Decline in shoe business justifies agent’s award

Mr Philip Moser for Mr Lonsdale; Mr Oliver Segal for Howard and Hallam; Mr Fergus Randolph and Ms Victoria Wakefield for the Winemakers’ Federation of Australia Inc, intervening.

LORD HOFFMANN said that Mr Lonsdale was a commercial agent in the shoe trade. In 1990 he had been appointed by Howard and Hallam, the defendant shoe manufacturers, to sell their Elmdale brand in southeast England. A few years later he had been appointed by a German manufacturer to sell their Wendel brand in a slightly larger territory.

Wendel seemed to have sold well, but Elmdale had been in terminal decline. Like many UK shoe manufacturers, Howards had been unable to compete on style and price. Sales, and with them Mr Lonsdale’s commission income, had fallen year by year. In 1997-1998 his gross commission had been almost £17,000, but by 2002-2003 it had fallen to £9,621.

In 2003 Howards had ceased trading and sold the goodwill of the Elmdale brand to a competitor. They had given Mr Lonsdale six months’ notice, agreed to have been reasonable. He had been paid the commission on the sales that he had generated, so he had no further contractual entitlement.

He had, however, a statutory entitlement to compensation under regulation 17(6) of the Commercial Agents (Council Directive) Regulations (SI 1993 No 3053) which had been made to give effect to Council Directive 86/653/EEC of December 18, 1986 (OJ L382/17-21) on the coordination of the laws of the member states relating to self-employed commercial agents.

Article 17 of the Directive allowed member states to choose between two different rights to be accorded to a commercial agent on the termination of the agency: indemnity or compensation. The United Kingdom had chosen both systems in that it allowed the parties to opt for an indemnity but provided that in default of agreement the agent should be entitled to compensation.

In the present case, the parties had made no choice and Mr Lonsdale was therefore entitled to compensation. The question was how it should be determined.

As the relevant part of the Directive was based on French law, one was entitled to look at French law for guidance as to what it meant. The agent was entitled to be compensated for being deprived of the benefit of the agency relationship.

The value of that lay in the prospect of earning commission. That required one to say what could reasonably have been obtained, at the date of termination, for the rights that the agent had been enjoying. For that purpose it was obviously necessary to assume that the agency would have continued and that the hypothetical purchaser would have been able to stand in the agent’s shoes.

There was, however, no reason to make assumptions contrary to the position in the real world at the date of termination. If the market for the products in which the agent dealt had been rising or declining, that would have affected what a hypothetical purchaser would have been willing to give.

Mr Moser had objected that that method of calculation was likely to produce less than he would have been awarded by a French court. It appeared that it was common practice for French courts to value agencies at twice the average annual gross commission over the previous three years. Mr Moser contended that the Directive adopted the French practice as Community law.

The Court of Justice of the European Communities, however, had made it clear that the method of calculation was a matter for each member state to decide: see (Case C-465/04) Honeyvem informazioni commerciali SrL v De Zotti ([2006] ECR I-02879 paragraphs 34-36).

It seemed, further, that commercial agencies in France operated in market conditions different from those prevailing in England.

In France agencies changed hands, and it was common for the premium charged on such a transaction to be twice the average annual gross commission over the previous three years.

There was no such market in England. It would appear that the difference between French and English practice existed not because their courts were applying different rules of law but because they were operating in different markets.

The courts of the United Kingdom would not be acting inconsistently with the Directive if they were to calculate the compensation payable by reference to the value of the agency on the assumption that it had continued: the amount that the agent could reasonably have expected to receive for the right to stand in his shoes, continue to perform the duties of the agency and receive the commissions that he would have received.

His Lordship considered the English and Scottish authorities, including King v T Tunnock Ltd (2000 SC 424), and said that the judge had found that Mr Lonsdale’s net commission had been running at about £8,000 a year.

He had said: “Common sense would indicate that few people wanting the opportunity to earn what the claimant was earning would be prepared to pay well over £20,000 [two years’ commission] for the privilege...

“Given the absence of evidence about how commercially to value goodwill, or ... what price in practice might have been available, the court might be thought to be justified in simply finding that the claimant has failed to prove his case...

“This was an agency producing a modest and falling income in a steadily deteriorating environment. There is no evidence that anyone would have paid anything to buy it ... I am strongly tempted to find that no damage has been established ... But perhaps that conclusion...is a little overrigorous...”

His Lordship agreed with the Court of Appeal that the judge had been right in his approach. He could not have been faulted if he had simply dismissed the claim.

Mr Moser had urged their Lordships not to adopt a principle that required valuation evidence. Valuations, he said, were expensive and most claims were too small to justify the cost.

But, as the judge had said, it should not be difficult for the parties, with the benefit of advice about the going rate for such businesses, to agree on an appropriate valuation. His Lordship did not see how, if the matter did go to court, the judge could decide the case without some information about the standard valuation methodology.

Lord Bingham, Lord Rodger, Lord Carswell and Lord Neuberger agreed.

Solicitors: Morgan Cole, Oxford; Harvey Ingram LLP, Leicester; APP Law, Runcorn.