Valuing agency

Like any relationship, that between a principal and an agent will experience tensions from time to time. The High Court explored these tensions in its decision in Nigel Fryer v Ian Firth Hardware Limited [2008] EWHC 767, a case involving an agency agreement for the sale of patio and garage doors to the UK building industry.

Patten J found that the agent's continued failure to provide reports to the principal '“ even after a meeting in which the agent disclosed he acted for a competitor and was subsequently asked to make full disclosure of all personal and third party business activities '“ was 'the last straw'. Accordingly it was open to the defendant company to treat the agent's actions as a repudiation.

However, Patten J failed to consider either the agent's common law fiduciary duty not to allow his interests to conflict with those of his principal, or the agent's statutory obligation to act dutifully and in good faith under the Commercial Agents Regulations 1993. Instead, he focused on the defendant's reliance on the loosely drafted obligations contained in the agreement. These required the agent to work exclusively for the defendant and provided that if the agent commenced work with any other company, the defendant was to be given details to ensure 'these do not clash with this arrangement'.

Patten J's interpreted this provision unequivocally: 'Sensibly construed, this must mean that [the agent] had to notify [the defendant] of any contracts entered into with any other company regardless of whether they were competitors and by necessary implication for [the defendant's] consent to be given.'

However, the agent's other interests were not notified by him. Nor did he obtain the defendant's consent. However, more important was the fact that one of the agent's other activities was admitted by him to take up 30 per cent of his time.

Curiously, the issue of whether a failure to notify and obtain consent amounteds to a repudiatory breach was not addressed by Patten J. Indeed, his judgment suggests that it may not, insofar as were this the only complaint against the agent, 'the proper course would be for [the defendant] to request [the agent] to reduce his other activities rather than terminate the agreement.' Nevertheless, it was clear to Patten J that the disclosure of the scale of the agent's other interests had to be considered in the context of his refusal to submit reports, and in this respect amounted to repudiatory conduct by him.

For Patten J to suggest that the involvement of the agent in unauthorised and time-consuming activities has to be considered together with the refusal to submit reports is unhelpful in the extreme. In this respect, the only redeeming feature helpful guidance which emerges from his judgment is that for the purposes of relying on Reg.18 (and so avoiding the payment of compensation to the terminated agent), the principal must rely upon the repudiatory acts as the basis for terminating the agency agreement. With reference to this, Patten J was prepared to construe the contents of the letter of termination as being sufficient to make clear the basis upon which repudiation by the agent was being claimed by the principal.

Although it was unnecessary to do so, Patten J went on to consider the valuation of compensation as prescribed by Lord Hoffman in Lonsdale [2007] 1WLR 2055. He pointed out that the Lords had confirmed that compensation for the loss of a commercial agency is to be calculated by reference to the market value of the agency on the assumption that it had continued and was assignable.

One of the criticisms of the Lords' decision in Lonsdale was the lack of clear guidance as to how an agency is to be valued. In particular, since Lonsdale there has been discussion as to whether or not account should be taken of a salary for the notional purchaser in operating the 'purchased' agency. In this respect, Patten J showed no hesitation. He identified a net income (after expenses) of Mr Fryer's agency and stated that it took 'no account of the time worked in order to earn the commission and if sold to a company rather than an individual, the income figure would have to be reduced to take account of salary'.

Patten J pointed out that the net income figure that had been arrived at before such a salary was considered was much less than the 2005 New Earnings Survey figures for sales representatives. In his opinion, such an amount of income could be obtained by 'almost anyone.. . in an unskilled job without paying a premium for it'.

As a hypothetical purchaser would not be willing to pay a substantial sum for the opportunity of earning that amount through his own labour 'unless the prospects of increasing the return for approximately the same amount of effort were considerable', Patten J would have rejected the claim for compensation.

In making these obiter remarks, it is regrettable that Patten J failed to go further in explaining his comments. It seems clear that a notional salary should be taken into account in determining the amount that a hypothetical purchaser would pay for the agency and, therefore, its value. However, it may be that Patten J is suggesting that where a hypothetical purchaser would not pay 'a substantial sum' for the agency, it should be treated as having only a nominal value.

It is likely that this issue will be explored in future judgments and, so far as clients are concerned, the sooner the better.