Commercial Agency Compensation & Termination Risk

by Thom Vaughan of E.A.D. Solicitors L.L.P.
and Adrian Pym of RSM Tenon
Last year the case of McQuillan –v-
McCormick was the talk of the town
in agency circles. This was, of course,
the case of the agents who sold
Pandora jewellery and acted during
the brand’s meteoric rise from
obscurity to high street name.
Commentators read this case to be a departure
from the leading case of Lonsdale and
predicted a fall in the level of compensation
payable to agents.
In our view such comments are incorrect and
need clarification.

Lonsdale sets out the basis of compensation
payments and what should and should not be
taken into account. Paragraph 12 states that
“it is obviously necessary to assume that the
agency would have continued and the
hypothetical purchaser would have been able
to properly perform the agency contract. He
must be assumed to have been able to take
over the agency and stand in the shoes of the
agent…..What has to be valued is the income
stream which the agency would have
generated.”
Paragraph 21 goes on to state that the
compensation payable should be calculated
on the assumption that the agency continued.
Lonsdale clearly makes the assumption of
continuation of the agency and of the
conditions existing immediately prior to
termination. What then are the risks of
termination that can be taken into account?

Following Lonsdale the contractual notice
period within the agency contract should not
limit the value of the future income stream.

The notice period of one month for each year
of the agency, to a maximum of 3 years,
referred to in Regulation 17 of the Directive is
therefore not a limiting factor is assessing
compensation under Regulation 17(3). Equally,
if the parties elected for a longer period of
notice it is expected that this would not
interfere with the principle.

However, external risks of termination, “real
factors”, may also exist which could limit the
amount a hypothetical purchaser would pay
for the future income stream. If the financial
health of the principal was in question at the
date of termination, and there is a risk that the
future income stream would cease if the
principal were to cease trading, it would be
logical for the valuation of the agency’s
income stream to factor in the risk of such an
event.
The external risks of termination is what brings
us back to the decision in McQuillan. In this
case the principal was not the manufacturer of
the product sold by the agent under the
agency agreement. McCormick was the UK
distributor of the Pandora Jewellery products
under its own contract with Pandora A/S.
At Paragraph 167 of the McQuillan judgement
the Judge stated: “If the contract between Mr
McCormick and Pandora A/S comes to an end
then there will be no income stream. In that
event it is clear from Lord Hoffmann’s speech
that it is of no value. Thus the question to be
asked is what is the value of an income stream
of £149,000 which is increasing but which
could be terminated within 2 years. When the
question is asked in that way it becomes plain
to my mind that the discount applied by the
expert of 25% is far too small. For my part I
doubt if anyone would pay more than 1 years
purchase and I propose to value the
compensation at £150,000…”
The risk of termination identified by the Judge
was not the risk of the agency contract being
terminated, as many commentators believe,
but that of the distribution agreement
between the manufacturer and McCormick; a
separate contract over which the agent had no
control or influence. A hypothetical purchaser
would see this as a real commercial risk and
would value the agency accordingly.

This is consistent with the comment at
Paragraph 12 of Lonsdale that “What has to be
valued is the income stream which the agency
would have generated” and the comment at
paragraph 13 that there is no reason to make
assumptions contrary to the position in the
real world. The real world in the McQuillan
case was that at the date of termination, the
principal’s distribution agreement hung very
much in the balance and was at serious risk of
termination, which did in fact take place.
The logical extension of this is that if a
distributor had a secure contract with no
c o n t r a c t u a l o p t i o n s f o r i m m e d i a t e
termination and no commercial factors
suggesting termination then it would not act as
a limiting factor. What McQuillan shows us is
simply the court’s readiness to take a global
common sense view of all aspects of the
trading basis in the real world and to feed this
into the agency valuation.
It will be interesting to see if Defendant lawyers
will now seek to obtain copies of distribution
agreements in the hope of discovering details
that show such agreements are precarious or
likely to fail in the near future. If the principal is
the manufacturer then this aspect falls away,
unless it is in turn experiencing trading
difficulties!
Therefore, whilst McQuillan is an interesting
case, in our opinion it does not change the
valuation of compensation payable under
Lonsdale and simply allows an insight into the
overall approach taken by the courts.
EAD Solicitors LLP successfully represented Mr
and Mrs McQuillan in this case and RSM Tenon
were instructed as joint expert to value the
agency business.

Adrian Pym is Director of Forensic Accounting
business valuation experts RSM Tenon.
Head Office: Charterhouse,

Legge Street, Birmingham B4 7EU
Tel: 0121 333 3100
www.rsmtenon.com

Thom Vaughan is a solicitor with E.A.D Solicitors LLP
and specialises in commercial agency matters.

Head Office: Prospect House,
Columbus Quay, Liverpool L3 4DB
Tel: 0151 735 1000
www.eadsolicitors.co.uk

Disclaimer: This column does not contain legal advice and is for general guidance only. Agentbase, E.A.D. Solicitors, RSM Tenon and the writer accept no liability in connection with the general guidance given in this column.

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