The application of the "compensation" principle in the European Communities (Commercial Agents) Regulations 1994 and 1997 (the Regulations)1 has the potential to cause an injustice in the case of a principal who gives proper notice of termination of the agency, in that there is no guidance given in the Regulations on the calculation of the "compensation" due to the agent in such circumstances. Indeed, it could come as a surprise to many "principals" that their "agents" are entitled to "compensation" at all, where the agency is lawfully terminated. However, a recent English High Court case (McQuillan v McCormick)2, may represent an attempt by the English Courts to try to move the "compensation" pendulum back in favour of the principal, by focusing on the termination provisions in the relevant agency agreement.

The relevant legislation

The Regulations transpose Directive 86/653/EEC (the Directive on the Co-ordination of the Laws of the Member States Relating to Self-Employed Commercial Agents) (the Directive) into Irish law. Article 17(3) of the Directive provides that, subject to certain exceptions, a commercial agent is entitled to compensation for the damage he suffers for termination of the relationship. It would also appear that compensation must be paid by the principal even if the agent has been given proper contractual notice of termination.

The Regulations provide that a commercial agent is to be compensated under Article 17(3) of the Directive, rather than indemnified3. The Directive offers little guidance as to how that "compensation" is to be calculated, and the question of compensation has yet to be considered by the Irish courts.

The decision of the UK House of Lords (now called the Supreme Court) in the case of Lonsdale (t/a Lonsdale Agencies) v Howard & Hallam Ltd [2007] UKHL 32, [2007] 1 W.L.R. 2055 (Lonsdale) recently clarified the law in regard to the question of "compensation". The House of Lords held that the correct quantum of compensation is the value of the agency at the termination date of the agency contract if it were to be purchased by a third party purchaser for value. The court is entitled to have regard to activities which may take place in the future. For example, if a principal is about to go into liquidation and terminates its agency contract with an agent, then the compensation would reflect the fact that the principal is about to go into liquidation and the agency is of very limited value.

McQuillan v McCormick – the background

In the more recent English case of McQuillan v McCormick (McQuillan) the claimants, Mr. and Mrs. McQuillan, sought damages or compensation under the UK's Commercial Agents (Council Directive) Regulations 1993 (the 1993 Regulations). They contended that in February 2006 they were appointed by the defendant, Mr McCormick, as commercial agents to sell Pandora jewellery products exclusively on his behalf, and that the agency continued until February 2008 when it was wrongfully terminated by the defendant.

There were four heads of claim – (1) commissions due up the date of termination; (2) commissions due after the date of termination; (3) compensation resulting from the termination pursuant to regulation 17 of the 1993 Regulations; and (4) damages for breach of contract as a result of the failure to give the minimum 2 months notice required by regulation 15 of the 1993 Regulations.

It was common ground that if the defendant was entitled to determine the agreement summarily, as he alleged, then pursuant to regulation 18(a) of the 1993 Regulations, no compensation would be payable.4

The Court held that the defendant had been in serious breach of contract in failing to pay the claimants commissions that were due, and that the defendant had failed to establish any of his allegations of breach by the claimants. Accordingly, there were no grounds justifying the summary termination of the agreement within regulation 18(a). The Court further held that the claimants were entitled to commission, damages for breach of contract based on the defendant's failure to give the minimum two months' notice required by regulation 15, and "compensation" resulting from the termination pursuant to regulation 17, based on the value of the agency at the date of termination. The key question was what should be the measure of "compensation" to be awarded.

Calculation of compensation in McQuillan

A single joint expert was appointed to provide valuation evidence, and also subsequently a further expert was instructed by Pandora UK to assist. The judge adopted the view of the experts that there was an exclusive agency and that the appropriate valuation date was 30 April 2008. The termination date was 2 February 2008, which was the date when the agency ended. However the claimants were entitled to damages for early termination which would put them in the same position as if the agency had been terminated with 2 months notice. In those circumstances, the judge held that it was appropriate to value the compensation as at 30 April 2008.

However, the judge disagreed with the experts' findings in respect of the amount of the discount to be applied to the award to take account of the lack of a written agreement and the risk of termination. The judge found the lack of a written agreement of relative unimportance5. However, he held that the risk of termination of the agency contract was a crucial factor to be taken into consideration. He stated that it was arguable that the defendant's Licence with Pandora A/S was terminable on only a years notice.

Accordingly, the judge rejected the view of the experts that the amount to be awarded as compensation, for an exclusive agreement, valued from 30 April 2008, was £342,895. He calculated that the income stream was approximately £149,000 per annum. The judge further stated that if the contract between Mr McCormick and Pandora A/S were to come to an end, then there would be no income stream, and in that event the agency would have no value. Applying the Lonsdale principles (i.e. what would a buyer of the agency reasonably be expected to pay for the agency at the date of termination), the judge doubted if anyone would pay more than 1 years purchase, and therefore valued the compensation to be awarded at £150,000.

Commentary – potential significance of McQuillan

The Directive sought to harmonise European Law relating to the rights of commercial agents. Unlike the traditional position in Ireland and the UK, where the relationship of "principal and agent" is governed principally by contract law, and the Courts have sought to protect the rights of the principal, rather than the agent, in a number of EU States (and especially in Germany and France) the legal position has been very different. There, commercial agents have traditionally been regarded as having a valuable asset which derives from the agency relationship. To paraphrase Lord Hoffman in Lonsdale, commercial agents are seen as holders of a share in the goodwill of their principal's business, which they have helped to create. As a result, such agents have acquired a valuable asset which entitles them to compensation in the event of the termination of the agency.

In the past, the English courts have demonstrated a degree of scepticism about the philosophical basis of the Directive6. While Lonsdale appears to have recognised the legitimacy of the Directive's approach to the issue of compensation, the approach in McQuillan indicated that the English Courts at least are ready and willing to focus on the provisions in the contract, and especially the express (or indeed implied) termination provisions, in order to arrive at what they see as a balanced valuation of the rights of the agent vis-à-vis his principal.

The critical factor in McQuillan, which reduced the amount of compensation to be awarded, was the notice period on which the agency contract could be terminated. This was not mentioned as a factor in the assessment of compensation in Lonsdale, and is not referred to in the Directive (or in the Regulations). If the judge's approach in McQuillan (and by implication the approach of the House of Lords in Lonsdale) is followed by an Irish court, it will mean less compensation for commercial agents but most likely a fairer result for principals. We wait with anticipation to see whether the Irish courts will adopt a similar approach if and when the issue of calculating compensation arises7. In the interim, it would be wise to review agreements which are, or could be held to be, governed by the Directive and the Regulations, to assess the relevant notice periods and the potential compensation payable in the event of termination.