Berry v Laytons & Anor

The Claimant, Mr Alec Berry claims damages against the First Defendant, Laytons, a firm of solicitors, for breach of contract and professional negligence. Mr Berry was at all material times the main partner in a firm called Electronic Interconnection Services Associates (EIS). EIS acted as agents for a number of principals, one of which was Polamco Limited (Polamco). Polamco’s main business is the sale of “connector backshells” which are engine parts, to aircraft and engine manufacturers.

Laytons is a firm of solicitors, specialising in the provision of information and advice on the Commercial Agents (Council Directive) Regulations 1993 (the Agency Regulations).

It is alleged in this action that in May 2000, in breach of contract, and negligently, Laytons gave confused and inadequate advice to EIS on its rights under Regulations 8 and 17 of the Agency Regulations in relation to the termination by Polamco of its agency. It is alleged that had different advice been given, EIS would have pursued Polamco for very substantial sums resulting from the termination. Instead, it is said, as a result of the advice it was given, EIS accepted termination sums fixed by its agency contract which were far lower than its statutory entitlement under the Agency Regulations. It is alleged that the shortfall, in the case of regulation 8, was about £100,000, and in the case of regulation 17, about £350,000 if not more, whether one assesses the amount by reference to the understanding of the law back in 2000, or by reference to the law as clarified by the House of Lords in 2007 in Lonsdale v. Howard & Hallam Ltd [2007] 1 WLR 2055.

The Second Defendant, Mr Jones, was at one time a partner in EIS. The EIS partnership was dissolved in December 2000, and Mr Jones is joined as a formality so that he is bound by any judgment in this matter. He assigned his rights against Laytons to Mr Berry by an assignment made on 27 July 2006, shortly after the issue of the claim form, and he has not taken part in these proceedings.

I have heard oral evidence from Mr Berry on matters relating to liability and quantum, and from the experts instructed by each side on quantum.

The issues broadly are these.

I shall begin by giving an outline of the facts, indicating where relevant, any areas of controversy. I have been assisted in doing so by the written submissions provided by Mr Peter Knox QC appearing for Mr Berry and Mr Neil Hext appearing for Laytons.

Mr Berry is a very experienced businessman, now aged 65 with extensive experience in the sale of electronic interconnection equipment. From 1965 to 1988, he worked for an EMI subsidiary. He then worked for the Plessey Group. Finally he worked for Raychem Limited, which is part of Raychem Corporation, the world leader in electronic interconnection systems for aerospace and defence markets. In 1988, at the age of 44, he decided to set up on his own, and traded as EIS. After about six months, he was joined by Graham Swift from Raychem, and formed a partnership in which he held a two-thirds stake.

EIS assisted principals to sell connector backshells for aircraft engines to aircraft manufacturers and engine manufacturers, both civil and military. These are bolt like devices at the point where the cable joins the connector. Any one engine might have up to 50 such devices, and they would sell for between £10 and £50 each. Mr Berry produced one during the course of giving his evidence and explained the various component parts. EIS had considerable expertise in this area, and Mr Berry’s evidence was that it would help “design in” the backshells with the customer to suit the requirements of the customer’s engine. This would take a considerable time, because of all the testing that has to be done in order to obtain the necessary approvals. Once the product was finally tested and approved, the principal was in an advantageous position, because the product had been “designed in”. And as long as the engine design remained in use. The principal could rely upon a steady stream of repeat orders without much competition.

In 1990, EIS obtained an agency from Polamco, which at the time was a sub-contract engineering company machining gearboxes for cars. It also manufactured connector backshells as a sub-contractor for Raychem. At that point however, its backshell turnover was very small (in the order of just £18,000 a year). EIS was appointed as its agent to promote the sale of these products.

Initially, there was no written agreement. One was eventually entered into on 22 January 1993, for an exclusive agency for a rolling twelve-month period, terminable on six months’ notice, with detailed terms as to the commission payable. By now, EIS had taken on a third partner, Mr Bryn Jones. Mr Berry had a 50 per cent share of the firm, Mr Swift 40 per cent, and Mr Jones 10 per cent. It appears that EIS did extremely well for Polamco. In the course of the 1990’s Polamco became established in the United Kingdom as the market leader in connector backshells, with long-term contracts with Rolls Royce, British Aerospace and Thales (previously Racal).

The Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”) came into force, on 1 January 1994, pursuant to the Council Directive on the Co-ordination of the Laws of the Members States Relating to Self-Employed Commercial Agents, Dir 86/653, adopted in 1986 (“the Directive”). The Regulations apply to a class of agent defined as a “commercial agent”, the definition of which is in Regulation 2(1).

The purpose of the Directive (and therefore of the Regulations) was to harmonise the law relating to commercial agents across the European Community: see the preamble. Their principal feature was to introduce a series of protections for commercial agents, in particular in relation to the termination of an agency.

Commercial agents were not a class of agent that had hitherto enjoyed any special protection under English common law. The protection that the Regulations seek to provide originated in the civil law systems of France and Germany where there existed two distinct legal regimes. In Germany, upon termination of a commercial agency, the agent became entitled to an equitable payment, known as an “indemnity”. In France, the system involved the award of “compensation.” The two regimes operated differently, and could lead in any particular case to different results.

The differences between an indemnity and compensation seem to have been impossible to reconcile, and in the event the Directive simply permitted individual Members States to choose one or the other: see Article 17(1) of the Directive. The United Kingdom, in its implementation of the Directive, passed that choice on to the parties to the agency contract, save that Regulation 17(2) provided that, in the absence of any express stipulation, compensation was the default remedy.

The three important regulations for the purposes of this action are Regulations 8, 17 and 19.

Regulation 8 provides so far as is relevant:

“Subject to regulation 9 below, a commercial agent shall be entitled to commission on commercial transactions concluded after the agency contract has terminated if-

a transaction is mainly attributable to his efforts during the period covered by the agency contract and if the transaction was entered into within a reasonable period after that contract terminated;...”

Regulation 17 provides so far as is relevant:

“(1)

This regulation has effect for the purpose of ensuring that the commercial agent is, after termination of the agency contract, indemnified in accordance with paragraphs (3) to (5) below or compensated for damage in accordance with paragraphs (6) and (7) below.

(2)

Except where the agency contract otherwise provides, the commercial agent shall be entitled to be compensated rather than indemnified…

(6)

Subject to paragraph (9) and to regulation 18 below, the commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with his principal.

(7)

For the purpose of these Regulations such damage shall be deemed to occur particularly when the termination takes place in either or both of the following circumstances, namely circumstances which -

(a)

deprive the commercial agent of the commission which proper performance of the agency contract would have procured for him whilst providing his principal with substantial benefits linked to the activities of the commercial agent; or

(b)

have not enabled the commercial agent to amortize the costs and expenses that he had incurred in the performance of the agency contract on the advice of his principal.”

By Regulation 17(9), the agent loses his right to compensation if he does not give notice to his principal of his intention to pursue his entitlement before the expiry of one year following termination.

The Regulations limit the parties’ right to contract out of Regulation 17. Regulation 19 provides:

“The Parties may not derogate from regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires.”

One of the central issues in this action concerns the advice given by Laytons to Mr Berry about the effect of Regulation 19 on Mr Berry’s rights against Polamco.

