There are various legal hurdles to jump through when terminating an agency agreement, and it's key you get it right.
In the recent case of Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd & Ors [2019] EWHC 507 (Ch), the High Court provided a valuable insight into the consequences of terminating an agency agreement under the Commercial Agents (Council Directive) Regulations 1993 (‘the Regulations’). The Court considered the compensation that was due to an agent upon termination, the interrelationship between compensation payable under the Regulations and common law damages for breach of contract and provided an in-depth analysis of how statutory compensation should be calculated.
Facts
Between May 2015 and January 2017, Economy Energy Trading Ltd & Ors (‘EET’) engaged Green Deal Marketing Southern Ltd (‘Green Deal’) to visit households which sourced their gas and electricity from the larger energy suppliers and encourage them to switch to EET. In January 2017, EET claimed that Green Deal had failed to reach the agreed targets and that its field agents had committed large-scale mis-selling. As such, EET suspended all doorstep sales by Green Deal and refused to clarify when they could resume their duties. Green Deal viewed this as a repudiatory breach of contract by EET, so as to terminate the agreement, and brought a claim against EET for:
- Damages at common law for breach of contract; and
- Statutory compensation under the Regulations.
Green Deal claimed both remedies on the basis that, although there had been a breach of contract, statutory compensation is a different remedy from common law damages and there is nothing within the Regulations which purports to exclude an aggrieved agent from claiming both.
High Court’s Decision
Damages at common law or statutory compensation? Or both?
The Court found that the agency agreement did fall within the Regulations and therefore Green Deal did have a right to statutory compensation. However, the judge held that an award of statutory compensation under the Regulations (which can be granted without any breach of contract) does not necessarily mean that the victim of a contractual breach ought additionally to receive common law damages. The judge clarified that if the loss suffered by the breach had been sufficiently compensated under the Regulations, an additional award of damages should not be made if this would result in double recovery for the claimant. This was the case here and, as such, the judge rejected Green Deal’s claim for damages.
How is compensation calculated?
In determining the amount of statutory compensation payable to Green Deal, the Court applied the existing principle that the award should be the price a hypothetical purchaser would be willing to pay for the agency as at the date of termination. This is a complex calculation based on expert evidence given by both parties. Whilst it is difficult to summarise the extensive analysis of the evidence given in this case, it is worth noting the following factors as to how the experts calculate their valuations and how the judge will assess them:
- Valuation should be based on earnings rather than assets. Both experts calculated their valuation by applying a multiplier for years of purchase to an estimate of sustainable annual profit.
- The judge favoured the method of valuation which considered earnings before interest, tax, depreciation and amortisation, which was adopted by the defendant’s expert.
- Both experts referred to positive and negative factors in connection with Green Deal and the energy sector generally in order to build up a valuation. Positive factors included strong sales growth, experienced management team and a history of profitable trading. Negative factors included the fact it was a short, fixed term contract, the fact that Green Deal only had a single customer (EET) and the relative immaturity of the business.
- The judge accepted that the fact that the agency was a single customer agency was highly material to the choice of multiplier and the valuation of the business in the market. He also accepted that regulatory pressures would be highly relevant to a real-world valuation of Green Deal’s business.
- However, the judge did not accept that discount should be made for the fact that the agency was non-assignable.
Green Deal’s compensation under the Regulations was eventually assessed at £1.05 million. This is a further useful decision on compensation calculation methodology applied under the Regulations. The case provides clarity as to which remedies an agent can claim following termination of the agency and offers valuable guidance on the approach the courts will take when determining the amount of compensation to award. The judge’s lengthy analysis of expert evidence regarding the valuation of an agency leaves this judgment as one that is likely to be referred to by practitioners when assessing compensation payments in future cases.
For more information on the topic please contact Richard Hough or a member of our commercial team.
