Termination of commercial agency dispute case study

Kate was engaged as expert for the defendant in a dispute concerning the termination of a commercial agency.

Termination of commercial agency dispute

The dispute, between Green Deal Marketing Southern Ltd (“GDM”) and Economy Energy Trading Ltd (“EE”), received a fair amount of publicity, not least because its published judgment served as a reminder of the application of law in the quantification of compensation in commercial agency disputes.

In this article we take a look at some of the decisions set out in the High Court judgment which we found interesting and helpful for future engagements.

The value of the agency

In introducing the approach by which the amount of compensation should be determined, the judgment reiterates the approach set out in Lonsdale v Howard & Hallam Ltd [2007] UKHL32, [2007] 1 W.L.R. 2055. The basic approach is that the agent should be regarded as having a share in the goodwill that the they have helped to generate in the principal’s business. On first glance, this seems an odd way of looking at it from an accountant’s perspective – the value lost by the agent was actually a proportion of the value of the principal?

However, this value is ultimately equivalent to the value of the future commission that can be expected to be earned by the agent (assuming proper performance under the agency agreement).

The judgment highlights a difference between the valuation of a commercial agency in the real world, say in relation to the sale of the agency, and the valuation for concluding on the amount of compensation. It should be assumed that a hypothetical purchaser could have taken over the agency, even where the agency agreement does not provide for such assignment.

There is a difference between the valuation of a commercial agency for commercial purposes and for determining compensation
The period of agency

A significant factor in the quantification of compensation is the future length of the agency. In GDM v EE, the Heads of Terms (the overarching agreement in respect of the agency in the case) provided for a fixed term of three years, after which the contract would continue but could be cancelled by either party with three months’ notice.

After paying consideration to a number of other judgments, the judge stated that (in spite of the knowledge that the relationship had gone sour) it shouldn’t be assumed that the agency would be terminated at the earliest opportunity. Neither it should be assumed that the agency would last forever.

So, in the matter of GDM v EE, the agency should be assumed to last somewhere between (but not equal to) three months (assuming the agreement has been in place for three years) and an unknown (but longer) period. A sensible expert should address this uncertainty by providing a range of calculations. In this case Kate addressed the uncertainty by adopting a range of EBITDA multiples, each adjusted for the expected duration of the agreement.

termination of commercial agency dispute
Discounts are subjective and are reliant on the experience of, and research conducted by, the expert
Discounts

The amount of compensation was calculated by applying an EV/EBITDA multiple to the maintainable EBITDA of the agent. This approach effectively values the business of the agent. EV/EBITDA multiples are usually determined using publically available information and adjusted (a premium or discount applied) in respect of factors specific to the business being valued. The judge concluded that an appropriate multiple for a fully-diversified, nonagency, owner-managed business of a similar size to GDM was 4 (being the mid point of the range given by Kate). To this multiple, the judge accepted the following discounts for:

  • Reliance on the sole principal (the agent did not act for any other principals) – 50% discount
  • Developments in the market (regulatory pressures) – 20% discount

The extent of such discounts is subjective and discounts are ultimately reliant on the experience of the expert. In reaching a conclusion, we would usually (and did in this case) research discounts, taking into consideration, amongst other sources, recent judgments such as this one!

For those of you more familiar with the Commercial Agents (Council Directive) Regulations 1993, there may not be any surprises in the judgment. However, it is helpful to see the Courts applying a consistent approach and going into some detail in relation to quantum.

All references to the facts of the case are taken from the published judgment.

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