In 1995, EIS and Polamco entered into negotiations for a new agency agreement. Laytons specialised in advising on the Regulations. It was one of four firms of solicitors who participated in a legal advice scheme for the British Agents Register. Mr Berry, acting for EIS, therefore instructed Laytons in about May 1995 in relation to the negotiations with Polamco. He dealt with a partner, Mr Richard Brown. On 4 November 1996 a new five year agreement was concluded (“the 1995 Agreement”) which ran from 1 July 1995 to 30 June 2000. It provided for an exclusive UK agency. On Mr Richard Brown’s advice, the partners in EIS set up a new company (EIS Ltd) to limit their risk. The 1995 Agreement was entered into in EIS Ltd’s name.

However EIS in fact continued to act as Polamco’s agent under the terms of the 1995 Agreement. It continued to negotiate and conclude the sale of all goods for Polamco, EIS invoiced Polamco for its commission, Polamco paid EIS and EIS’s accounts were prepared on this basis. EIS Ltd did nothing and prepared no accounts. Nothing in this action turns on the fact that the 1995 Agreement was in its name.

Clauses 7.1 and 12.1-2 and 13.6 of the 1995 Agreement provided as follows.

“7.

Financial provisions

7.1

In consideration of the obligations undertaken by the Agent hereunder the Principal shall pay the Agent commission detailed below and limited as detailed in Schedule Two being a percentage of the net Invoice Price of all Products which at any time during the continuance and within six months after the termination of this Agreement are sold by the Principal in the Territory to customers introduced by the Agent…

1^st July 1999 to 30^th June 2000

12.1

The Agent shall be entitled to compensation pursuant to the terms and conditions of this Agreement in the event of termination of the Agreement arising as a result of:

(a)

A breach of this Agreement by the Principal;

(b)

The Principal giving notice to terminate pursuant to clause 10.1

(c)

Force majeure.

12.2

The amount of the compensation payable to the Agent pursuant to this clause has been agreed between the parties bearing in mind the matters set out in Regulation 17(1) of The Commercial Agents (Council Directive) Regulations 1993 and shall represent the value of three times the average monthly commission earned by the Agent over the life of this Agreement…

13.6

Each party acknowledges that in entering into this Agreement it does not do so on the basis of and does not rely on any representation warranty or other provision except as expressly provided herein and all conditions warranties or other terms implied by statute or common law are hereby excluded to the fullest extent permitted by law.”

In about mid 1999, discussions began between EIS and Polamco for a renewed agency agreement. Mr Swift had retired from EIS at the end of 1998, leaving only Mr Berry (with 78 per cent) and Mr Jones (with 22 per cent) as its partners. Polamco put forward a proposed draft for a three year agreement which would have had the effect of reducing EIS’s annual commission by about 55 per cent. Further, on 29 June 1999, it gave the one year’s notice required to terminate the 1995 Agreement as at 30 June 2000. It still continued to negotiate for the new agreement however. In July 1999 Mr Berry instructed Laytons again to help on the negotiations. A different partner, Jeremy Brown, gave certain advice on the proposed draft. He then passed the matter over first to a Mr Scroggs, and then, on 30 September 1999, to Ms Nita King, an assistant solicitor then seven years post qualification. It is Ms King who wrote the letter of 25 May 2000 which contained the allegedly negligent advice.

Before Ms King gave any advice on the negotiations, by letter dated 22 October 1999, Polamco told EIS that it did not intend to enter into a new agency agreement. It said:

“We have given a lot of careful consideration to this matter and we believe that the time is now right to have our own dedicated sales force who can concentrate 100% on selling Polamco products. This is not a reflection on the work that EIS have done for Polamco over the last ten years, but we feel that we have reached the stage of development where we should employ our own people. David and Andrew have asked me to express their appreciation for all the business that you and your colleagues have helped to generate over the last decade and we believe that the association has been beneficial to both parties.”

It is said by Mr Knox that Polamco had a lot to be grateful to EIS for, and in my view on the evidence of the figures, he is right. By this stage, Polamco’s connector backshell business had increased from £18,000 back in 1990 when Mr Berry had first come on to the scene, to £3 million in 1999; and it was now the market leader in the production and sale of connector backshells.

The withdrawal of its agency was a serious blow for EIS, because it had only two other agencies (with companies Hellerman Tyton and Habia), and its annual gross commissions from Polamco, as is common ground, were about £200,000 net of VAT, which accounted for about two thirds of its turnover.

In about mid 1999, Hellerman Tyton also indicated first, that it wanted to renegotiate EIS’s contract, and then that it wanted to terminate its agency. Mr Berry instructed Laytons. Ms King dealt with this matter as well.

One consequence of Polamco’s decision was that Laytons’ advice was no longer required on the terms of any new agreement, but on Mr Berry’s rights on termination of the agency.

On 18 November 1999, Mr Berry wrote to Ms King. He pointed out clauses 7.1 and 12.2 of the Agreement, and asked if EIS was entitled to potential commission under regulations 7 and 8 of the Regulations. He informed her that Polamco was EIS’s largest principal, providing an income of £240,000 a year (an average of about £20,000 a month). He sent on EIS’s termination correspondence to Ms King, together with a copy of the 1995 Agreement “so that you may advise me on these points”. It is suggested on behalf of Mr Berry, and not disputed by Laytons, that Mr Berry enclosed both Polamco’s letters of 29 June 1999 and 18 November 1999.Mr Berry did not ask for advice about regulation 17. His letter said in part:

“Under clause 7.1 of the Polamco Agreement, commission continues for a further six month period and compensation is limited to 3 months commission as provided in clause 12.2 of the agreement. However, are we entitled to potential commission pursuant to Regulations 7(1) (Footnote: ¹) and 8 of the Commercial Agents Regulations 1993 and, if so, from what date would this become effective?”

In response, Ms King provided advice on regulations 7 and 8 by letter dated 26 November 1999:

“1.

Clause 7.1: My understanding of clause 7.1 is that you are entitled to commission as detailed in clause 7.1 during the term and thereafter for a period of 6 months provided the products are sold in your territory to customers introduced by yourself. I believe this provision may have had Regulation 8 in mind. You will be aware that pursuant to Regulation 8 you are entitled to commission on transactions concluded after the agency contract has been terminated if a transaction is mainly attributable to your efforts during the period after the contract terminated. Therefore my reading of clause 7.1 is that you are entitled to commission for a further period of 6 months after 30^th June 2000 provided these customers have been introduced by you before termination and the product is sold by the principal after termination. The agreement does not specify the rate of commission and I would argue that the applicable percentage must be 7.5%.

2.

Regulations 7 and 8: The Regulations do not specify whether or not a principal can derogate from both these Regulations. Both the Regulations use the word ‘shall be entitled’ which would suggest that the Regulations will apply to all agreements. This point has not been tested in Court as yet and obviously it will be raised by the principal in view of clause 13.6, which excludes terms implied by statute.

3.

With regard to Regulation 8 you may refer your principal to clause 7.1 of the agreement which would, in my opinion, entitle you to 6 months commission after termination.”

On 30 November or 1 December 1999, after receiving that advice, Mr Berry rang Ms King he says, for clarification, because EIS was obviously entitled to the 6 month run on commission in clause 7.1. The question was whether he could get more under regulation 8.

