Uncertainty in agency law sees compensation vary
The Commercial Agents (Council Directives) Regulations 1993 brought the law in the UK on the appointment of agents into line with other EU member states.
The regulations apply where an agent is employed by another (the principal) to carry out work on their behalf, most commonly under an agency agreement.
The introduction of the regulations has seen a significant increase in the protection afforded to commercial agents, to the extent that in some circumstances they are better protected than employees.
Since 1993, there has been great debate about the fact that the regulations appear heavily weighted in the agent's favour, particularly with regard to the payment of compensation after the agreement has terminated.
Under the regulations, if an agency agreement is terminated the principal is liable to pay an indemnity or compensation to the agents for any lost profit which would otherwise be due to the agent had the relationship continued.
A principal cannot contract out of the regulations, however, it is commonplace for a clause to be inserted into the agency agreement which entitles the agent to an indemnity payment only.
An indemnity payment is capped at one year's average annual remuneration over the last five years (or over the duration of the contract, if shorter). The clause intends to give some indication to the principal as to the amount the agent is entitled.
There has been no amendment to the regulations or any legislative reform on this issue.
However, the courts have developed a more pragmatic approach when calculating the indemnity or compensation due.
In the landmark case of Lonsdale (t/a Lonsdale Agencies) v Howard & Hallam Ltd  it was decided that the calculation of compensation should be based on an expert's valuation of the estimated open market value of that agency.
However, in Michael McQuillan, Lorna McQuillan v Darren McCormick, Wizzeweb Limited, Pandora Jewellery Limited  the judge departed significantly from the expert's valuation of the agency, basing the figure on what a potential purchaser would pay given that the agreement was terminable on one year's notice.
The figure awarded was less than half the expert's agreed figure.
More recently, Alan Ramsay Sales & Marketing Ltd v Typhoo Tea Limited  illustrates the range of factors a court will consider when calculating compensation.
While the decisions in McQuillan and Ramsey are not binding authorities, they demonstrate the pragmatic approach a judge may take in considering what compensation is due to an agent.
They also suggest a less onerous position for principals and show that while the obligations remain, payments to agents may be limited and numerous arguments can be deployed to minimise pay-outs.
A principal may also rely on the fact that this area of law is still riddled with uncertainty, potentially giving them an advantage during settlement negotiations.
Sara McGaughey is a solicitor in the commercial property department in Worthingtons and frequently advises a range of clients on landlord and tenant matters