England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ROYAL COURTS OF JUSTICE

		Royal Courts of Justice, Strand, London WC2A 2LL
		1st February 2001

1. JUDGE BOWERS: This is the second and the third preliminary issue I have been asked to decide on the interpretation of these regulations of 1993.
2. I must say I approach my task with some degree of trepidation, dipping my toe into the ocean of European law and interpretation because it is certainly not a field in which I would regard myself as over-practised and, if I do not do justice to the arguments and the erudition with which they have been presented to me, I hope at least the parties will under-stand that I take a practical interpretative approach to the regulations.
3. The simple question is – and surprisingly it has never actually been decided before in the High Court – on what basis compensation is to be assessed under what is Regulation 17. Mr. Berkley on behalf of the Claimant has contended that the tariff basis which is used in France is an appropriate starting point in most, if not all, cases, partly because the scheme of "compensation" was and is derived from French law, (whereas by contrast the "indemnity" scheme comes from the German jurisdiction), and French law provides that, on termination of an agency contract, the agent would be entitled in most cases to a two year purchase as a tariff. The Defendants, on the other hand, through Mr. Segal say that to do that is to do despite to the language of the regulations and requires me to import into them a concept which is neither expressly stated, and which they say it is certainly not necessary to imply in order to give a purposive construction to them.
4. The sequence of events around the introduction of the regulations in the U.K. is important. I have been directed to a number of the earlier documents. I am not going to go through them in detail because this is an extemporary judgment and I do not intend to read out great tracts of the reports. Suffice it if I simply highlight the pages and the references in the sense that I will look up the particular page and make a brief comment about it. The Directive was given in 1986 and in the Directive it is clear that its purpose was to achieve a degree of harmonis-ation of Community law in order to facilitate the Single Market. In fact differences existed between the various component members of the Community at that stage which meant that in some jurisdictions, such as France and Germany, compensation or indemnity was payable whereas in the U.K., for example, apart from any contractual basis, there would be no claim for damages or compensation if the contract was not terminated. The 1986 directive set out in fairly clear terms what was required in a number of steps and in Article 17 by way of a compromise, because they could not agree – (the French would not back down on their system which had been established for many years and the Germans did not back down on theirs, which in fact I think was probably more widespread anyway) – and in any event the compromise was reached whereby member States could implement either of the options of "indemnity" or "compensation" on the termination of an agency contract. The rest of the member States implemented this directive in about 1990, I am told by Mr. Segal, although obviously Germany and France had already similar national laws which dealt with such a situation. It was in 1993 that the United Kingdom produced their regulations. They had been given a four year period of grace, apparently, in order to make their minds up and, rather typically, in making up their minds they did not come to any firm conclusion and sat "firmly on the fence". Thus the regulation is quite clear, as I have already mentioned, provides for an alternative method of assessment, but it is important to note that the "indemnity" method can be invoked only by agreement between the parties, whereas the "compensation" method has been referred to in argument as the default method. Another document I have seen was dated 1995, which is called the Compliance Costs Assessment, and was produced to show the degree of consultation that there had been prior to the introduction of the regulations in the United Kingdom and how it appears that a reason "compensation" had been initially favoured by the U.K. Government was they felt that compensation was probably the cheaper of the two options. However, business preferred "indemnity" and it was introduced as an alternative. Finally, there was the report in 1998 which had been directed by the Commission and which carried out a review of the way in which Article 17 had been implemented throughout the Market. I do not want to go through it in great detail -- but it is quite apparent that they accepted Article 17 represented a compromise, as I have already mentioned, and on page 157 there is reference to compensation and it says, "By judicial custom the level of compensation is fixed as the global sum of the last two years' commission or the sum of two years' commission calculated over the average of the last three years of the agency contract which conforms with commercial practice", that being the French law. "However, the courts retain a discretion to award a different level of compensation where the principal brings evidence that the agent's loss was in fact less, for example, because of the short duration of the contract or where, for example, the agent's loss is greater because of the agent's age or his length of service." The passage goes on in the next two paragraphs referring to the word "indemnity". However, it is accepted in fact that it probably should read "the compensation is calculated" (rather than "indemnity") because it is dealing there with the way in which French law operates the system of compensation. Later on I noted there were references at page 160 under the heading "Compensation" to the U.K. and what parties in the U.K. were tending to do. Apparently here we were attempting to apply common law principles, and the specific example is given of the English system taking into account future developments and mitigation of loss, (a fact which Mr. Segal accepts is an incorrect interpretation of the regulations) but, on the other hand, it does seem that the practice was being reported at that stage as going on. I do not want to go through that section in great detail but there is reference in the report to, "It is not possible to predict how the U.K. courts will interpret the directive but it seems likely that they will have regard to existing common law principles". Then there is a reference which Mr. Berkley pointed out, saying, "The uncertainty and divergence also led to a reluctance to create agencies and act as a barrier to principals to take on agents in other member States. It is important that the directive is uniformly interpreted and leads to predictable and clear results." Later on there is a section which deals with the U.K. specifically, again, which I do not intend to go through, although it does give an indication as to how the cases have anecdotally apparently been looked at in the U.K. courts.
