The recent decision of the House of Lords in Lonsdale (t/a Lonsdale Agencies) v Howard & Hallam Limited could, in many situations, reduce the compensation that commercial agents can expect to receive on termination of their agency agreements.

This is the first House of Lords decision to consider the quantification of compensation under the Commercial Agents (Council Directive) Regulations 1993. Prior to the Regulations, agents had no automatic rights on termination under common law. The Regulations radically changed the position in the UK, affording agents protection on termination and, in particular, giving agents the right to be either compensated or indemnified. In the absence of an indemnity clause, the agent is entitled to compensation. However, the Regulations are silent on the basis on which compensation ought to be calculated. This led to growing uncertainty in the UK courts as to the correct method of calculation. The Lonsdale ruling seeks to clarify the position. Lord Hoffman's opinion (with whom all of the Lords agreed) is also notable for its criticism of the leading Scottish commercial agents authority, King v Tunnock.

Mr Lonsdale was a commercial agent operating in England where he sold brand shoes for Howard & Hallam. His agency was terminated by Howard & Hallam after a steady decline in sales. Shortly thereafter, Howard & Hallam ceased trading and the brand was sold into a third party. Mr Lonsdale sought compensation of over £20,000 under the Regulations. At first instance, he was awarded £5,000. This award was upheld at the Court of Appeal. Mr Lonsdale then appealed to the House of Lords arguing that the level of compensation ought to have been calculated at two years annual commission calculated over the previous three years. This was the approach that was followed in the French courts. The European Directive (86/653/EEC), to which the Regulations give effect, had been based upon the compensation provisions that already existed for agents under French law. In the absence of a specified method of calculation, Mr Lonsdale argued that the UK should look to French judicial practice for guidance. This was the approach that had been taken by the Scottish Courts in King v Tunnock where the Extra Division held that the French custom of awarding two years' average gross commission would be an appropriate award on termination of an agency. If the Lords did not accept this method of calculation, Mr Lonsdale argued that the question should be referred to the European Court of Justice.

The Lords rejected Mr Lonsdale's argument and dismissed French judicial practice as being of "no relevance whatsoever". In doing so, Lord Hoffman stated that the reasoning of the Extra Division in King v Tunnock was "not at all convincing". The Regulations entitle the agent to compensation for the damage that he suffers as a result of the termination. The compensation the agent receives is for the loss of the value of his agency. Therefore, rather than applying the French multiplier and arguing for two years commission, the agent will need to provide evidence of the actual value of the agency as at the date of termination. Finally, the Lords refused Mr Lonsdale's request for a referral to the European Court of Justice on the basis that the meaning of compensation under the Directive (and the resulting Regulations) was clear.

So what does this mean in practice? Principals will be breathing a sigh of relief knowing that agents can no longer seek to advance the French "two year commission argument" in Court and at the negotiating table. Agents are, of course, still entitled to protection and compensation. Indeed, if their agency is growing in value at the date of termination, they could still be entitled to a substantial payment (Mr Lonsdale's agency business was in steady decline). However, the focus will now shift to determining the true value of the agent's loss. This could result in increased costs for agents who will now be under pressure to produce an expert valuation before principals will agree to settle claims.

The general view of many commentators seems to be that Lonsdale will remove the uncertainty that has been surrounding the Regulations. It is clear from the case law that the Regulations are difficult to interpret and, as evidenced by the conflicting position in Scotland and England, the compensation calculation does not sit easily within the UK legal framework. While Lonsdale is clearly an attempt to clarify the UK position, it may prove unfortunate that an opportunity for clarification at European level has been missed by the House of Lords' refusal to refer this case to the ECJ.