Guidance on how to calculate compensation

by Christopher Tayton
of Clarkslegal LLP

For many years after the
Commercial Agents
Regulations came into
force in 1994, there was
uncertainty over how a
commercial agent should
calculate the value of the
“compensation” they
were owed under
Regulation 17 following
the termination of their
agency agreement.

Some argued for the French model of awarding
agents compensation equivalent to two years
gross commission and others applied a
complicated checklist of points to take into
account when valuing compensation.

That all changed in 2007 following the House of
Lords decision in Graham Lonsdale v Howard
Hallam Limited. The Court clarified that
compensation is calculated by valuing the future
income stream of the agency business.

In other words, you need to value what someone
would have been prepared to pay to buy the
commercial agency on the date the agency
agreement was terminated. In practice, when a
commercial agency agreement is terminated,
there is usually no one who actually purchases
the business.

Instead, the customers of the commercial agent
often go on to deal directly with the principal or
the principal appoints a new agent to take over
the former agent’s customers.
To value compensation, therefore, a legal
assumption is made that there is a “hypothetical
purchaser” who is able to purchase the agency
business, irrespective of whether the agency
agreement would allow it, for example because
there is a clause prohibiting assignment of the
In the recent Court of Appeal decision in Warren
(T/A On-Line Cartons and Print) v Drukkerij Flach
B.V. 2014, the Court provided further guidance
on what the valuer should assume about the
hypothetical purchaser when valuing the agency
business. The case involved a commercial agent
who sold cardboard packaging in the UK.
The principal terminated the agency agreement
and a dispute arose about how much
compensation the commercial agent was owed
under Regulation 17.
When the matter was first heard by the Court, the
Judge made two assumptions about the
“hypothetical purchaser”. First, that there was a
hypothetical purchaser who was able to purchase
the agency business. This assumption is correct
and follows the rule in Lonsdale.
The Judge also assumed that the hypothetical
purchaser would have been prepared to pay an
actual price for the business and noted that his
function was to determine that price. That part
of the judgment was incorrect.
It was quite possible that a hypothetical
purchaser would not have been prepared to pay
any price for the agency business.

This may happen where the business of the
principal is in terminal decline and no sensible
purchaser would pay anything for the privilege of
taking on the agency business. Although the
judge did get this point wrong, it made no
difference to the overall result as the Court of
Appeal held that, on the valuation evidence,
there was every reason to believe that a
hypothetical purchaser would have been
prepared to pay a price for this business.

Although this case does not mark any change to
the law, it is a useful practical reminder that actual
evidence of what someone might have been
prepared to pay for the agency business is
relevant material the Court can take into account
when determining compensation under
Regulation 17.
If, for example, there is evidence that the
commercial agent had tried unsuccessfully to sell
their agency business in the period leading up to
termination of the agency agreement, this will be
relevant evidence for working out what a
hypothetical purchaser would have been
prepared to pay.

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Disclaimer: This column does not contain legal advice and is for general
guidance only. Agentbase, Clarkslegal LLP 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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