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English High Court Tips the Scales in Favour of Principals in Agency Contracts

DATE: 23.06.2011

 

 

Recently, the English High Court in McQuillan v McCormick [2010] EWHC 1112 (QB) (the “McQuillan Case”) revisited the issue of compensation to agents for termination of their agency contract and set out factors to be considered in the calculation of such compensation.

Background

Regulation 17 of the European Communities (Commercial Agents) Regulations 1994 and 1997 (the “Regulations”) provides that in certain circumstances, a commercial agent is entitled to compensation after its contract with a principal has terminated, even where that contract was lawfully terminated with the required notice provisions.

The Regulations do not specify how such compensation should be calculated but the judgement in Lonsdale v Howard & Hallam [2007] UKHL 32 (the “Lonsdale Case”) set out a method for such a calculation. It was found that the correct approach was to value the agency by reference to what a hypothetical purchaser would pay for that agency on the open market. This valuation should be carried out in the same way as any business would be valued, taking into account any factors which would influence how much a purchaser on the open market would pay for the agent's business.

Facts of the McQuillan Case

 

Mr McCormick acquired sole distribution rights to the Pandora jewellery product in the UK in 2005. In February 2006, he appointed Mr and Mrs McQuillan as agents to sell Pandora in a designated area in the UK. On 2 February 2008, Mr McCormick purported to terminate the contract without notice. Mr and Mrs McQuillan claimed the agency contract was wrongfully terminated and, among other things, sought compensation under Regulation 17 of the Regulations.

The Lonsdale Case set out a method of calculation for assessing compensation under Regulation 17 as follows: (1) what is the estimated future earnings less interest; (2) is the agency assignable; (3) is the market declining or rising; (4) will the agent incur expenses to earn the commission and (5) is the principal’s business secure?

Opposing experts in the McQuillan Case followed this method of calculating compensation and arrived at an agreed value for the exclusive agency of €342,895. This incorporated a reduction of 25% in the final valuation to allow for the risk of termination of the principal’s contract with Pandora.

The Court took into account the amount of notice Pandora was required to give Mr McCormick in order to terminate its agreement with him, the termination of which would render the agency agreement with Mr and Mrs McQuillan worthless. Mr McCormick’s agreement with Pandora could be terminated on one year’s notice. The McQuillan’s agency agreement generated an annual income of €149,000. The Court held, therefore, that it would be unlikely that a prospective purchaser of the agency agreement would pay more than the €149,000 for the agency rights of Mr and Mrs McQuillan given that the underlying agreement with Pandora could be terminated on one year’s notice. The Court awarded the couple €149,000 in respect of their claim for Regulation 17 compensation.

Conclusion

If followed by the Irish courts, this case and the Lonsdale case clarify the law in relation to the compensation of commercial agents on termination of their agency agreements.

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