Judgments - Lonsdale (t/a Lonsdale Agencies) (Appellant) v. Howard & Hallam Limited (Respondents)

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    28.  I agree that this is what compensation in article 17(3) means. My only caution is that one must be careful about the word "notional". All that is notional is the assumption that the agency was available to be bought and sold at the relevant date. What it would fetch depends upon circumstances as they existed in the real world at the time: what the earnings prospects of the agency were and what people would have been willing to pay for similar businesses at the time.

    29.  In Tigana Ltd v Decoro [2003] EuLR 189 the judge awarded the agent a sum equal to his commission less expenses over the 14 to 15 months during which the agency had subsisted. I would agree that prima facie the value of the agency should be fixed by reference to its net earnings because, as a matter of common sense, that is what will matter to the hypothetical purchaser. Furthermore, in the case of an agent who has more than one agency, the costs must be fairly attributed to each. He cannot simply say, as Mr Lonsdale did in this case, that the marginal cost of the Elmdale agency was little or nothing because he had to see the same customers and go to the same exhibitions for Wendel.

    30.  It may well be that 14 months commission adopted by the judge was a fair valuation. But he seems to have had no evidence that anyone would have paid this figure for a comparable business. Instead, he gave (at p. 221) a non-exhaustive list of 14 factors ((a) to (n)), some of them very wide ranging indeed, which he said would require consideration. The list gives no indication of the weight to be attributed to each factor.

    31.  More recently, in Smith, Bailey Palmer v Howard & Hallam Ltd [2006] EuLR 578 Judge Overend (sitting as a High Court judge) dealt with claims by other agents who had worked for the respondent in this case. He noted that the Elmdale brand had been sold to a competitor for £550,000 and that, over the three years before the sale, 42% of the sales and distribution expenses had consisted of agent's commission. On these figures, he considered that it would be right to attribute 42% of the value of the brand to the agents. This seems to me a flawed method of calculation. First, it treats the entire value of the brand, i.e. the goodwill of the Elmdale name, as attributable to sales and marketing. No allowance is made for the possibility that some of the goodwill may have been attributable to the fact that the company made good shoes. Secondly, no allowance is made for the fact that the commission, which is treated as the measure of the proprietary interest of the agents in the assets of the company, is what the agents were actually paid for their services. On this theory, the advertising agents should have acquired an interest proportionate to what they were paid. Thirdly, the valuation is based entirely on cost rather than what anyone would actually have paid for the agency.

    32.  That brings me to the judgments in the present case. The claim was heard by Judge Harris QC in the Oxford County Court and his judgment was, if I may respectfully say so, a model of clarity and common sense. I shall extract one or two of the most important passages:

    "18.  If it is kept in mind that the damage for which the agent is to be compensated consists in the loss of the value or goodwill he can be said to have possessed in the agency, then it can be seen that valuation ought to be reasonably straightforward. Small businesses of all kinds are daily being bought and sold, and a major element in the composition of their price will be a valuation of goodwill.

    19.  But neither side put evidence before the court about how commercial goodwill is conventionally valued. Nor was I told upon what basis claims of this type are conventionally settled. There was no evidence at all about how commercially to value such assets. It is of course for the claimant, as a seeker of compensation, to prove the value of what he has lost."

    33.  The judge then found that net commission was running at about £8,000 a year and said:

    "20.  …The value of that agency, the commercial value is what someone would pay for it; to acquire by assignment a business vehicle with a likely net annual income of £8,000…

    22.  Commonsense would indicate that few people wanting the opportunity to earn what the claimant was earning would be prepared to pay well over £20,000 for the privilege of doing so, still less would they do so in an industry in remorseless decline, and in which the likely buyers would be men of modest means…

    23.  Given the absence of evidence about how commercially to value goodwill, or evidence about what price in practice might have been available, the court might be thought to be justified in simply finding that the claimant has failed to prove his case…

    30.  This was an agency producing a modest and falling income in a steadily deteriorating environment. There is no evidence that anyone would have paid anything to buy it…I am strongly tempted to find that no damage has been established…But perhaps that conclusion, though I regard it as logical, is a little over rigorous given that the defendant has already made a payment. Doing the best I can, I find that the appropriate figure for compensation is one of £5,000."