Ms King’s attendance note of their conversation says this in relation to clause 7.1 of the agreement and Regulation 8:

“With regard to commission after termination I told him that that appears to be dealt with by clause 7.1 of his present agreement.... I told him that he appears to have limited his entitlement to commission for a period of six months on orders which are received prior to his termination but processed thereafter. I told him that they may argue that he is not entitled to commission under Regulations 7 and 8 by virtue of clause 13.6 in his agreement. I told him that he must argue that he disagrees as that clause would be void due to the Regulations.”

In consequence it is said, Mr Berry was led to believe what appears in his letter of 12 January 2000 to Polamco in which he says that clause 7.1 of the 1995 Agreement entitled EIS to six months commission after the termination date “and is with regard to Regulation 8”. Laytons did not respond to or contradict this understanding.

In March 2000, the Court of Session in Scotland decided King v. Tunnock 2000 SC 424. This held, in summary, that in assessing compensation (as opposed to an indemnity) under regulation 17, the court should have regard to the approach adopted by the French courts on the equivalent French provisions. Therefore, on termination, the agent was entitled to compensation for the loss of the value of the agency, and this could properly be assessed in the normal case, as was standard in France, at two years’ average gross income, without regard to subsequent events such as (as in King v Tunnock itself) the fact that the principal was winding up his business.

In April 2000, discussions between Mr Berry and Polamco about termination continued. By letter dated 17 April 2000, Polamco set out its position on the commission/compensation payable to EIS in the remaining period of the contract and upon termination. That letter stated Polamco’s intention to pay EIS i) commission upon sales for the six months following termination (as per clause 7.1 of the Agreement); and ii) final compensation in April 2001 of three times the average monthly commission paid over the previous five years, which they put at £16,000 per month (as per clause 12.1 of the 1995 Agreement).

Mr Berry accordingly wrote to Ms King again on 5 May 2000, enclosing a copy of this letter and a draft response prepared by him. He asked in terms for her to examine the draft response and advise him of any amendments that should be made. He pointed out what he understood to be the difference between him and Polamco, namely, although EIS’s entitlement under Regulation 8 was “covered by clause 7.1”, it was also entitled under Regulation 7 to commission on the outstanding order book value at 30 June 2000. It is said by Laytons that Mr Berry did not ask for a comprehensive advice or for Ms King to express a view on prospects of success; he simply asked for advice on what he should be saying to the other side.

On 8 May 2000, Ms King gave Mr Berry certain advice over the telephone. She appears (so it is said by Mr Knox) for the first time to have turned her mind to the question of compensation under regulation 17, possibly in the light of the decision in Kingv Tunnock. Mr Berry’s note of her telephone advice says:

“Nita will advise on Compensation. May be able to claim extra.”

Ms King’s note of the same conversation does not mention the question of compensation at all, save to note that it was payable “on termination not 2001” (i.e. as was being claimed by Polamco).

On 25 May 2000, Ms King wrote the letter (“the 25 May letter”) which is central to this case. It said this:

“1.

Compensation: You are entitled to payment of three months commission based on the average commission earnings over the five year contract, pursuant to clause 12 of your Agreement....

2.

There is no case law at present challenging an agreement between parties to pay compensation on the grounds that it derogates from Regulation 17. That said, in King -v- T. Tunnock Ltd a Scottish case, the Court has endorsed that guidance must be sought of French law when deciding the level of compensation. Under French law compensation of two years’ commission is regarded as standard compensation for loss of an agency. This can be varied at the Judge’s discretion.

Therefore I am of the opinion that any pre-estimate clause for compensation agreed by parties must be reasonable otherwise it may be open to challenge on the ground that it derogates from Regulation 17.

Subject to the above it must be worth your while to negotiate a higher level of compensation bearing in mind the level of goodwill and turnover generated by you and the length of service. One month’s commission for each year’s service may be argued as the minimum amount reasonable. However without authority I cannot advise on your chances of success if you were to litigate this point. Yours would be a test case.”

In relation to regulation 8, the 25 May letter went on to say that Mr Berry’s draft was correct (i.e. it was “covered by Clause 7.1”). Ms King also confirmed that Mr Berry’s understanding of regulation 7 was correct, i.e. he was entitled to commission on the order book value as at 30 June 2000.

Mr Berry says he understood the reference to “each year’s service” to mean for each year of the 1995 Agreement, i.e. five years. He telephoned Ms King on 25 May 2000 to tell her that he had received the letter and that the advice was clear. On 31 May 2000 he wrote to Polamco asserting a claim for compensation in excess of that provided for under clause 12.2 of the contract, and along the lines of what he says was his understanding of the advice Ms King gave in the 25 May letter, to the effect that the regulation 8 claim was covered by clause 7. He added that compensation was covered by clause 12, but that he had been advised that:

Polamco strongly rejected the claim for more compensation than the Agreement provided for. By its reply of 6 June 2000, Polamco asserted that the pre-estimate in clause 12.2 was reasonable, having been agreed by negotiation; that compensation could be varied at the judge’s discretion; and that it would pay only the pre-fixed sum. It also agreed that Polamco would pay commission for a further six months (i.e. as it had contracted to do in clause 7.1). It accepted that EIS would no longer have to promote Polamco products after 30 June 2000, save Breyden products. (This arrangement had been proposed by Mr Berry and was to survive termination. EIS would become, in effect, the agent for an American company called Breyden for the sales of it products to Polamco).

In his reply dated 9 June 2000, Mr Berry accepted these terms without further recourse to Laytons. On 20 June 2000, he wrote to Ms King to inform her of this settlement. The reason he gave was as follows:

“Polamco’s stance during recent negotiations has been intimidating and verbal threats have been made with respect to the continuing association with Breyden Products, whereby EIS act as Breyden’s representatives and Polamco acts as the Distributor. It seems that litigation is my only alternative option; in view of the high risks involved, I have decided against this course of action.”

On 30 June 2000, the 1995 Agreement came to an end, and in December 2000, EIS was dissolved. Mr Berry carried on on his own thereafter. Nothing eventually came of a proposed deal for Breyden products. Mr Berry eventually had to resort to litigation against Polamco using other solicitors in order to get his commission under clause 7.1.

By 30 June 2001 EIS had intimated no claim against Polamco for compensation under regulation 17. It therefore lost its right to compensation by virtue of regulation 17(9). Pursuant to the settlement, EIS received £47,811 plus VAT under regulation 17.

In August 2004, Mr Berry read an article in the August 2004 edition of the British Agents Register by a solicitor, David Bentley of Bentley & Co, about a case involving a pre-estimate of compensation under regulation 17. By this time, Mr Berry had already instructed Mr Bentley to assist in his dispute with Hellermans, and so he discussed the article with him. In the result, on 26 October 2004, Mr Bentley wrote a letter of complaint to Laytons to the effect that clause 12.2 obviously amounted a derogation from EIS’s rights on the facts of the case, because, bearing in mind King v Tunnock, which represented the commonly understood approach at the time, EIS could have expected somewhere between 11 months to two years commissions. So it had nothing to lose and much to gain by challenging clause 12.2.

By reply dated 17 January 2005, Laytons disputed Mr Berry’s complaint, and said that Mr Berry had settled EIS’s claim without reference to it.

These proceedings were issued on 11 May 2006.The Particulars of Claim were served on 22 August 2006, the Defence was served on 18 October 2006, and the Reply on 1 July 2008.

On 4 July 2007, after service of the Defence but before the Reply, the House of Lords in Lonsdale affirmed that a commercial agent was entitled to be compensated for the value of his agency as at termination, on the assumption it was an assignable asset, but disapproved the approach in King v Tunnock to the effect that courts should approach this valuation exercise from a presumption that this value should be assessed at the total of two years’ average gross commission. Lord Hoffman said this at [29]:

“... 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.”

