdale brought proceedings before the UK courts claiming that, as a general rule, he was entitled to compensation equal to two years’ gross compensation. The court at first instance rejected this general two year rule, and held that the correct approach to calculating an agent’s compensation entitlement was to value the commercial goodwill of the agency on the open market.

The decision was upheld by the Court of Appeal, and Lonsdale appealed to the House of Lords.

Judgment of the House of Lords

The House of Lords, in the leading opinion delivered by Lord Hoffman, addressed two key issues relevant to the calculation of an agent’s compensation entitlement: first, exactly what an agent is to be compensated for under the Regulations; and second, how that compensation is to be valued.

On the first issue, Lord Hoffman found the legislation to be explicit – the agent is to be compensated for "the damage he suffers as a result of the termination of his relations with the principal". Because the value of an agency relationship lies in the prospect of earning future commission, and the agent’s expectation that "proper performance of the agency contract" will provide him with a future income stream, it is that future income stream which needs to be valued.

On the question of how that compensation should be valued, the Lords firmly rejected the notion that the UK courts were required to follow the French law practice of valuing agencies at twice the average annual gross commission. This was for two reasons: first, European case law had established that while the entitlement to compensation was mandatory, Member States had discretion as to the choice of method for calculating the compensation; and second, commercial agents in France operated in market conditions which were different to those in the UK.

Instead, the House of Lords held that the correct method was to value the agency by reference to what a hypothetical purchaser would pay for that agency on the open market. This valuation is to be carried out in the same way as any business would be valued, taking into account any ‘real world’ factors which would influence the amount that a purchaser on the open market would pay for the agent’s business.

Although Lord Hoffman did not give an exhaustive list of factors to be taken into account in making a valuation (on the basis that this should be determined by market practice and conditions at the time), he gave an indication of some of the factors which he thought would be relevant to the valuation (and which are likely, therefore, to be taken into account by courts in the future).

In particular, Lord Hoffman indicated that the valuation should be by reference to net earnings (some previous awards had been calculated on gross commission), and, that because a value is being placed on future income, those future earnings should be discounted by an appropriate level of interest. Most significantly, perhaps, the question as to whether the market for products sold by the agent was rising or declining would be a major factor in determining the amount which a purchaser would pay for the agent’s business.

The potential impact that this approach could have on the calculation of an agent’s compensation entitlement is apparent from Lord Hoffman’s view in Lonsdale that, because H & H had ceased trading and had closed its business, the commercial agent in that case was not entitled to any compensation.


The House of Lords decision is to be welcomed in that it cuts through some 15 years of diverging, and at times contradictory, judgments on the appropriate method for calculating the compensation payable to an agent, and finally kicks into touch the notion that, as a general rule, two years’ gross commission should be payable on termination.

In endorsing the position that it is the loss of the agent’s future income stream (in the form of commission) that Regulation 17 is intended to compensate for, and that the correct method of calculation is to look at what a hypothetical purchaser would pay for the agency, taking into account all relevant ‘real-world’ factors, the decision should provide principals and agents in the UK with a sound commercial basis for reaching settlement on the agent’s compensation entitlement, and should, therefore, reduce the number of cases which end up before the courts for resolution.

However, the decision should not be interpreted as meaning that principals will now have to pay less under the compensation alternative than was previously thought to be the case. Although the House of Lords in Lonsdale concluded that the agent in that case was not entitled to any compensation, this conclusion was due to the fact that the principal’s business had ceased trading. At the other end of the scale, principals whose businesses are highly successful may be required to pay significantly more than two years’ gross commission to their agents on termination.

That this is a genuine concern is apparent from the intervention, in Lonsdale, by the Wine Federation of Australia (WFA), on behalf of Australian wine growers. These wine growers use agents to sell their produce to UK supermarkets, and were concerned that, with the continuing consumer demand in the UK for Australian wines, they would face potentially crippling compensation payments if they were to terminate their agreements with those agents, since the market value for those businesses is significantly higher than the equivalent of two years’ gross commission. This concern was accentuated by the fact that these former agents could, following termination, persuade the supermarkets to switch to the produce of an alternative wine grower.

The House of Lords was of the view that circumstances such as these would be reflected in the valuation process – if there was a risk that all customers would defect to the former agent, then it was unlikely that a purchaser would be prepared to pay much for the agency.

It remains to be seen what impact the House of Lords decision in Lonsdale will have on market practice in the UK. However, on the basis that businesses which are highly successful could end up paying significantly in excess of two years’ commission under the compensation alternative, it is likely that the indemnity alternative (with its one year cap) will continue to be seen as the better option by most businesses who sell through agents in the UK.


1 For an overview of the approach adopted by other member states, see the European Commission’s report on the implementation of the Article 17 of the Directive at

2 In King v Tunnock Ltd 2000 SC 424, for example, the Scottish Courts awarded the commercial agent compensation equivalent to the gross commission that he had earned in the two years prior to termination of the agency relationship.

3 See, for example, Tigana Ltd. v. Decoro Ltd (2003) EWHC 23 (QB), where the agent was awarded the equivalent of 14 months net commission.

4 Lord Hoffman, relying on Honeyvem Informazioni Commerciale Srl v Mariella de Zotti [2006] ECR I-02879.

5 In France, for example, when agencies are assigned or sold to a third party, it is common for a premium of twice the gross commission to be charged on the transaction. This has lead to some principals in France demanding payment of an estimated twice gross commission in return for the grant of a commercial agency, even if they have to lend the agent that money.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.