5. Now, that is very much by way of an introduction because from that background the Claimant is arguing that, first of all, this compensation is outside any common law concept, and that I accept. One is not assessing damages for the loss of the future prospects of the agency and it is not a question of mitigation of loss, as has been mentioned already. It is, I think, almost agreed that what here is being compensated for as "entitlement" is in the nature of a quasi-proprietary right. It is the loss of the value of the agency to the agent which is being compensated for, and the precise moment at which that valuation takes place is at or about immediately on termination, as if the agency had not been terminated.
6. The Claimant argues that compensation, being for the rupture of a relationship, means that a person is entitled to either his "indemnity" or "compensation" for the damage he suffers unless they fall within Regulation 18 or bring their claim after a year. The strength of the Claimant's argument is reinforced by a case in the Court of Sessions called King v. Temple Limited to which considerable reference has been made. Lord Caplan gave the judgment in that case, and looking at the headnote, which is perhaps not what I would want to do in detail, there is much with which one can agree because the first half of that headnote deals with matters which are probably uncontroversial. For example, "In determining whether a commercial agent is entitled to compensation on termination of his agency, the governing principle is that expressed in 17.6. A commercial agent is entitled to compensation for damage he suffers as a result of the termination of his relationship. Compensation is payable upon the rupture of the relationship with the principal. At that point in time the value of the lost agency must be ascertained. The emphasis is not on future loss. There is no reference to the actual course of events to be expected after termination and it is not necessary for the agent to project his actual prospective loss. All he needs to prove is that after termination he lost the value of an agency asset which prior to termination existed." Then it talks about right to compensation under 17.6 not being restricted or qualified by Regulation 17.7. "Under 17.7 the damage is deemed to occur particularly when termination takes place in circumstances in which the principal would continue to derive substantial benefit from the agent's activities or where the agent had incurred costs and expenses which he had hoped to recover. That does not mean that the damage would be deemed to occur only where specified circumstances apply. 17.7 does not set out the exclusive circumstances giving rise to compensation. Accordingly, it is not a prerequisite to entitlement to compensation that the employer should continue in business. Compensation may arise where, (as in that case), the principal shut down the relevant part of the business or where it ceases to trade because the company goes into receivership. So far as entitlement to compensation is concerned, the regulations do not deal with what happens after the date of termination. It is the value of the rupture of the agency relationship that is the source and justification for compensation." All that, it seems to me, is virtually uncontested and accepted. It is accepted also that the reflection of the French law is not disputed. What is hotly disputed is the fact that in the last paragraph the Court of Session took the view that, given the particular type of loss concerned, a broad approach was inevitable and a practical requirement of the law, and in fixing the level of compensation the approach of the French courts of using two year purchase of gross commission as a benchmark was entitled to respect, and in those circumstances that is what the Court of Session did. That part of it is hotly contested because much of the other reasoning on valuation appeared to be coming to a different conclusion and it was only towards the end of the judgment that Lord Caplan appears to take what can only be described as the "broad brush" approach rather than valuing the loss of the asset which in fact had ceased to exist.
7. As I have said already, the argument for the Claimant is that, when one is assessing the value of the agency the loss is the damage the agent suffers as a result of termination, and I can understand the origins of both the "indemnity" and "compensation" provisions. As I have said already, the U.K. had no concept for that, and consequently what has been introduced is an animal which has no like, it seems, in common law and is a statutory creation imported from the Continent. But nonetheless it is strongly argued by Mr. Berkley that, in interpreting this word "compensation" I should use the French practice of the two year rule and the tariff approach because this gives effect to "harmonisation", and in that connection he used the expression that there are in fact "two pools of harmonisation". Certainly there are at least nine countries whouse the principle of "indemnity"; only the French have compensation and the British have both. It is interesting to note that John Mitting, Q.C. sitting as a Deputy Judge of the High Court in the case of Moore (in which Mr. Segal appeared) was referred to the German provisions regarding indemnity which he departed from, I think, in a number of respects. Although he accepted that the concept had been imported from Germany, he did not consider, in assessing the "indemnity" to be paid in that case, that this court or the courts in the United Kingdom should follow precisely the jurisdiction and findings of the German court.