Mr Berry’s claim against Laytons in relation to its advice on regulation 17 in Ms King’s 25 May letter can be summarised as follows:

Mr Berry’s claim in relation to Laytons’ advice on regulation 8 can be summarised as follows:

Laytons’ case in relation to the claim under Regulation 17 in summary is this:

Laytons’ case in relation to the claim under Regulation 8 can be summarised as follows:

There is no dispute between the parties as to the requisite principles of law in the area of professional negligence, and in particular, solicitors’ negligence, which are well established. Laytons owed Mr Berry both a contractual duty and duty in tort to give advice with reasonable skill and care. Since they held themselves out as having a particular expertise in the area of the law concerning commercial agents, and they were consulted on that basis, they were required to meet the standard of skill and care reasonably to be expected of solicitors with such standing and expertise. See for a useful summary, the judgment of Henderson J. in Hicks v. Russell Jones & Walker 2007 EWHC 940 at para 138. Laytons were also obliged to convey their advice with proper clarity so that a reasonable recipient could understand the message that was being conveyed.

Laytons are not liable for any errors of judgment. They are only liable for errors that no reasonably well-informed and competent member of their profession with the requisite skill and care reasonably to be expected of them as specialists in their field could have made. Whether they failed to attain the proper standard of skill and care depends on how the relevant matters stood at the time they advised, and as they were known or ought to have been known to them. In every case it is important to avoid the benefit of hindsight.

When determining whether Laytons were negligent, Mr Hext invites me consider what Laytons were asked to advise on. It is relevant he submits when determining whether Laytons were negligent to consider the limited scope of the retainer. It is said that Mr Berry himself set out the “parameters” of what he required Laytons to do in his letter of 5 May 2000:

“I refer to my letter of 12^th January 2000 and have drafted a letter to Polamco concerning the termination clauses of our Marketing Agency Agreement.

I also enclose a recent letter dated 17^th April 2000, indicating Polamco’s interpretation of the financial settlement of this Agreement. Could you please examine my draft response and advise me of any amendments that should be made.”

In cross-examination, Mr Berry insisted that this letter was not restricted in what it was asking Laytons to do, but so Mr Hext says, there can be no doubt that at this stage all he was asking for, was advice on the points that he should be taking in his draft letter of response. Subsequently, Ms King appears to have agreed to provide some advice on whether Mr Berry could claim more under regulation 17 than was set out in clause 12.2 of the 1995 Agreement. However, Mr Hext submits she was not asked to provide a definitive advice on the merits or prospects of success of his claim against Polamco. Nor was she asked to advise on settlement.

I do not accept that Ms King’s retainer was as limited as Mr Hext suggests. In my view Ms King was being asked to advise as to what Mr Berry might legitimately claim from Polamco. This was plainly not limited to what he was entitled to under the 1995 Agreement since that was quite clear from the terms of the 1995 Agreement itself. What Mr Berry really wanted to know so it seems to me, was what he was or would be entitled to in addition under the Regulations; and with the benefit of that information, therefore what he could legitimately claim from Polamco. That after all was one of the reasons for consulting Laytons as specialists on the Regulations.

Nor do I accept that Mr Berry was asking for preliminary advice or that this is how Ms King understood what he was asking for (let alone that it was clear from her response that this is what she was providing). I accept that Mr Berry was not asking for very detailed advice. But I do think he would have expected to be told at this stage if there was a significant issue arising under the Regulations affecting his rights of which he ought to be aware when negotiating termination terms with Polamco.

Mr Hext submits Ms King might have expected someone in Mr Berry’s position to come back for further advice once Polamco had given their response. It is true a solicitor in Ms King’s position might not necessarily expect the client to treat the advice that was received as being the last word on the subject. But on the other hand, a solicitor could not be sure that the client would not do so. And Ms King would have known (or should have known) that it would be difficult for Mr Berry to subsequently claim more from Polamco, than he did in the letter on which she was advising, once he had ‘set out his stall’ in such a letter. Mr Berry was after all putting forward proposals for his financial compensation (using the term broadly) on termination of the 1995 Agreement, and there was always the possibility that Polamco would immediately accept whatever proposal Mr Berry put forward.

In any event I think it is clear from the terms of Mr Berry’s letter and indeed from Ms King’s response that he expected (and indeed she purported to give) advice on what his rights were and what he could legitimately ask for in the negotiation. It is of course the case that there is no evidence from Ms King as to what she actually expected Mr Berry to do, but the importance and significance of Mr Berry’s letter to Polamco and how he pitched his claim to Polamco was obvious in my view, and would have been obvious to Ms King.

Mr Hext suggests two other matters are relevant when considering the scope of Laytons’ duty to Mr Berry. First, Mr Berry he says clearly had some knowledge of the Regulations and indeed had received advice in relation to them from Laytons at an earlier stage. I agree that in some situations the knowledge of the client may be relevant. There may be a difference for example in certain situations between what is required when advising a professional client and lay client. But this is not a matter that can be addressed in the abstract. It all depends on the facts. And in my judgment, such considerations are not significant in this case. The area of law with which this case is concerned, and on which Mr Berry was asking advice was complex; he had no specialist knowledge himself. What is more, Mr Berry had not been given specific advice on the question of his entitlement to compensation under regulation 17 or on the implications of regulation 19 and derogation before. He was a layman, asking for advice from a specialist solicitor.

Second, a suggestion was also made (albeit somewhat faintly) that Mr Berry was “cost conscious’ and would not have been prepared to pay for the sort of in depth advice Ms King is now being criticised for not providing (Mr Hext pointed out the invoice for the advice provided was £270).

I do not accept that submission either. If the situation was that Ms King felt in depth advice was required, and that to provide it would cost significantly more than Mr Berry was expecting to pay, then her duty so it seems to me was to have alerted Mr Berry to the position so he could decide whether he wanted to pay for it. It cannot be right that a solicitor is entitled to give negligent advice because a client is on a limited budget, and/or because the client is not told that more detailed (and therefore costly) advice is required. Indeed it might be thought that a client who consults a specialist, can legitimately expect a shorter and more cost effective route to reasonably careful and skilful advice in that specialist field.

There are also real difficulties so it seems to me, in pursuing such an argument on the facts since there is no evidence from Ms King that cost considerations were in fact relevant to the scope of the advice she gave to Mr Berry; nor is there any evidence that Mr Berry himself set any such limit.

I turn now to the claim of negligence in relation to the claim under Regulation 17, reminding myself that Laytons are not liable for any errors of judgment: they are only liable for errors that no reasonably well-informed and competent member of their profession with their specialist knowledge and expertise could have made.

Both Mr Knox and Mr Hext have addressed me in detail on the meaning and effect of the letter of advice. Obviously, it has to be read carefully. On the other hand, it would be wrong to try and construe it as though it was a statute. What matters is the purport of the advice that was being given, and how it would reasonably have been understood by its recipient; I have already said that it is not controversial that advice has to be given with suitable or proper clarity. To that extent, it seems to me that what matters is the advice as it was actually given, and as it might reasonably be understood.

Parts of the 25 May letter, are in my view, confused and difficult to follow.

So far as the second paragraph is concerned (not using the numbers given to the paragraphs in the letter itself) it is correct that there was at that time, as Ms King said in the letter, no case which challenged an agreement between the parties to pay compensation on the ground that it derogated from Regulation 17. She goes on to say that King v Tunnock has endorsed the French law approach that two years commission is regarded as standard compensation. What I find difficult to interpret is how or why this links with the next sentence: “Therefore I am of the opinion that that any pre-estimate clause for compensation must be reasonable otherwise it may be open to challenge” and why the decision in King v Tunnock has, apparently led her to take that view. Moreover, if King v Tunnock on Ms King’s interpretation, could lead to compensation of two years commission, albeit with a discretion to the judge to vary it, why one might ask rhetorically, should a pre-estimate clause that provides for anything less than that not amount to a derogation? She does not explain. Nor is it clear to me why, if a pre-estimate clause “must” be reasonable (to avoid a challenge under Regulation 19) it only “may” be open to challenge if it is not.

Be that as it may, it is said by Mr Knox that the 25 May letter conveyed the following message which was confused and negligent: (i) Because there is no authority on the point I cannot advise you on your chances of success in defeating clause 12.2. (ii) Even if I could advise you, (a) you might lose even if the pre-estimate is unreasonable, and (b) even if you win, five months commission could be a reasonable figure.

Mr Hext on the other hand submits what Ms King was saying was, in essence, this. She thought that three months’ commission was on the low side. There was a prospect of being able to challenge clause 12.2, albeit that the view she expressed was that that prospect was highly uncertain. But that uncertainty is something that cut both ways, against both Polamco and EIS. When Ms King said that she could not advise on prospects, that meant that she could not say who would win. The upshot of her advice was that this was a case that could go either way. He says that on any reasonable construction of the letter, Ms King was not saying that the prospects of success were slim (the construction Mr Berry said in evidence he put on the letter) nor was there any basis for putting such a construction on the letter. Indeed, that does not form part of Mr Berry’s pleaded position. The letter was plainly saying that EIS might be entitled to more. Indeed, it is cautiously positive on the question - “it must be worth your while to negotiate”; Ms King thought that there was a case to be run.

I simply do not accept that the 25 May letter was cautiously positive. On the contrary, from a layman’s point of view, it was in my view pessimistic. Any ordinary person reading the letter would conclude it seems to me, that the essence of the message it was conveying was this: it must be worth your while to try and negotiate for more compensation than clause 12.2 provides for in the 1995 Agreement, but it is simply not worth taking the risk of litigation, in the event that this is refused, because, in the absence of authority on the validity of a pre-estimate of damage clause on compensation, no advice can be given on whether you would win or lose. In other words, I cannot give a view on your prospects of success. It would be a pure gamble. Ms King was not in my view, giving advice that this was a 50:50 decision or that the prospects were merely equivocal. For all Mr Berry knew on the basis of what she advised, the odds of him winning could have been very significantly less than that. Whilst one might be willing to “take a punt” on the Derby, at long odds, it seems to me as a matter of reality and common sense, that a solicitor advising a client in such terms (unless the client was so rich that the costs of fighting and losing would be insignificant to him or her) would appreciate that the door on litigation as an option was being closed.

That conclusion is reinforced by the message of the third paragraph: logically, it follows from what Ms King there says, that a pre-estimate which was unreasonable, might nonetheless be held to be valid by the courts.

There is a specific issue between the parties on the interpretation of the phrase “for each year’s service”. Mr Berry’s evidence is that he understood that to mean, for each year 1995 Agreement (i.e. five years). It is said however on behalf of Laytons that this was an unreasonable interpretation: what the phrase meant, and what Ms King plainly meant, was for each year that Mr Berry/EIS had acted as Polamco’s agent. In my view, the phrase was ambiguous, and it should not have been. The point was significant in terms of the amount being claimed. If Ms King had meant to say 10 months’ commission would be the minimum amount Mr Berry should press for, because Mr Berry’s rights fell to be determined by reference to the total period he had worked as Polamco’s agent, she should in my view have spelled it out: a reasonably careful solicitor would have done. Advice has to be given with proper clarity, and in my view this part of the advice was not. As it was, it was not unreasonable in my view for Mr Berry to interpret what was being said as “for each year of the 1995 Agreement” given the context of the advice that was being sought, namely, his rights on termination of it. In any event, this point has to be seen in the context of the fact that the overall message as I have already indicated was not that this was an amount to which Mr Berry was entitled, and which he could successfully litigate to obtain, but was an amount to be asked for in negotiation.

So far as Mr Berry’s reaction to what he was told is concerned, I am not surprised that that he concluded that his prospects of success were slim, as he said in his oral evidence. In my view that would be a reasonable laymen’s reaction to the message the letter conveyed. I am also inclined to think that to criticise him for this (as Mr Hext does, on the footing that this is not the pleaded case) is to adopt an unrealistic approach. The point that is made on behalf of Mr Berry and the essence of his case in this litigation, as he himself said in evidence, is that nobody would have considered litigation on the basis of the advice in the letter. He understood from it that it was ‘not worth litigating”. If however he had been given the more positive non negligent advice he should have been given, he would have then not have settled the matter with Polamco on disadvantageous terms, but would have pursued the matter.

It is also suggested that in this respect, and indeed in others, Mr Berry was inclined to reconstruct his evidence in order to suit his case. I do not however accept that suggestion. There are obvious difficulties for any witness giving evidence on matters which occurred nine years earlier. But I had the opportunity to observe Mr Berry during a lengthy and probing cross-examination. In my view, he was a palpably honest witness, giving honest and careful evidence about the matters in issue.

With those matters in mind, was the advice Ms King gave negligent? In determining that question it is necessary to have regard to the state of the law in relation to compensation under the Regulations as at May 2000, when the advice was given.

As at May 2000, the Regulations had been in force for just over six years. When the Regulations were introduced, perhaps inevitably having regard to their genesis, their interpretation was in some respects the subject of some discussion amongst various commentators. In particular, there was some debate with regard to the question of how compensation was to be calculated. The provisions in regulation 17 for an indemnity or compensation on termination of an agency even where there was no breach by the principal represented a new concept for common lawyers, and there was no reported English authority on how they were to be approached.

Guidance Notes on the Regulations published by the Department of Trade and Industry did not specify the manner of calculation. In the European Commission report of 23 July 1996, to which Mr Hext attaches particular significance (Report on the Application of Article 17 of Council Directive on the Co-Ordination of the laws of the Member States relating to Self-Employed Commercial Agents, COM (96) 364 Final in 1996) the Commission reported on the application of Article 17 of the Directive (from which Regulation 17 derived) and noted that the compensation system was based on French law dating from 1958 (page 5). Various judgments of the French courts had justified the payment of compensation on the ground that it represented the cost of purchasing the agency to the agent’s successor or on the ground that it represents the time it takes for the agent to re-constitute the client base which he has been forcefully deprived of. It noted a judicial custom to fix compensation as the global sum of two years’ (average) commission, with a “discretion” to award a different level of compensation where the principal was able to show that the agent’s loss was in fact less. But as appears from that report, this was a narrowly circumscribed discretion, which in circumstances such as those pertaining to this case, would not in my view have led to a lower award to EIS, having regard to the length of the agency concerned. The relevant paragraph of the report says as follows:

“By judicial custom the level of compensation is fixed as the global sum of the last two years commission or the sum of two years’ commission calculated over the average of the last three years of the agency contract which conforms with commercial practice. However, the courts retain a discretion to award a different level of compensation where the principal brings evidence that the agent’s loss was in fact less, for example, because of the short duration of the contract or where, for example, the agent’s loss is greater because of the agent’s age or his length of service.”

