In the April 2020 edition of the AgentBase magazine I explained how compensation claims are valued under Regulation 17 and discussed some of the issues this can cause where the sales agency has an annual revenue of £25,000 or less.
The first step in calculating the value of the compensation claim is to determine the net annual earnings that the sales agency would have generated in the future if it had continued instead of being terminated. This exercise is usually carried out by an expert forensic accountant. Within that exercise, the deduction of a notional salary / the labour cost of a replacement for the sales agent can have a significant impact. There are several different ways to assess that cost, which can increase the uncertainty as to whether the deduction will be quite small or whether it could be quite large and reduce the value of the compensation claim significantly (potentially even to 0). The latter is often the view taken by principals, which leaves the sales agent with a difficult decision to make – to either pursue their claim through the Court process or to drop the claim.
Litigation is a risky process and there is no guarantee that the sales agent will win their case or that the expert will give a favourable valuation of the compensation claim. This is a problem because litigation involving compensation claims is also likely to be quite expensive, even where the value of the compensation claim is relatively low. It would still be necessary to disclose key documents, produce witness statements and obtain expert evidence from a forensic accountant.
If the parties are unable to agree a settlement of the compensation claim, the costs incurred by each party to get the claim to trial and get a judgment could quite easily equal or exceed the value of the compensation claim. The risks around costs apply to both the commercial sales agent and the principal. Unless the claim is allocated to the small claims track (see below), in the usual course of events the losing party at trial would have to pay the winning party’s legal costs in addition to their own. If the freelance agent loses, they would have to bear two sets of legal costs – their own and the principal’s. For the principal, the situation would be worse because they would have to pay the value of the compensation claim as well as bearing two sets of legal costs. The stakes are therefore very high for both parties.
The position is slightly different if the Court allocates the claim to what is called the small claims track (this happens where the value of the claim is £10,000 or less and the issues in the case are not particularly complex). The usual position on the small claims track is that the costs of the winning party are limited to any Court fees or expert fees paid by that party, plus a small amount of fixed costs attributable to starting the Court process if the Claimant agent is successful. The Court has discretion to make a different order on costs if it considers that one of the parties has behaved unreasonably during the course of the proceedings, but this is quite rare.
While the costs position on the small claims track reduces the overall costs exposure of both the sales agent and the principal it also means that, whatever the outcome of the case, both parties are going to have to incur legal costs which they cannot recover from the other party. This should push the parties to consider, at an early stage, whether a settlement of the compensation claim could be reached and if both parties act sensibly this is often what happens.
However, emotions sometimes run high and the positions of the parties become entrenched. In those situations, the losing party can be liable for hefty sums compared to the settlement they could have reached at an early stage. By way of example, I have previously dealt with a claim where the principal lost at trial and was faced with a total liability for compensation and legal costs of almost £30,000, for a claim that was found to be worth around £11,000 at trial and which my client had offered to settle several months earlier for £7,000! A painful lesson for the principal in that case.
My advice to both principal and sales agent in dealing with low value compensation claims would be to explore whether a settlement can be reached before Court proceedings are started. If the parties have wildly different views on the value of the compensation claim, it might be worth them jointly instructing a forensic accountant at that early stage to provide an informal view on the value of the compensation claim. This could save them both a great deal of time, cost and stress because, ultimately, if it can be avoided, neither party should want a smaller value compensation claim to go to Court.
Kevin Manship, Partner
Fletcher Day | 110 Cannon Street | London | EC4N 6EU
Direct Tel: 029 2130 3485