Brexit – How might sales agents or their principals be affected?

Most principals and agents have
heard of the House of Lords
decision in the Lonsdale case in
2007 which set out the principles
to be followed when valuing a
compensation claim under
Regulation 17 of the Commercial
Agents (Council Directive)
Regulations 1993.
The recent case of Alan Ramsay Sales and Marketing
Limited v Typhoo Tea Limited [2016] EWHC 486
(Comm) gives a good illustration of how those
principles are applied in practice by the Courts to
come up with a compensation figure.
Background
The Claimant company was a commercial agent for
Typhoo (the well know producer of teas) from 2006
until May 2013 when its agency was terminated.
There were issues in the case about which party
terminated the agency, but the Court resolved those
in favour of the Claimant and then assessed the value
of the Claimant’s compensation claim following the
Lonsdale principles.
One of the key conclusions from Lonsdale is that the
compensation payable to the commercial agent
should be the notional price a hypothetical purchaser
would be willing to pay for the agency, as at the date
of termination of the agency. To assess that notional
price, each party in Ramsay instructed an expert
forensic accountant who was a specialist in valuing
companies. The experts agreed that the
compensation value should be assessed in the
following way:
— Identify the annual net earnings (ie revenue
minus costs) likely to be made under the agency
in the future;
— Apply the appropriate multiplier to that net
earnings figure to measure the risk of investing in
an agency business.
Net earnings
The Claimant’s annual revenue was actually quite
straightforward to calculate because it was paid a
fixed retainer of £260,000 per year by Typhoo.
Revenue calculations are often more difficult to make
where the agent receives commission payments as
these can fluctuate quite a lot from year to year
depending on the level of sales made.
The costs of the Claimant to be deducted from this
revenue figure included:
— Wage costs of staff employed by the Claimant
who worked on the Typhoo agency. The
Claimant also acted for a number of principals
who had products which did not compete with
Typhoo and the Court therefore had to assess
what portion of wage costs should be allocated
to the Typhoo agency. The experts disagreed on
the approach to be taken, but the Court decided
to adopt the approach taken by the Claimant’s
expert in comparing the wage costs for the last
year before termination of the Typhoo agency
with the wage costs for the following year after
the agency had ended.
— The cost of employing an equivalent replacement
for Mr Ramsay, the owner of the Claimant
company who ran the business on a day to day
basis;
— Motor, travel and accommodation costs (which
were borne by the Claimant rather than Typhoo).
If those costs had been reimbursed by Typhoo
they would not have been included in the costs
calculation; and
— Fixed costs and overheads (eg cost of premises,
telephone, electricity, insurance, computer
expenses etc), which were apportioned between
the various principals that the Claimant acted for.
In this case, the Judge decided that a figure of
£10,000 was appropriate.
The categories of costs incurred by a commercial
agent will vary from case to case, depending on the
nature of the particular agency and in particular what
staff (if any) are employed by the agent. The
categories outlined above are likely to apply where
the commercial agent employs staff to assist them.
Based on the above, the Judge determined that the
future annual costs that would be incurred by the
notional purchaser would be £217,375, which resulted
in an annual figure for net earnings of £42,625. The
Judge noted that this was a pre-tax figure and stated
that the parties would need to calculate the post-tax
figure for the purposes of the calculation of
compensation under Regulation 17.
Multiplier
Neither of the experts could identify a business which
could be used as a direct comparator to assess how
the agency would have performed in the period
following termination. This meant that the starting
point for the experts in assessing the appropriate
multiplier to be applied to the net earnings figure was
to take the appropriate price / earnings ratio from the
FTSE as at the date of termination of the agency.
There was some disagreement between the experts
as to which ratio should be used, but the Judge
decided that the ratio for “Consumer Goods and
Consumer Services” was the correct one. This gave a
starting figure for the multiplier of 16.93.
Both experts agreed that this figure should be
discounted by 70% (40% for lack of marketability and
30% because the size of the Claimant’s business was
small in comparison to the companies reflected in the
FTSE price / earnings ratio).
That gave a multiplier figure of 5.09, which the Judge
reduced further to 4 to reflect uncertainty about
Typhoo’s business and its falling share of the market
and also to reflect the likelihood that any theoretical
purchaser of the Claimant’s agency would be
conservative and cautious in their approach to buying
the agency.
The final compensation figure
The final calculation would be to apply the multiplier
of 4 to the post-tax net earnings figure (ie £42,265
minus the tax payable on that figure). The Judge did
not calculate the final compensation figure but noted
it would be in the region of £130,000.
This case highlights that the process of calculating the
compensation figure can be quite complex. It can be
expensive and time consuming to resolve areas of
dispute, particularly if extensive expert evidence is
needed. It is in the best interests of principals and
agents to explore early on whether they can agree a
compensation figure which is acceptable to both of
them and go their separate ways.

