England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LIVERPOOL COUNTY COURT
MR RECORDER GARSIDE

		Royal Courts of Justice Strand, London, WC2A 2LL
		18th July 2014

Lord Justice Longmore:

Introduction

1. This appeal focuses on Regulation 17 and 18 of the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) ("the Regulations"), which are based on the underlying Council Directive (86/653/CEE) of December 1986.
2. The appellant is a Dutch company which produces printed cardboard to be made into cartons for containing goods. By a written agreement dated 18^th December 1997, Mr Warren started work as a commercial agent for the appellant in the UK. His role included introducing UK customers to the appellant's products, acting as a conduit for orders, and responding to customer problems. Over the years he succeeded in bringing a variety of business to the appellant. However, on 14^th September 2009, at the age of 69 he decided to retire and gave three months notice to terminate his agency. He duly ended his agency relationship with the appellant in December 2009, and the parties parted on good terms.
3. At the time his agency ended, Mr Warren was maintaining two UK customers for the appellant, by far the most valuable of whom was the tea manufacturer Clipper Tea. He said that, in the period preceding the end of the agency, he was spending an average of eight hours a week working on the agency and that he was earning an annual net commission of £18,000. In the six months following the end of his agency in December 2009, around £230,000 worth of orders was placed with the appellant by the two customers (of which £224,000 worth was placed by Clipper Tea).
4. Although Mr Warren and the appellant parted on good terms, he later learnt of the legal basis upon which he could make a possible claim against the appellant under the Regulations. He then issued a claim under both Regulation 8 and 17. Regulation 8 provides that a former agent is entitled to "pipeline commissions" on deals made between customers introduced to the principal by the agent during his agency, for a certain amount of time following the termination of the agency. Regulation 17 broadly provides that the former agent is entitled to indemnity or compensation, in regard to the damage he suffers when the agency comes to an end. This is assessed by addressing the question of how much the agency would notionally be worth if it was valued and bought at the time the agent's role came to a close.
5. In a judgment of 10^th July 2012 in Liverpool County Court, Mr Recorder Garside QC ("the judge") determined the claim. He found that the "pipeline commissions" to which Mr Warren was entitled under Regulation 8 amounted to £5,771, and that Mr Warren was entitled to £18,800 as compensation for the end of the agency under Regulation 17. The judge referred to an accountant's report, along with various other considerations advanced by the parties, in order to come to a conclusion as to what a reasonable hypothetical purchaser would have paid for the income stream provided by the agency.
6. The appellant sought permission to appeal both parts of the judgment. Permission was refused on the papers but granted on a renewed oral hearing by Aikens LJ because he thought it arguable that nothing was due to Mr Warren because he had himself given 3 months notice to retire and also because the method of calculating the compensation adopted by the judge might be wrong. He put it like this in paragraph 6 of his reasons for giving permission:-

"It seems to me that there is a reasonable prospect of persuading the Court of Appeal that, upon the true construction of the regulations, given that they are based on the underlying Council Directive (86/653(CEE)) of 18^th December 1986, that nothing whatever is due to Mr Warren in the circumstances in which he decided to give three months' notice to retire. There is also, in my judgment, an arguable case to be put to this court on the method, by which any compensation might be payable."

7. The appellant now accepts that Mr Warren is entitled to the pipeline commissions but continues to argue that nothing should be paid by way of compensation.
8. Regulations 17 and 18 provide:-

"17. Entitlement of commercial agent to indemnity or compensation on termination of agency contract

1) This regulation has effect for the purpose of ensuring that the commercial agent is, after termination of the agency contract, indemnified in accordance with paragraphs (3) to (5) below or compensated for damage in accordance with paragraphs (6) and (7) below.

…

6) Subject to paragraph (9) and to regulation 19 below, the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal.

7) For the purpose of these Regulations such damage shall be deemed to occur particularly when the termination takes place in either or both of the following circumstances, namely circumstances which –

a) deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; or

b) have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.

18. Grounds for excluding payment of indemnity or compensation under regulation 17

The indemnity or compensation referred to in regulation 17 above shall not be payable to the commercial agent where –

a) the principal has terminated the agency contract because of default attributable to the commercial agent which would justify immediate termination of the agency contract pursuant to regulation 16 above; or

b) the commercial agent has himself terminated the agency contract, unless such termination is justified –

i) by circumstances attributable to the principal, or

ii) on grounds of the age, infirmity or illness of the commercial agent in consequence of which he cannot reasonably be required to continue his activities;

or

c) the commercial agent, with the agreement of his principal, assigns his rights and duties under the agency contract to another person."

The Submissions

9. Mr McNall for the appellant, on the basis of Regulation 18(b)(ii) declined to pursue the primary ground of appeal permitted by Aikens LJ but submitted

i) the judge made a serious error of law in saying that he had to assume that there was a hypothetical buyer for the agency which should, therefore, be valued on the basis that a buyer existed who would pay something for the agency;

ii) once that error of law was corrected, the evidence showed that there was in fact no buyer who would be prepared to pay anything for the agency especially when one took into account the further factors that

a) Clipper Tea and the appellant were dealing directly with each other at the end of the agency and did not wish to continue dealing through an agent; and

b) any new agent could, in any event, be given one month's notice to terminate pursuant to Regulation 15(2)(a).