8. The other point which Mr. Berkley makes on behalf of the Claimant is that the tariff system produces the benefit of certainty in the business community and avoids or reduces the incidence of litigation. Now, whether that is a legitimate consideration is arguable. It probably is not, but I do make a note in passing that it is quite surprising, if one is concerned about litigation, that seven years have passed before this point has been brought to the court's attention (and in a case which does not have enormous value on any terms, even on the Claimant's valuation). Nonetheless whilst this may be a triumph for commercial good common sense in other cases, I do not think the argument about the avoidance of litigation is itself an argument which would hold much water, so far as I am concerned, in the interpretation of the regulations; but I can understand the benefits of certainty and providing guidance which is as precise as possible for the business community.
9. There are a number of problems with the Claimant's submission but most of those that I find most difficult to answer are the most superficial and the simplest. First, if "compensation" is used as a term of art in these regulations and it is an import from French law and is effectively to be a general rule of two years' gross income, I find it remarkable that this is not spelled out in terms. The "indemnity" provisions do contain some detail at 17.4 whereas the "compensation" terms have no such formulae. I find it surprising. The second thing which I find very difficult to follow – and it is a problem which Mr. Segal has advanced – is if the tariff is for two years one wonders why 17.7 is included because it is a "deeming" provision in that damage is deemed to occur, particularly when termination takes place in two circumstances, neither of which is particularly relevant at the moment. It is interesting to see that that part of the Article in the directive, is reproduced faithfully in our regulations. The French civil code at Article 12 does not reproduce that, which is probably quite surprising seeing this was supposed to be derived from the basis of their law. Whether the U.K. Government in drafting these regulations have just adopted a lazy approach and simply reproduced the various aspects of the Article is one argument. On the other hand, it does seem to be a rather important provision, a deeming provision, which does require an explanation for its presence, and it would be entirely redundant, in my judgment, if the tariff approach was to be adopted. Interestingly enough, in the case of King I take the view that Lord Caplan was unable to explain the purpose of 17.7 in particular in the context of his adopting the two year tariff approach from France.
10. The third argument, is why should the "indemnity" be subject to a one year cap when an agreement has to be entered into in order to produce it, whereas the "compensation" tariff is automatically set at two years and in default, so that if the parties never get round to agreeing anything and it goes by default, then "compensation" automatically carries more than 12 months' more entitlement than an indemnity could possibly provide. Now, I know there is a provision (17.5) which allows an agent who proceeds in indemnity to continue to seek damages, although I am told by Mr. Segal that the use of that is rather redundant and most of the claims are either arguing for a period of notice under clause 15 or are claims for commission under the earlier parts of the regulations. But the provision is still there that the agent who receives indemnity is entitled to seek damages if his loss exceeds the 12 months' indemnity rule which has been imposed.
11. My greatest difficulty is this - and I did ask Mr. Berkley in the course of argument - how do we know in the United Kingdom, how do I know how the French would deal with this particular case? It is not as if their rule is specifically the last two years' gross payment. It is apparently either the last two years or the average of the last three multiplied by two, and I asked Mr. Berkley, "Well, how do you decide?" and he said, "Well, the Claimant has an election, in other words he can go for the higher figure". Further, it is quite apparent from the reports that the French can and do depart from that two year rule in their discretion and, as a matter of argument, I prevented Mr. Segal going into any of the French cases which opened up the areas of that discretion or exceptional departure from the rule of two years' compensation. But I did ask Mr. Berkley, and I do not think I got a very clear reply, whether he is saying that, if I import the two year rule from France into this jurisdiction, by whom and in what circumstances are the exceptions or discretionary elements to be developed? Do they follow on the tramlines of the French or are the English judges going to be free to develop their own jurisdiction and jurisprudence on this particular matter? It does seem to me that it is important to realise we are dealing with U.K. legislation and, whilst this "foreign animal" has been created which is unknown to common law, the compensation principles have in practical terms to be sufficiently U.K. based and developed so as to be interpreted and enforceable by U.K. judges, English judges, without requiring in any single case, it seems to me, an expert in French law to determine the case. I do not think from my own experience of the assessment of compensation that our system is incapable of dealing with unique challenges and changing situations or of developing rules for this new right of compensation. I think the law is sufficiently flexible and adaptable to deal with that.
