How does a Court value a compensation claim?

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.

 

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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 this 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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