10. Mr McGee for Mr Warren submitted:-

i) that the judge had not said he was legally required to assume the existence of a hypothetical purchaser prepared to pay a price; he had merely assumed, for the purposes of making a valuation, that there was a hypothetical purchaser; that was a purchaser who was prepared to pay only what the agency was worth; if it was worth nothing, then that was what he was prepared to pay;

ii) there was therefore no error of law to correct;

iii) even if there was an error of law, there were no findings on which the appellant could rely to show that there was no one prepared to pay for the agency or that the appellant and Clipper Tea were going to deal directly with the other in the future.

The Legal Background

11. In order to put these submissions in context, it is necessary to remind oneself that Regulation 17 was the subject of analysis by the House of Lords in Lonsdale v Howard & Hallam [2007] 1 WLR 2055. In that case it was the principal who had terminated the agency by giving reasonable notice and the courts had to assess the agent's entitlement to compensation for that termination. Lord Hoffmann (with whom the other members of the House agreed) pointed out that the agent had a right to choose between "indemnity" as derived from German law and "compensation" as derived from French law. He said that, if an agent opted for compensation, one had to ask what the agent should be compensated for; he answered that question by saying (para 8) that the agent is treated as having lost something of value as a result of the termination and is entitled to compensation for that loss. He then said this:-

"11. Having thus determined that the agent is entitled to be compensated for being deprived of the benefit of the agency relationship, the next question is how that loss should be calculated. The value of the agency relationship lies in the prospect of earning commission, the agent's expectation that "proper performance of the agency contract" will provide him with a future income stream. It is this which must be valued.

12. Like any other exercise in valuation, this requires one to say what could reasonably have been obtained, at the date of termination, for the rights which the agent had been enjoying. For this purpose it is obviously necessary to assume that the agency would have continued and the hypothetical purchaser would have been able properly to perform the agency contract. He must be assumed to have been able to take over the agency and (if I may be allowed the metaphor) stand in the shoes of the agent, even if, as a matter of contract, the agency was not assignable or there were in practice no dealings in such agencies: compare Inland Revenue Comrs v Crossman [1937] AC 26. What has to be valued is the income stream which the agency would have generated.

13. On the other hand, as at present advised, I see no reason to make any other assumptions contrary to what was the position in the real world at the date of termination. As one is placing a present value upon future income, one must discount future earnings by an appropriate rate of interest. If the agency was by its terms or in fact unassignable, it must be assumed, as I have said that the hypothetical purchaser would have been entitled to take it over. But there is no basis for assuming that he would then have obtained an assignable asset: compare the Crossman case. Likewise, if the market for the products in which the agent dealt was rising or declining, this would have affected what a hypothetical purchaser would have been willing to give. He would have paid fewer years' purchase for a declining agency than for one in an expanding market. If the agent would have had to incur expense or do work in earning his commission, it cannot be assumed that the hypothetical purchaser would have earned it gross or without having to do anything."

It will be noted that Lord Hoffmann uses the phrase "the hypothetical purchaser" on a number of occasions.

12. He then quoted the trial judge in Lonsdale as saying that there was no evidence that anyone would have paid anything to buy the agency and then awarding a somewhat notional figure of £5,000. Lord Hoffmann agreed with the Court of Appeal that that was the right approach and said the judge could not have been faulted if he had dismissed the claim.

Did the judge in this case proceed on the assumption that the existence of a hypothetical purchaser meant that there was a purchaser who would pay something for the agency?

13. This is not an easy question to answer. The judge sets out the parties' contentions in paras 21 and 22 and asks (para 23) "so what would a hypothetical purchaser have paid?" He then immediately proceeds to discuss what discounts have to be taken into account from any award he makes. He decides that the expert accountant had asked himself the wrong question by concentrating on the types of notional purchaser that might be forthcoming, which is

"not the point because the notional purchaser must be a purchaser who is prepared to buy, otherwise Regulation 17 and the opinion of Lord Hoffmann becomes meaningless. So I have to start off by assuming that there is a notional purchaser. ... So there must be a purchaser to be found. The question is what the purchaser would pay and that question has to be decided ... without any reference to the type of purchaser who might buy ..."

The judge then proceeded to say that no such purchaser would have factored in the possibilities of any expansion in the business and that any such purchaser would have to take into account various factors which operated to discount the price and to which the expert accountant had paid insufficient attention. The judge summed the matter up by saying:-

"I should say finally on this subject that I do not accept the defendant's submission that merely because nobody might have been available to buy this agency the income stream had no value because, as Lord Hoffmann points out, we have to assume that there was a hypothetical purchaser able to properly perform the agency contract. He must be assumed to have been able to take over the agency and stand in the shoes of the agent."