The Commission continued (at pages 8-9):

“Many commentators and lawyers have pointed to the imprecise and uncertain nature of Article 17, which causes difficulty in trying to advise clients on the extent of an agent’s rights on termination. This was reported in particular in Denmark, Ireland, Italy, Spain, Sweden and the UK…

At this stage, there is no UK case-law but the parties in practice are attempting to apply common law principles. These common law principles are directly opposed to the well-established method of calculation of compensation in France.... Under French Law, the standard award is two years commission which represents the value of the purchase of an agency or the period it will take the agent to re-establish his client base. It is difficult to see how the UK courts will reach this figure. This, no doubt, derives from the previous legal position in the UK, that agency contracts could be terminated on notice without any payment being due. This naturally has had consequences for business practices. There was no real concept of goodwill attaching to an agency to which the agent had a right to share in. It is not possible to predict how the UK courts will interpret the Directive, but it seems likely that they will have regard to existing common law principles…

The difficulties in interpretation have had an effect on the reactions of agents and principals to the Directive. For both it has entailed increased time being spent on negotiation since rights and levels of rights are not clearly established. This benefits neither party. It has also led to different amounts being awarded.”

On pages 20 and 21 of the report, the Commission dealt particularly with the position in the UK. It said that the law had caused “uncertainty” and “confusion,” and that typical compensation payments were “between 3-6 months with some payments of 15 months depending on the level of service.” Parties were “reluctant to litigate since lawyers [were] unconfident in advising what their clients’ rights [were] and consequently what the courts [would] award.”

It to be noted however, that the commentary on the regulations in Bowstead on Agency, 16^th edition, (1996) at 11-039 and following, was to the effect that regulation 17 was intended to compensate the agent for the value of the agency, and that reference was made (albeit in a footnote) to the French two-year rule of thumb.

In Page v. Combined Shipping and Trading Co 1997 3 All ER 656 the Court of Appeal reversed the first instance judge (Wright J) who had held that the compensation provisions in regulation 17 did not alter the common law; and who had accepted an argument by the principal that even if it had been in repudiatory breach of contract, the agent had suffered no loss, because it could have conducted the agency contract for the remainder of the term in such a way as to prevent the agent earning any commission. The Court of Appeal held that the agent had a good arguable case for saying that Regulation 17 not only provided for compensation for the lawful termination of the contract, but laid down its own measure of compensation; and that this could be the amount the agent would have earned if the contract had continued to be performed in the normal manner in which the parties intended it to be performed, rather than by reference to the lowest amount of commission if the principal had chosen so to arrange things. (See in particular, Millett LJ at page 661g.)

Lord Justice Staughton said at 660d: “It is of some significance to look at the …[the Council Directive 86/653] which gave rise to the regulations and in particular to its preamble, which tells us the purposes of the directive and regulations.” At 660f he then commented on that purpose as follows:

“Now, that indicates to my mind at least two purposes. The first is harmonisation of the law of member states of the Community so that people compete – in the popular cliché of today – on a level playing field. It should not make any significant difference whether one employs a commercial agent in country “A” or country “B”, they will compete on equal terms. The second objective is one which appears to be a motive of social policy, that commercial agents are a down-trodden race, and need and should be afforded protection against their principals.

Those reasons seem to me to point fairly strongly to an intention to depart from the domestic legal provisions of the various countries in the Community, or at any rate some of them, and achieve a regime which is new to some and will be the same for all. That is particularly emphasised by reg 19, which says: “The parties may not derogate from regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires”. These are regulations to protect and improve the position of commercial agents.”

This view of the purpose of the Directive was obviously important for the reason identified by John Mitting Q.C. (as he then was) sitting as a deputy judge of the High Court, in Moore v. Piretta PTA Ltd, decided in February 1998. First, he held, at 176c-e that:

“The duty of the English courts in construing the regulations was to give effect to the manifest purpose of the directive under which the regulations were made…”

He went on to say at 177d-g:

“It is apparent from the preamble that the primary purpose of the directive is the harmonisation of Community law by requiring all member states to introduce rights and duties similar to those already subsisting in at least two of the member states of the Community, the Federal Republic of German and France. .

Consistent with the purpose of achieving harmony between member states, it is in my judgment permissible to look into the law and practice of the country in which the relevant right, in this case the right to indemnity, originated, namely the Federal Republic of Germany; and to do so for the purpose of construing the English regulations and to use them as a guide to their application. …”

He also held (at 181a) that regulation 17 applied to all contracts in force as at 1 January 1994, not just those made afterwards; and that the purpose of the indemnity was to give to the agent on termination a share in the goodwill built up by his efforts in the course of the agency (page 182b-e). Although Moore was a case on the indemnity provisions in regulation 17 this reasoning was in my view plainly applicable to the regulations relating to compensation as well.

Just over a year later, Roy v. Pearlman SC 1999 459 was decided (in March 1999). In this case, the principal served six months’ notice to terminate the agency. The agent claimed, amongst other things, compensation under regulation 17. The principal contended that the national law of France was irrelevant to the interpretation and application of the Regulations. Lord Hamilton, sitting in the Outer House, disagreed, and at 469 agreed with the view expressed above in Moore to the effect that the courts should look to French and German approaches in order to construe Regulation 17.

The compensation provisions in Regulation 17 were considered by HHJ Hallgarten QC in October 1999, in Duffen v. Frabo 2000 1 Lloyds Rep. 180. He considered the approach of the cases cited above. He agreed up to a point with the notion that French law might enable a better understanding of the Regulations when considering the calculation of compensation under the Regulations, but was critical of the French approach of looking at gross rather than net earnings, which gave rise to a “windfall” to the claimant. He considered that Regulation 17(7)(a) was not determinative of compensation under Regulation 17(6).

In his view (at 198) where the agent established the necessary conditions viz that termination had deprived the agent of commission while giving to the principal substantial benefits linked to his former activities “this would result in a handsome payment to an agent”.

In March 2000, King v. Tunnock was handed down. In a detailed judgment the Court of Session noted the two distinct circumstances identified in the Regulations in which compensation would arise; but concluded that those circumstances were not exclusive: paragraphs 41-42. As a matter of French law, the Court found that compensation was “reparation for the loss of value of the terminated agency agreement. The agent gets a reward for the value of the agency he has built up and which he suddenly loses,” paragraph 44. At paragraph 48 it said:

“It is obvious, in our view, that on the basis of their own terms Regulation 17(6) and Regulation 17(7) provide for a different basis of making compensation that our traditional common law approach. However, as stated, the Regulation does fit in well with the French approach to such compensation. The legislation provides for valuation at the date of termination rather than requiring an explanation of the future prospects for the agency. During the currency of the agency the agent has owned a valuable asset and what he chooses or omits to do after he has lost that asset has no bearing on the value of what he has lost.... The Directive and Regulations, as presented seem to harmonise with the French approach and given their terms, and the general objective of achieving harmonisation, we see no justification for construing the Regulations as being radically different from the French approach.”

