Compensation under the Commercial Agents Regulations considered

In the recent case of Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd & Ors, 2019 the High Court provided useful guidance on the approach to take when assessing compensation under the Commercial Agent's Regulations 1993 (the Regulations). The ruling is also of interest in holding that electricity constitutes "goods" for the purpose of the Regulations and in considering the relationship between compensation under the Regulations and damages for breach of contract.

The facts

Economy Energy (EE) was an energy supplier selling electricity and gas to domestic customers. EE engaged Green Deal Marketing Southern Ltd ("GDM") to dispatch its door to door sales team to persuade customers to switch energy supply to EE.  From May 2015 to January 2017 GDM provided this service exclusively to EE. For the first year or so this was under a written Partnership Agreement. GDM contended that the relationship was then governed by a new written contract, the Heads of Terms, but EE disputed this.

The relationship was terminated in January 2017 by EE for breach of contract on the grounds of mis-selling by GDM's sales team. GDM treated EE's termination as repudiatory breach and brought a claim in damages for breach of contract and for compensation under the Regulations.

The High Court held that the breaches by GDM were not repudiatory, EE had wrongfully terminated its contract with GDM and in doing so had committed a repudiatory breach. The High Court went on to consider (amongst other issues): whether the Regulations applied; the value of any compensation due under the Regulations; and the claim for breach of contract damages

The applicability of the Regulations

The Regulations govern relations between commercial agents and their principals in relation to their activities. Under Regulation 17 an agent is "entitled to be compensated for the damage he suffers as a result of the termination of his relations with his principal".  An agent whose activities are "secondary" under the Regulations will not benefit from their terms. The High Court rejected EE's arguments that the Regulations did not apply. Part of this hinged on the assessment of whether electricity constitutes 'goods'.

GDM had been involved in sales of the supply of both gas and electricity, in the ratio of around 2:3. EE conceded that gas constituted goods but argued that: electricity was not "goods"; electricity made up a greater part of the arrangements; and therefore the agency activities were secondary. The High Court followed previous caselaw in stating that electricity is to be regarded as goods within the meaning of the Regulations. "There could be no purposive argument for distinguishing between agents who procure switches of gas supplier and agents who procure switches of electricity supplier."  It further indicated obiter that even if electricity was not held to be goods, GDM's activities wouldn't be considered "secondary" merely because EE sold more electricity than gas.

Assessment of compensation

The High Court determined the amount compensation payable by applying the principles established by the House of Lords in Lonsdale v Howard & Hallam Ltd. Of note two particular points:

• Goodwill: the underlying theory under the Regulations is that the agent is regarded as having a share in the goodwill in the principal's business which he helped to create. The agent is therefore entitled to compensation for the loss of his interest in the goodwill, retained by the principal after termination. The High Court rejected EE's argument that GDM had received all the commission to which it was entitled when it received commission for each customer that switched to EE. It instead stated that the agent should be "compensated for the loss of the income stream it would have received by way of commission if the agency had continued."
• Limited term/termination rights: the High Court reviewed various authorities to conclude that "a factor of obvious relevance to the valuations of business is the uncertainty concerning future performance" but that while the relevance of termination rights was real, it was limited.

The judgment includes a very thorough analysis of the conflicting expert valuation evidence adduced by each party, the detail of which is beyond the scope of this update, but includes a useful review of the case law in this area of the law.

Damages for breach of contract

The High Court agreed with GDM's submissions that compensation under the Regulations can be awarded in the absence of a breach of contract and that the Regulations do not exclude the right to breach of contract damages. However, the High Court was clear that this does not mean that "the victim of a breach ought to receive, in addition to compensation, damages for that breach". Instead the award depends on whether the loss has already been compensated by the award under the Regulations - if so double recovery will not be permitted.

GDM's contractual damages claim for loss of profits was held, on the facts, to have been recovered in the award for compensation and the claim for damages for loss of profits was refused on the grounds that it would result in two awards for the same loss.

Comment

It has been reported that this is the highest award ever made by a Court under the Regulations. Whether the Regulations apply and the quantum of compensation will depend upon the facts in each case.  This case is of particular interest, not as new law, but in providing an extensive review of the application of precedents when assessing the award of compensation under the Regulations. It is also of interest that electricity was, once again, deemed to be "goods" and that the relationship between compensation under the Regulations and damages for breach of contract was clarified.

The judgment will also stand as a useful tool for practitioners seeking to apply the practical points around assessing expert evidence for valuation of compensation.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions