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Agents and principals are now familiar with the concept that compensation falls to be calculated by reference to the price which a hypothetical purchaser would have been willing to pay for the agency business at the date of its termination. This is intended to compensate the agent for the loss of value of the agency business, including goodwill.
Whilst agents and principals alike have welcomed this clear guidance, there remains scope for clarification of the law in this area in the instance of an agent with a single, low earning agency.
There are many different methods of valuing a business, and there remains scope for arguing what methodology should be used.
It is common in our experience for accountancy experts to value commercial agency businesses using the capitalised earnings method. However, in the case of a low earning agency this method may produce what appears to be an absurd outcome.
In the case of Nigel Fryer Joinery Services Limited & Mr Nigel Fryer v Ian Firth Hardware Limited  EWHC 767, the court was required to consider whether Mr Fryer, who was employed by the defendant as a sales representative, was a commercial agent for the purposes of the Commercial Agents Regulations 1993.
Mr Fryer was, on the facts, found to be a commercial agent for the purposes of the Regulations. However, it was determined that the principal had validly terminated the agency agreement because of a repudiatory breach of contract by Mr Fryer which meant that he was not entitled to compensation under Regulation 17. Despite finding that Mr Fryer was not entitled to compensation, the court did go on to address the question of whether he would have been due any compensation if he had not been in repudiatory breach.
Mr Fryer was earning a salary as a sales representative of £11,000 per annum plus commission of 1.5% of the net value of sales from all new accounts introduced by him. After taxes and expenses he was left with a net income of £14,100 per annum, which was well below the UK average earnings of £27,128 per annum. The Judge commented that he did not think that anyone would be willing to pay a premium for such a business, and would therefore have rejected a claim for compensation under Regulation 17. These comments are not binding because they did not concern the decision which was made in the case, but they are noteworthy and of much interest nonetheless.
They suggest that the idea that an agent is automatically entitled to compensation on termination may not be correct. In addition to what a hypothetical buyer might be willing to pay for the agency, there may be a further factor for the court to consider– that being whether there would be a buyer at all?
The comments made in the Nigel Fryer Joinery case as to the entitlement of Mr Fryer’s hypothetical claim for compensation are highly questionable in our view. Why should an agent with a low value but steady agency be penalised in this way? Should every agent not be entitled to be compensated to some extent for the value of the goodwill in the agency?
It is argued by some commentators that it is unlikely on commercial grounds that any purchaser or investor would be willing to pay for a business providing a return equal to the market wage for the proprietor’s efforts, when he or she could obtain that in the employment market without any capital outlay or investment risk. Whilst at first blush these comments have some force, the idea that an agent with a low earning agency will not be entitled to any compensation under Regulation 17 simply because a hypothetical purchaser would be unwilling to pay anything for the agency business, does not sit comfortably with the intention and spirit of the European Directive from which the Regulations are derived.
Of interest is the observation that the valuation methodology used in commercial agency claims is often the capitalised earnings method. In the case of low earning agencies where this methodology provides an unfavourable outcome for the agent on a Regulation 17 claim, a different methodology might be more appropriate.
The decision in the Nigel Fryer Joinery case is a County Court decision so has limited impact on future decisions of the court. Nevertheless, the court’s comments are regularly relied upon by principals facing claims for compensation in similar circumstances.
It therefore remains to be seen what stance the court will take when faced with a claim for compensation which under current caselaw appears unviable on the figures. The question is when, not if, the comments of the court in Nigel Fryer Joinery will be challenged?
Never one to dodge a challenge, Myerson Solicitors LLP, in conjunction with Old Square Chambers, are looking to overturn the current inequitable status quo and create a more nuanced interpretation of the Regulations that would produce a favourable result for lower-earning agencies. We are therefore interested in hearing from agents with sole low earning agencies which have been terminated and whose claims for compensation have been rejected.
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