And at paragraph 49:

“The matter of fixing an appropriate level of compensation remains. It seems that even in France the two year rule is only a benchmark and can be varied at the discretion of the judge. However that does not mean we are precluded from considering what will happen in France, for the rulings of a judicial system applying the same legislation …must be entitled to some respect. There are also practical considerations. The French law obviously considers that there is some merit in finding a clear and practical basis for determining a fair level of loss. We equally consider that, given the particular type of loss we are dealing with a broad approach is both inevitable and a practical requirement of the law. This approach is emphasised when we consider that they are seeking an overview of the commercial situation where one of the dominant aims is to protect the agent.”

Given the history of the agency and the commissions earned, the agency must have been “very valuable for an agency of its type.... [W]e consider it likely that the pursuer would have expected and required a relatively high level of compensation to surrender his successful and long-established agency.” In the circumstances the court concluded that the agent would have expected to receive a capital sum representing at least the total for the last two years of his earnings to be paid before he would voluntarily have given up his agency. The court did not have before it any valuation evidence, but was reassured by the fact that this was the sum that the French court would have awarded: paragraph 51, and ignored for this purpose, the fact that post-termination, the principal was going to wind his business up anyway.

King v Tunnock was a Scottish case, and thus not binding in this jurisdiction. But though it did not deal with the alternative justification given for the French approach identified by the European Commission, namely the time it would have taken for the agent to re-constitute the client base, Mr Knox is right in my judgment in suggesting that there was nothing new in the notion that the court should look to French law in deciding what the compensation provisions in Regulation 17 intended to compensate the agent for – i.e. the value of the agency. This much is clear from Ms King’s own letter to another client on 2 February 2000 – i.e. before the Court of Session’s decision - and from the commentary on the Regulations provided in Bowstead 16^th edition (1996) at paras 11-039 to 11-040.

In the light of the above authorities by the time Laytons advised EIS on 25 May 2000, in my view, as Mr Knox suggests, the following propositions were well recognised:

The two related areas on which there was doubt, and on which there remained doubt until Lonsdale, were:

Mr Hext refers me to the post King v Tunnock cases with a view to suggesting that the course taken following 2000, although not something that could have been known to Laytons, demonstrates that such caution as Ms King expressed on Mr Berry’s prospects of success, would have been justified. In my view, it would be wrong for me to take these cases into account on this issue since I have to consider how matters stood at the time Ms King gave her advice. But in any event, none of the later cases cast doubt on the propositions set out in paragraph 95.

By May 2000 therefore, it was well recognised that the purpose of compensation under regulation 17(6) was to compensate the agent for the value of the agency business that he lost as a result of its termination. Thus, a commercial agent in the position of Mr Berry, who had built up what was a very profitable exclusive agency with a substantial clientele with considerable value over a ten year period (the turnover for Polamco had increased from £18,000 to £3 million between 1990 and 1999) might expect to be entitled by reason of regulation 17, to receive a very substantial sum in compensation on termination (however the “valuation” exercise was performed). It is to be noted that there was no evidence on the facts relating to this agency of any post termination event (such as the failure of the principal’s business, or EIS’s replacement of the Polamco agency which it had lost) which might have led to an argument that there should be a substantial reduction in compensation.

As at May 2000 therefore, EIS appeared to be an example par excellence of the “downtrodden” commercial agent requiring protection, referred to by Lord Justice Staughton in Page. Subject to whether compensation had been fixed by clause 12.2, on the law and the facts at the material time, EIS in my view appeared to have a strong claim for substantial compensation under regulation 17 against Polamco – certainly,for a much bigger sum than just three months’ commission - and in my view, no reasonably careful solicitor, specialising in this field could have concluded otherwise, even in the absence of a formal valuation.

It was against that background that Ms King was asked to advise. She had to consider, in the light of the law and the facts, what in her view Mr Berry could be entitled to by way of compensation under Regulation 17. She had to consider whether clause 12.2 which purported to limit the claim to compensation to three months’ commission, could be void as a derogation from Mr Berry’s rights under Regulation 19. And it is to the question of derogation I turn next.

It is correct as Ms King said in the 25 May letter, that in May 2000 there had as yet been no decision on whether a clause which limited the compensation which an agent could recover under Regulation 17, could survive Regulation 19. (The matter was decided in Honyvem v. Mariella De Zotti ECJ Case C-465/04, 23 March 2006 when the ECJ decided in the context of a claim for an indemnity, that a clause fixing compensation for a commercial agent in advance will be ineffective if there is a possibility at the time of contracting that the compensation calculated in accordance with the Regulations might be more than the sum fixed).

Mr Hext submits that in some cases (and indeed in this one) sometimes the answer to a legal question will be inherently uncertain and too difficult to call. In such a case not only is the solicitor entitled to say so in advising, but probably wrong if he does not. Of course there may be such cases. The question is whether this was one of them. I do not accept that, on the facts pertaining to this agency, this was such a case. Specifically, I do not accept that without such an authority (on derogation), a solicitor could reasonably conclude that he or she could not give a view on Mr Berry’s prospects of success, which in my judgment, is what Ms King was saying.

If the question of derogation had been considered with reasonable care and skill in the context of Mr Berry’s relationship with Polamco and the terms of the 1995 Agreement, I consider a view could have been given about Mr Berry’s prospects of successfully challenging clause 12.2 on the ground that it derogated from his rights under the Regulations; and it is likely in my view that it would have been positive as to his prospects of success. Different views could reasonably have been formed about precisely where on the scale the prospects of success were: but in my view, no non negligent solicitor could have formed a view that his prospects were less than reasonable.

The starting point is Regulation 19 itself, the language of which is straightforward. As I have said, it provides that “The parties may not derogate from regulations 17 and 18 to the detriment of the commercial agent before the agency contract expires.”

Having regard to the relevant facts about the agency (i.e. its exclusivity, its profitability, its substantial clientele, and ten year length), as I have already indicated it was plainly of substantial value as at 2000 and was likely to be valued, at significantly more than three months’ commission, even if the court did not follow King v Tunnock and value it at two years’ gross commission. The three months’ commission provided for by clause 12.2 could not sensibly therefore be regarded as a genuine and reasonable estimate of EIS’s loss. Further, there was no basis for suggesting (as Ms King did) that (a) EIS might lose even if clause 12.2 was not a reasonable pre-estimate, or (b) that even if it won, five months’ commission (on the reasonable interpretation given to the letter by Mr Berry) might be a reasonable sum.

If as a matter of law, therefore, EIS was entitled on termination in 2000 to compensation for the loss of value of its agency, then any attempt to fix compensation in the 1995 Agreement at a figure which represented something else and was lower was obviously to its detriment. It would have been no answer for Polamco to say that it did not realise that what it was supposed to be doing in clause 12.2 was to pre-estimate the likely value of the agency as at termination in 2000. Such an argument would be an admission the clause was not even intended to be a pre-estimate of the loss which EIS, as a matter of law, was entitled to recover on termination under regulation 17.

Mr Hext however submits that the matter should be looked at from a different perspective. He says two main questions arose on the facts as they were known to Laytons. First, could the parties to an agency contract stipulate the amount that the agent would receive by way of compensation under Regulation 17(1), and if so, did the liquidated sum have to be a genuine pre-estimate? Second, was the three months’ commission fixed by clause 12.2 such a genuine pre-estimate? There is of course, no evidence from Ms King that the matter was considered in this way by her. But I agree with Mr Hext that if objectively, her advice could be justified by reference to such matters, then it is permissible to consider them (see Jackson and Powell, para 11.108).

