Rules for agents

Many industries rely on self-employed sales agents. The arrangement often suits both parties; companies will not have the same responsibilities and overheads as they would if their salespeople were employees, and sales agents can often earn high levels of commission.

The case of Lonsdale v Howard & Hallam has major repercussions for all self-employed sales agents in the UK - of which there are estimated to be around 16,000 - and any company which employs them.

The case revolves around the financial awards that are, or should be, involved when a contract is terminated between a self-employed sales agent and the company using its services.

The claimant, Graham Lonsdale, was seeking to overturn a Court of Appeal judgement which said compensation should be assessed by doing a valuation, usually by a professional valuer, of the open market value of the agency.

The Court of Appeal judgement in February 2006 was itself a surprise, as previously compensation had been assessed by taking into account the French practice of awarding two years' average earnings.

The House of Lords dismissed the appeal, upholding the Court of Appeal judgement and Lord Hoffman also refused to refer the case to Europe, ruling compensation was a matter for the UK alone, and the French two-year rule' had no relevance in this country's law.

The case means that in future compensation cases it is likely to become the norm for those claiming compensation to have to seek a professional valuation of the open market value of the goodwill of the agency they have lost.

What does this mean for companies and agents?

The case brings clarity to what was a very uncertain area of law. But there are few companies, or agents, who are aware of this change and the risks attached to current contracts.

Both agents, and firms which employ them, should reconsider whether contracts need looking at again in the light of this judgement.

The judgement means there will be winners and losers on both sides of the fence.

Very successful agents who find their contracts terminated could be in for a substantial windfall, because the open market value of their agencies may be considerable.

That is why representatives of the wine industry in Australia intervened in the appeal, because there are a lot of wine agents selling New World wines to UK supermarkets who would make very substantial money if their contracts are terminated early.

But smaller agents, or those like Mr Lonsdale, who work for companies which decide to restructure, or sell their business, will find themselves worse off.

It may well be more onerous for less well-paid agents, who perhaps are not members of a union, or do not have insurance funding, to fund the costs of expensive litigation.

So there is a danger that existing agency contracts may be out-of-date and could expose either side to risks.

Companies using self-employed sales agents should now: l Review all contracts drafted before 2006, as they may no longer be appropriate.

l Think about what will happen if there is a need to terminate the agency contract, looking at the profile of the business, and its future prospects.

l Obtain early legal advice if it becomes necessary to terminate an agent's contract, or a dispute concerning termination rights seems likely. You may need to instruct an expert valuer, and substantial sums are likely to be at stake.

Agents should: l Review their contract as soon as possible, seeking legal advice.

l Consider whether they are likely to be better protected with compensation, or with an indemnity provision.

l Be aware there is a one-year time limit to notify a company that you are making a claim under the regulations.

l If a member of a union, or industry association, contact them to see if there is support or advice they can offer.

n Contact: 0870 366 4644 www.morgan-cole.com