12. I agree with Mr. Segal in his submission this morning that it is entirely within the spirit and the structure of the E.U. that, where there is a breach of a right, it would generally give rise to a domestic remedy and I think it would be extraordinary, (although my experience is somewhat limited), or Mr. Segal says unique, for one member State to be required to impose not just a remedy from Europe but in fact from another member State. The concept of compensation seems to me to be one which the courts are quite capable of interpreting in accordance with the justice of the situation. Mr. Berkley responds to that by saying really what I am being asked to identify, is the "entitlement" and I am defining what the right is and I am not really looking at a remedy. Quite frankly, I do think that to impose the French remedy on this right would be, (unless the language was clear and I was driven to it), something which I would be very reluctant to embark upon. I think the case of Emar, which was referred to in argument, which is a case which has occurred since the case of King, is a judgment of the E.C.J. and I think the phrasing of paragraph 21 of that particular judgment does lend some support to Mr. Segal's argument, although I think, as it was not directly the point in issue, it would be impossible to be absolutely certain that, when they used the phrase, "However, Articles 17 and 18 prescribe a precise framework within the member States may exercise their discretion as to the choice of methods for calculating the indemnity or compensation to be granted". The emphasis he put on was on the words "for calculating" whereas in the previous sentence member States were allowed to choose between the indemnification and compensation. And so effectively he is saying that this later sentence is taking the previous sentence a step further. He is saying that "the calculation" is a matter for the member States. Given that the interpretation and the view I have taken generally of this case, I think Mr. Segal's point is probably fair comment, whilst it is not a point of great significance and I would not draw great comfort from it or build my edifice upon it, but it does seem to me that his interpretation would certainly be in line with general thinking in this regard.
13. I am very conscious that I am disagreeing with King v. Temple because, apart from anything else, the Court of Session would obviously carry considerable persuasive authority on any issue, particularly when it is the interpretation of exactly the same regulation that I am asked to interpret today.
14. At 34 of the King judgment I do disagree with the comments on harmonisation. It seems to me that harmonisation, so far as the directive was concerned, was as to the establishment of the right to an entitlement within the member States generally and that the particular method of assessing the value of that entitlement was to be left to the member States to individually work out. But I do not agree with Lord Caplan where he says that, if the national courts treating their country's applications arising from the directive under their national regulations continue to produce divergent results, then the whole objective of the directive has failed. I do not agree with that at all because it seems to me that the directive is aimed at providing rights and to that extent it has achieved them. Precisely what that right is worth within any particular member country is clearly a matter, I would have thought, for its domestic courts.
15. Now, as I have said and made it very clear, I do not accept the tariff approach. I believe the objections to it are powerful both legally and logically. In summary, I think it is unjustified to impose a tariff on a fair reading of this text. A simpler rule could easily have been stated if it was meant to re-import it. The inclusion of 17.7 is, as far as I can see, rendered redundant with the tariff. It would have been much easier to simply say that the general rule is that two years' purchase would be the compensation subject to (a), (b) and (c). Not only is it unjustified, as I say, I think it is unworkable at a practical level. In this regard I draw comfort from His Honour Judge Hallgarten, Q.C. in a case called Duffyn. He deals with this at the end of the judgment at page 197 [2000] Lloyd's Reports volume 1... I am not going to read it beyond this, saying "All these points can be made as a matter of construction", and he is dealing there with Regulation 17 and, quite frankly, what he says from the bottom of the first column on that page is uncontroversial and are matters which I would adopt. First he says, "Such cases have been decided are consistent in one respect. The application of the regulations entails abandonment of at least some common law principles", and he quotes the page. "Secondly, however, whilst there is general agreement that the regulations be approached on the assumption that the member States desire harmonisation, there are certain cases which go further and suggest that the right approach is to adopt French law from which it is said that the compensation aspect of Regulation 17 is derived." The reference then is to Moore, a decision of Mr. John Mitting, and Roy v. Harman (Lord Hamilton). What he says is this: "I venture to agree with these decisions up to a point. A better understanding of the regulations would be gained by having some idea of the principles applicable within the legal system or stems from which those regulations may have been derived, but at this point I hesitate", and so do I. It seems to me that what he says after that is entirely appropriate, trenchant comment with which I would wholeheartedly agree. He says, "It is one thing to be told that knowledge that under French law events after termination have no bearing on the compensation to be awarded." That is accepted here in that sense. "It is quite another", he says, "to be asked to go on then to award as a matter of routine two years' commission which is said to be the standard award by the French courts, albeit this standard award is itself subject to exceptions", and he then quotes from the report, and he says, "It seems to me that, once an English court is diverted from the general into the particular, it will find itself drawn into attempting to mimic what a French court actually had done, a task which it is ill equipped to perform". So I do adopt what he says in that part of the judgment and as to the explanation of 17.7A as well. I think it would be, in practical terms, unworkable unless the English courts had got a specific regulation to deal with two years and develop its own exceptions in certain circumstances. I think the idea of having to import in every case the French decision is unworkable on a practical level. I do think, further that it is unnecessary to read a two year tariff into this order in order to make it comply with the directive. As I have already said, the purposive element and harmonisation is achieved by providing for payment for entitlement at all, and it is important then that we have to accept, contrary to our common law instincts, that an independent agency, even though it may be on a fairly flimsy footing, has a value and a significant value and it is not something which can ever be valued or assessed by using former common law principles. Certainly one is going to have to innovate or develop the form of the compensation in respect of this particular regulation.