Sales agents and principals are
looking over their shoulders as
Brexit approaches.
The law that protects the rights
of commercial agents in the UK is
the Commercial Agents (Council
Directive) Regulations 1993 (the
‘Regulations’). This implemented
an EU directive into UK law. The
directive harmonised various rights
of sales agents across Europe.
Might the Regulations be revoked as a result of Brexit?
And what effect would that have on commercial
agency contracts and agents’ rights?
At the time of this article, Theresa May has announced
her new Cabinet, but has stated that there will be no early
general election, so the Government will run its full term
until the 2020 election. She has said there will not be a
further referendum.
Likely effect in the short term – 2-3
years
It is likely that negotiating the UK’s exit from the EU will
be a long process. Article 50 of the Lisbon Treaty (allowing
states to leave the EU) has not formally been exercised, and
negotiating the terms of Brexit only starts when that Article
is invoked. In the meantime, EU law continues to be binding
in the UK, and in many areas it trumps UK law.
EU laws have been incorporated into UK law by two
methods: (1) Acts of Parliament – major pieces of legislation
passed by Parliament (or ‘primary legislation’) and (2)
‘Secondary legislation’ where Government Ministers
have powers, under the European Communities Act of
1972, to sign new EU laws into effect for the UK (using
statutory instruments), where Parliament never passes an
Act. Statutory instruments are often the practical tools to
implement the principles of Acts of Parliament.
The first type of law – primary legislation – needs Parliament
to pass another Act to repeal it. But the second type of law
will usually automatically be revoked if the Act of Parliament
from which it derived is repealed. The Regulations are
secondary legislation. If it wished, Parliament could pass
a law to repeal the European Communities Act of 1972
entirely, and then the Regulations (and similar EU-derived
laws) would automatically cease to have effect.
This scenario raises key political questions. This Government
is, understandably following the Brexit vote, more
‘Eurosceptic’ in its membership than any Government since
1972. Some Ministers would welcome a ‘bonfire of the EU
laws’ as soon as possible. If their arguments hold sway then
a sudden repeal of the 1972 Act becomes more likely, in
which the Regulations and many other pieces of EU law
would fall away.
But the above scenario would be unsettling and costly for
business at a time when stability is crucial. Such a move
might well also be defeated in a Parliamentary vote. If calmer
voices hold sway, the Government may prefer a gradual
approach – keeping all EU legislation applying in the UK in
force for long enough for each piece to be scrutinised to
decide what to keep and what to lose. Such a process would
be likely to take much longer.
In the short term, while Brexit is negotiated, principals and
agents need to assume the Regulations are likely to remain
in force for at least the next 2 years. By the end of that time
we should have a better idea of whether we are heading for
a ‘sudden bonfire’ of EU laws or a more gradual process.
If the Government takes the cautious approach the
Regulations are likely to be long down the list of EU laws
that a Conservative Government tackles, so it would appear
unlikely that the Regulations would be revoked before the
next election. If that election results in another Conservative
Government then the process of rolling back the influence
of EU law in the UK may well gather pace. So laws like the
Regulations, which protects agents but which costs many
businesses significant sums in compensation, indemnity and
pipeline payments, might be revoked or at least changed. But
if a Labour or Coalition Government is elected then it may
wish to retain some of principles of the Regulations in UK
law as part of an agenda of protecting the rights of working
people generally.
Implications for principals and agents
Reviewing agency contracts at some point in the next few
years is a good idea. A key issue is to understand what
the agency agreement says about termination rights. Many
contracts contain a provision such as “to the extent the
Commercial Agents (Council Directive) Regulations 1993
apply the following provisions have effect” or similar. Such a
clause would mean that if the Regulations are revoked then,
depending on what the whole clause says, the agent might
no longer be entitled to compensation (or indemnity). But
other clauses may not have this effect – it all depends how
termination provisions are worded.
Principals may now want to look at again at having fixed
term contracts, which expire after say 1-3 years, with
optional renewal. Agents will want to resist this. Under
current law, the fact a commercial agency ends because the
contract term comes up does not exempt the principal
from compensation or indemnity under Regulation 17 (if
indemnity is not chosen compensation applies). But if the
Regulations are revoked, unless some kind of replacement
right is enacted, the rights of agents would revert to what
they were before the Regulations. Under usual contract
law principles if a contract expires through passage of time
there is no automatic right to a payment of any kind. This
would make Regulation 8 ‘pipeline commission’ payments
more difficult to claim too, though not impossible and every
case will turn on its facts.
Notice provisions might also be affected – at present
Regulation 15 provides for 1 month’s notice in the first year,
2 in the second, and 3 in the third and subsequent years.
These statutory minimum periods are reflected in many
written agency agreements. If the Regulations are revoked
there may be scope for principals to impose shorter notice
periods in new contracts.
Given these risks, if the agent is negotiating a contract at the
outset of an agency and has a good bargaining position, they
may want some form of ‘termination payment’ provisions to
apply even if the Regulations were revoked. Principals will
probably want to resist that.
Sometimes principals feel trapped in commercial agency
contracts because of the cost of exiting them, unless
the agent is in material breach of the agreement. If the
Regulations are revoked it will probably become significantly
less costly for principals to terminate agencies.
Commercial agency law, as with so much else, is facing
a period of Brexit uncertainty. Taking legal advice on
your circumstances to stay ahead of the game could be
important, particularly if contemplating a new agency
contract.

 

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Disclaimer: This column does not contain legal advice and is for general guidance only.
Agentbase, Blake Morgan Solicitors and the writer accept no liability in connection
with the general guidance given in this column.
Please ensure that you obtain legal advice before acting in reliance upon anything in
the article. For example please be clear that the answers given in this column may not
cover all possible angles, aspects, relevant considerations and/or points of law and so
that all or any information which is given above needs in every instance to be referred
for legal advice for clarification and amplification, before being relied upon.

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