He then concluded that he would award one year's income.

14. At no stage does the judge appear to address an argument that the agency was in fact valueless as the appellant contended. His frequent references to the hypothetical purchaser (particularly in para 26) make it look as if he is assuming that there is a value and that he must assess what it is. That is, with respect, wrong. All that Lord Hoffmann meant by referring to the "hypothetical purchaser" was that for the purpose of deciding what value (if any) an agency has one has to assume the existence of someone who is prepared to buy. In one sense, of course, if a hypothetical purchaser would not be prepared to pay anything, it is odd to refer to him as a "purchaser" at all. But for the purpose of making a valuation one always does assume a hypothetical purchaser. It does not mean that one also assumes that there is a price he will pay. The argument that the agency is in fact valueless does have to be addressed, if it is raised. This is not something which the judge expressly did. I would, therefore, uphold the first ground of appeal.
15. That does not, of course, mean that the appeal succeeds because the appellant has to show on the evidence that the agency was in fact valueless and that is a formidable task unless the judge has made relevant findings. The court would have to be persuaded that the evidence points to no other conclusion.

The Evidence

16. Mr McNall relied on various passages in Mr Warren's cross-examination in support of a submission that Mr Warren had tried to sell the agency and failed. But the evidence did not go as far as that. Mr Warren strongly denied an assertion made by the appellant's managing director, Mr Harry Zweers, who had served a witness statement in the proceedings, that Mr Warren had tried to sell the agency several times. He denied he had made any effort to find a buyer for the agency. He agreed he had asked a couple of people whom he thought might like to take the agency over but they had said they did not want it since they were getting on in years; one of these was a taxi driver who had lost his job but he said he was not interested ( Transcript pages 17-18). This hardly amounts to a failed effort to sell.
17. One of the difficulties with this kind of evidence is, as Lord Hoffmann pointed out in Lonsdale, that there is no tradition in England of these kinds of agencies being bought and sold. That may be because they are not usually assignable, being contracts for personal services. Mr Warren did say that Mr Zweers had asked him if he knew of anyone who would like to take over the agency and it was that which led him to ask the two people he mentioned. It cannot be right, however, to say that a claim must fail unless a claimant can point to an identifiable purchaser who would have been prepared to take on the agency at a price. The exercise of valuing an agency is more sophisticated than that. If there had been evidence of a sustained effort to sell which had failed for reasons connected with the agency itself, that would be a matter which a judge would, no doubt, take into account. But the evidence in this case did not go nearly so far.
18. Mr McNall sought to rely on evidence that the agency was due to collapse because the appellant and Clipper Tea wanted to deal directly with one another. This evidence depended on a meeting which Mr Warren could not attend because he was on holiday. Clipper Tea had appointed a new marketing director, Ms Gill Hesketh, and Mr Zweers attended the meeting and dealt with her directly. Mr Warren did agree (Transcript page 7) that after the meeting he spoke to Ms Hesketh who said:-

"I don't really want to speak to you. I'll speak to Mr Zweers."

Mr Warren claimed, however, that Mr Zweers was only standing in for him at the particular meeting and that his relationship with Clipper Tea's buyers was (and would have continued to be) unchanged (Transcript page 11).

19. This is a slender basis for submitting that the relationship with Clipper Tea was about to evaporate. Mr McNall pointed to para 65 of Mr Zweers' witness statement in which he said:-

"The reality of the meeting that went ahead between me (and not Mr Warren) and Clipper is that Clipper were not at all happy with Mr Warren. Clipper's impression of Mr Warren was that he made issues more difficult than necessary and that he was too long in the tooth."

20. But Mr Zweers did not attend the trial and could not be cross-examined. The judge was prepared to read his statement and take it into account but only because (para 6):-

"It seems to me that there is no issue which is central to my determination of this case about which Mr Zweers' statement differed in any material respect from the statement of Mr Warren."

Mr McNall's reliance on para 65 of the statement is highly controversial and it would not be right for us to take that into account in this court.

21. If it was really part of the appellant's case that the agency was about to disappear because Mr Zweers was going to deal directly with Clipper Tea, that would have been a controversial question on which Mr Zweers should have been available to be cross-examined. The judge acknowledged that it was part of the appellant's case that

"Mr Zweers was beginning to deal with a new marketing director who had been appointed when Clipper had been taken over by a private equity company."

It cannot therefore be said that this was a point which the judge excluded from his consideration.

22. Thus the evidence, on which the appellant relies, does not compel one to the conclusion that there was no value in the agency. Although a claimant has the burden of showing, on the balance of probabilities, that the agency did have a value of some kind it seems to me that, on the evidence in the case, that burden was discharged. It must follow that, since the estimation of the value of the agency is very much a matter for the first instance judge unless he goes outside the ambit of a reasonable view of the matter, the judge's conclusion cannot be impeached. I would therefore dismiss this appeal.

Lord Justice Tomlinson:

23. I agree.

Lord Justice Fulford:

24. I also agree.