16. The final point, I think, is that the application of a tariff would be unfair and would work injustice. A tariff would mean the same more or less for everyone. That was said by Mr. Berkley to be one of the benefits of it, that it would be simple to operate and known within the Community and we would have the benefit of certainty. The problem is, is it right that a man who has, for example, a two year written agreement with notice provided for who does not ask for indemnity should be entitled to two years' compensation whereas the man who, for example, has no written agreement and is bound to rely upon the limited protection of the regulations, should get exactly the same by way of multiplier? It seems to me that it would be a recipe for injustice and unfairness, particularly if different people will receive the same amount, some in undeserving cases and some which are deserving cases and, secondly, it seems to me that it would work an internal injustice within the regulations in that 17.3 and 4 which are dealing with indemnity, would then become far less attractive than the compensation provisions.
17. It seems to me that, in assessing compensation, there are various matters which have to be considered. Compensation can be awarded under 17.6 only for the damage he suffers as a result of the termination of his relations with his principal. Obviously, the matters in 17.7 are relevant to the assessment of compensation. It would seem to me that, as a matter of common sense, the duration of the agency and its history must be of relevance. Of relevance must be the precise terms, whether it was in writing or oral, whether there was any security of the agreement, and so on, as I have said, whether there was, for example, provision for notice of a year or whether there was just the bare statutory minimum. It must be of relevance whether the agency is dealing with a regular, repeating client base or whether the agency is simply dealing with one-off transactions with different persons. For example, one can imagine that there is a much stronger argument for larger compensation where one is dealing repeatedly with a client base which the agent has built up as opposed to clients who pass on to the agent's books for perhaps a week or two or perhaps one transaction and then disappear with very little repeat business. It seems to me that, if one is doing what, I think, is required – and to this extent I do accept a bit of what Lord Caplan says – one is valuing the agency and its connections that have been established by the agent at the time at or immediately before termination, and it is really a question of compensating for the notional value of that agency on the open market, somewhat similar, it seems to me, to the value of the goodwill that one might have in a business. It is interesting to see, for example, in 18C that there is no compensation payable where the agent assigns his agency with the agreement of the principal to another, presumably on the basis that, if it is of value, he will receive that value from the person to whom he transfers it, and it seems to me that the compensation is meant to be a reflection of the value of that asset at that time, and the argument about gross or net follows on from that very much as night follows day. Mr. Berkley was arguing for gross mainly on the basis that that was the French system, and certainly it is; but it seems to me that it is an affront to common sense, as was said in argument to me, if I earn £20,000 as an agent sitting at home and answering the telephone, and I gain that benefit with no expense, that I should get only the same compensation as the man who spends 50 per cent or 60 per cent of his commission on expenditure. It seems to me that, if one is valuing the agency at or immediately before its termination, then one has got to have regard to the expenditure which is incurred in earning the commission upon which the agency is based. That is certainly the approach which Judge Hallgarten preferred in Duffyn, and his trenchant comments are at page 198 in the second column where he says "It would be offensive to take gross rather than net earnings", and, quite frankly, I agree with his comments in that regard.
18. I am sorry that my remarks may have been not as judicially framed as I would have liked if I had sat down and written them out, but I hope I have done sufficient justice to your arguments and eloquence.