A typical compensation claim?

A typical compensation claim?

A recent High Court decision in Green Deal Marketing Southern Limited v Economy Energy Trading Limited and Others gives a really useful overview of the law on some of the key issues that commonly need to be decided when an agent puts forward a compensation claim following termination of their agency contract.

In this case, the Claimant (Green Deal) was engaged by the Defendant energy supplier (“EET”) to visit customers in their homes to try to persuade them to switch their gas and / or electricity supply to EET. Green Deal had a team of over 200 field sales agents who carried out these visits and Green Deal was paid an agreed amount by EET for each switch.

Did the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) apply?

One of the first points the Judge had to decide was whether the Regulations applied to the agency contract. If the Regulations did not apply, Green Deal would not have been able to bring a compensation claim.

The Regulations only apply where the definition of “commercial agent” is fulfilled. This requires an agent to prove that they are “…a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of … the “principal”…, or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal“.

Is electricity “goods”?

It has been established in previous cases that gas is classified as “goods” but, strangely, there had been no equivalent decision in relation to electricity. The Judge was unequivocal in confirming that electricity is also classified as “goods”.

Did Green Deal have authority to negotiate?

EET argued that Green Deal did not have authority to negotiate, and did not negotiate, the sale of power to customers. It noted that Green Deal’s role was limited to soliciting customers to switch their energy supplier to EET, but Green Deal had no ability to alter the terms offered to the customer and played no role in the subsequent sale of gas and / or electricity to the customer. The Judge acknowledged that this was the extent of Green Deal’s role but pointed out that the meaning of “negotiate” in the context of the Regulations has been construed broadly to mean “to deal with, manage or conduct” and was satisfied that what Green Deal did fell within that meaning.

The Judge also dismissed an argument that Green Deal’s agency role was a secondary part of its activities for EET and concluded that the Regulations did apply.

How was compensation valued?

Green Deal and EET each instructed an expert forensic accountant in order to value Green Deal’s compensation claim, following the principles set out by the House of Lords in Lonsdale v Howard & Hallam Limited. The experts both agreed that the valuation should be based on the earnings of the agency, rather than the value of the assets held by the agency. They also agreed that the basic calculation to be used in the valuation was:

(Estimate of sustainable net annual earnings) x (appropriate multiplier for years of purchase) = value of compensation.

However, the experts adopted very different valuation methodologies and reached very different conclusions on the value of the compensation claims. Green Deal’s expert came up with a figure of £1,156,116 for net annual earnings and then applied a multiplier of 6.93 to arrive at a compensation figure of just over £8m. EET’s expert reached a figure of £656,000 for net annual earnings and applied a multiplier of 1.6 to arrive at a compensation figure of just over £1m.

The Judge agreed with EET’s expert and explained at length why he reached that conclusion. Some key points to note are:

  • Both experts pointed out that GDM’s senior management team were paid by GDM via shareholder dividends rather than salaries and agreed that their calculations for net annual earnings needed to include “market rate” salaries to cover the functions undertaken by those directors. The inclusion of such “notional salaries” can be an important element of the calculation of net annual earnings.
  • After some initial considerations, the Judge stated that a sensible starting point for the appropriate multiplier would be 4. However, there were two important considerations which reduced that multiplier down to the final figure of 1.6:
    • The starting point taken by EET’s expert was for a fully diversified business. A reduction by 50% was therefore needed to account for the risks associated with operating under an exclusive agency agreement for a single customer (ie GDM was solely reliant on the business it had from EET);
    • A further reduction of 20% to reflect the regulatory pressures and scrutiny facing the energy market.

Can an agent bring a damages claim for loss of profits in addition to a compensation claim?

The Judge noted that compensation is a different remedy to damages. While there have been cases where an agent has been successful in claiming both damages for loss of profit and compensation under Regulation 17, the Judge was keen to point out that the two claims could only be made where an award of damages over and above compensation would not result in a double recovery for the agent. He went on to express the view that an award for compensation and an award of damages for loss of profit would tend to result in two awards of compensation for the same loss. He therefore refused GDM’s claim for damages on the basis it would result in double recovery.

While the Green Deal judgment did not introduce new law into the sphere of commercial agency claims, it is a good example of the issues that Courts commonly have to decide when dealing with compensation claims.

Kevin Manship, Legal Director
Blake Morgan Solicitors LLP, One Central Square, Cardiff, CF10 1FS
Email: kevin.manship@blakemorgan.co.uk

Direct Tel: 029 2068 6126

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