17 March 2016

The Commercial Agents Regulations 1993

The Commercial Agents Regulations 1993

The Commercial Agents Regulations 1993 set out how compensation for the termination of an agency arrangement is calculated. Perhaps surprisingly, even where a contractual termination occurs, compensation is still payable to an agent (at least where the agency is of products rather than services). Where the parties have not agreed an indemnity under their contract then compensation is due, but how is it calculated?

A recent case (Alan Ramsay Sales and Marketing Ltd v Typhoo Tea Limited) used existing rules, namely that the compensation should be the notional price a hypothetical purchaser would be willing to pay for the agency, at the date of termination. It is accepted that the compensation should be assessed on a future annual net earnings basis, to be multiplied by a multiplier, but applying a discount to take account of risk factors such as the stability of the principal's business, its place in the market, its financial position and trading relationships.

The experts in the case started with data on price/earnings ratios from FTSE on the day of termination, although they used different market sectors for comparison. A discount was applied of 40% for lack of marketability and 30% for relative size of business (compared to the FTSE companies). Other factors such as the costs of the agency and in particular, that the agent had a number of other agency contracts were considered. Costs had to be apportioned between the various agency contracts fairly. One cannot just impute a marginal cost of the agency being dealt with simply because of the other agencies being in place (and the overheads therefore already incurred). Another aspect of the costs of the agency was that the relevant cost were the likely costs a notional purchaser would incur not the actual costs incurred by the agent.

It was decided a multiplier of 4 was appropriate having regard to the issues mentioned above and that a purchaser would be someone cautious of modest means. The court also noted that in the absence of external matters (such as financial difficulty or a declining industry), it should be assumed that the agency would have continued.

Terminating an agency agreement is not uncomplicated (where the agency is a product agency), and suitable advice should be obtained to properly manage the aftermath.

Alex Lee

Alex Lee
Partner