    34.  The Court of Appeal approved of this approach. After a thorough review of the authorities, Moore-Bick LJ quoted paragraph 18 of the judgment (see above) and said that the judge was right in his approach. I agree. Furthermore, I do not think that the judge could have been faulted if he had simply dismissed the claim.

    35.  That is sufficient to dispose of the appeal, but there are three additional comments to be made. First, Mr Moser urged your Lordships not to adopt a principle which required valuation evidence. Valuations, he said, were expensive and most claims were too small to justify the cost. Moore-Bick LJ said (at paragraph 57) that "in most cases" the court would be likely to benefit from the assistance of an expert witness but that in some cases it might be sufficient to place all the material before the court and invite the judge to act as valuer. It seems to me that once it is firmly understood that the compensation is for the loss of the value of the agency, relatively few cases will go to court. As Judge Harris said, small comparable businesses are bought and sold every day and it should not be difficult for the parties, with the benefit of advice about the going rate for such businesses, to agree on an appropriate valuation. It should not always be necessary for them to obtain a full scale valuation, involving the checking of income and expenditure figures and the application of the going rate to those figures. But I do not see how, if the matter does go to court, the judge can decide the case without some information about the standard methodology for the valuation of such businesses. In this case, the judge was simply invited to pluck a figure out of the air from across the Channel and rightly refused to do so. Nothing is more likely to cause uncertainty and promote litigation than a lottery system under which judges are invited to choose figures at random.

    36.  It may also be possible, after a period of experience in such valuations, for the court to take judicial notice of what would be the going rate in what I might call the standard case, namely an agency which has continued for some time and in which the net commission figures are fairly stable. It should not be necessary to repeat boilerplate evidence in every case. But the judge must be reasonably confident that he is dealing with the standard case. Adjustments would be needed if, as in this case, the market was in decline or had disappeared altogether.

    37.  Secondly, there is the question raised by the Winemakers' Federation of Australia Inc, who were given leave to intervene and made submissions. They are concerned about the case in which the agent is able to transfer the goodwill he has created with customers to another principal: for example, to persuade the supermarkets to whom he has been selling the produce of one winery to transfer to another. In such a case the former principal would not retain the goodwill which the agent had created and it would be unfair to have to pay compensation on the basis that the agent had gone out of business.

    38.  In my opinion circumstances such as these will be reflected in the process of valuation. The hypothetical purchase of the agency does not involve an assumption that the agent gives a covenant against competition. If the situation in real life is that the hypothetical purchaser would be in competition with the former agent and could not have any assurance that the customers would continue to trade with him, that would affect the amount he was prepared to pay. If it appeared that all the customers were likely to defect to the former agent (or, for that matter, to someone else), he would be unlikely to be prepared to pay much for the agency.

    39.  What matters, of course, is what would have appeared likely at the date of termination and not what actually happened afterwards. But I do not see think that the court is required to shut its eyes to what actually happened. It may provide evidence of what the parties were likely to have expected to happen.

    40.  Thirdly and finally, there is the question of whether a reference should be made to the European Court of Justice. Mr Moser says that the differences in opinion between the Scottish and the English courts and between various English judges show that the law is uncertain. That is true, but what is uncertain is not the meaning of the directive. It is clear that the agent is entitled to compensation for "the damage he suffers as a result of the termination of his relations with the principal" and that the method by which that damage should be calculated is a discretionary matter for the domestic laws of the Member States. It is the way in which our domestic law should implement that discretion which has been uncertain and the resolution of that uncertainty is the task of this House and not the European Court of Justice.

    41.  I would therefore dismiss the appeal.

    LORD RODGER OF EARLSFERRY

My Lords,

    42.  I have had the privilege of considering the speech of my noble and learned friend, Lord Hoffmann, in draft. I agree with it and, for the reasons he gives, I too would dismiss the appeal.

LORD CARSWELL

My Lords,

    43.  I have had the advantage of reading in draft the opinion prepared by my noble and learned friend Lord Hoffmann. For the reasons which he has given, and with which I fully agree, I too would dismiss the appeal and decline to make a reference.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

    44.  I have had the privilege of reading in draft my noble and learned friend Lord Hoffmann's speech, with which I fully agree, and to which there is nothing I can usefully add. Accordingly, I too would dismiss this appeal.

 
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