He says that as to the first of these questions (as is common ground) that there was at the time no authority that held that the parties could not agree the compensation in advance. There was of course Regulation 19. But that simply prohibited derogation from Regulation 17.

Notwithstanding the clear wording of Regulation 19, Mr Hext suggests – without authority – that there were parallels, albeit not exact, with the law on liquidated damages. He says therefore that such a clause might be valid, if, judged at the time the contract was entered into, the amount stipulated was a genuine pre-estimate of the compensation to which the agent would be entitled on termination (presumably, even if, by the time the agency came to an end, the amount stipulated was less than the amount of compensation an agent would otherwise be entitled to under the regulations). By analogy with the cases on penalty clauses, he suggests there was such a degree of uncertainty as to the amount of compensation which an agent might be entitled to under Regulation 17, that the three months fixed on by the parties in this case could be regarded as a genuine pre-estimate (and thus, clause 12.2 might be upheld notwithstanding regulation 19).

In support of his argument, Mr Hext draws my attention to some Guidance Notes on the Regulations published by the DTI 1993, which dealt amongst other matters, with the effect of Regulation 19 and the validity of liquidated damages clauses in the light of the impermissibility of derogation which said the following:

“Q. Is it possible to include a liquidated damages provision within the contract?

A.

Liquidated damages is a provision within a contract where one party agrees to pay to the other a specified sum of money in the event of a breach of contract. Such clauses may be permissible provided that they represent a genuine pre-estimate of damage.

Although one object of the clause will be to limit the principal’s liability, it may not be a pure limitation clause in that it forms a compromise between the parties and is intended to be enforceable whether the actual loss is greater or less than the sum agreed. Nevertheless, as against the principal, such provisions risk attack by the agent as void by virtue of Regulation 19”

Mr Hext suggests this accorded with the views of Oliver Segal, a specialist counsel in the field. He referred me (without objection from Mr Knox) to some notes on the Regulations written by Mr Segal for a seminar given by him and apparently attended by Ms King in June 1999. I asked him during the course of argument for what purpose such evidence was being relied on. He suggested the significance of such material was that it was in Laytons’ disclosure and predated the advice that was given. Mr Segal’s views therefore could be considered as a representation at the material time of what a respected barrister’s assessment was of the validity of a pre-estimate clause having regard to regulation 19.

I am not persuaded that such material is admissible in relation to the issues I have to determine, notwithstanding the absence of objection from Mr Knox. It is one thing to rely on evidence (for example) as to the standard practice at a particular time in medical negligence cases. It is quite another to rely on evidence of what a practitioner lawyer (even an eminent one) considered to be the law in this jurisdiction at a particular time. This is a matter which the court itself should be able to determine on the basis of the legislation and any relevant authorities: this court is presumed to know what the law is and was (see Midland Bank v Hett, Stubb & Kemp [1979] Ch. 384). But in any event, it seems to me that Mr Segal’s views do not really bite on the factual issues raised in this case. He was giving some general views in the abstract.

Nonetheless, Mr Hext suggests the advice Ms King gave on the prospects of Mr Berry’s successfully defeating clause 12.2 was not negligent, because it fell within the band of advice that a reasonably careful solicitor could give on that topic.

I do not accept that submission. Ms King was not advising in the abstract, or considering a hypothetical situation. She had to consider whether clause 12.2 (which allowed only for three months commission as compensation) trumped Mr Berry’s entitlement to compensation under the Regulations, notwithstanding Regulation 19 which prohibited derogation in from an agent’s entitlement to compensation in very clear terms. On the facts relating to this agency, in my judgment, the amount stipulated was too low, and at the very least, it was very likely that a court asked to consider the matter would have so concluded, whether one looked at the matter as at 1996, or as at 2000.

It is to be noted in this context, that Laytons’ own case as to the meaning of the advice which Ms King gave, was that the minimum reasonable amount may be argued to be one month’s commission for each year’s service: i.e. a graduated amount which increased with the length of the agency.

Even if one accepts therefore the hypothesis put forward by Mr Hext that the law on liquidated damages was or might be an appropriate guide to the approach the courts might adopt to a clause which purported to fix an amount of compensation in advance, there was a reasonable prospect of establishing that clause 12.2 failed to pass muster on the ground that the amount stipulated would not have been regarded as a genuine (reasonable) pre-estimate of the amount that Mr Berry might be entitled to under the Regulations on the facts of this case. By late 1996, the agency relationship between Polamco and EIS had been up and running for 6 years and was highly successful, and there is no evidence, that the clause 12.2 sum regarded objectively, was or was intended to be a genuine and reasonable pre-estimate by the parties of the EIS’s Regulation 17 entitlement, in the light of the agency’s position at that time (as opposed, for example, to a minimum amount that Polamco considered it could get away with paying).

There is a further point. On the hypothesis that the law relating to liquidated damages did or might apply, if the amount stipulated was not a genuine (reasonable) pre-estimate, and was less than an agent’s regulation 17 entitlement to compensation then the clause would amount to a derogation and would be unenforceable. But that was not the advice Ms King gave. She did not say if the amount is not reasonable (that is, a reasonable pre-estimate), it will be unenforceable, but that it may be. I consider that advice was plainly and obviously wrong.

Mr Berry was therefore given negligent advice both about the likelihood that clause 12.2 could survive Regulation 19 and about the implications for the outcome of litigation if it did not.

It is said on behalf of Mr Berry, that had he been properly advised he had a legitimate claim to substantial compensation under Regulation 17 he would not have written its letter of 31 May 2000 which effectively repeated Ms King’s advice and offered up the white flag of surrender. Instead, he would have written a much tougher letter, and would have negotiated or litigated in the usual way unless a reasonably satisfactory compromise was reached. EIS was not frightened of litigation if the likely benefits outweighed the risks, and had everything to gain from litigation (and little to lose) if there was a realistic chance of obtaining a judgment for £400,000 odd.

Mr Hext submits that even if the advice was negligent, Mr Berry cannot establish that it was causative of any loss, since on the facts, he cannot establish with a sufficient degree of certainty that he would have pursued Polamco or sued if non negligent advice had been given.

In this context, there is an issue as to the correct approach on causation in the hypothetical situation that Laytons had not given negligent advice. Is it to consider what Mr Berry would have done if the “correct” advice had been given, or to consider causation by reference to the range of advice which a non-negligent solicitor could have given on the facts? If the latter, where in the range, should the court look to consider what Mr Berry would have done? This question arises, at least potentially on the facts, since an issue between the parties is what prospects of success Mr Berry would have required to pursue a claim against Polamco, whether to obtain a settlement or to litigate.

After closing submissions, Mr Hext put in further written submissions following the decision of Andrew Smith J in Levicom International Holdings BV and anor v Linklaters (A Firm) 2009 EWCH 812 (Comm), a decision handed down on 21 April 2009. He drew my attention to the discussion of the correct approach to causation in solicitors’ negligence cases at paragraphs [325] to [335] where Andrew Smith J considered potential differences of approach if information was given, if advice was given or if the defendant omitted to act.

Mr Hext suggested that the test on causation might be different if Mr Berry’s case was not that positive negligent advice had been given, but that no advice had been given. In those circumstances he submitted, the court should approach the matter by reference to the test in Bolitho v Hackney and City Health Authority, [1998] AC 232andthe causation question would then be, what advice would Ms King in fact have given had she turned her mind to the relevant issues. Mr Hext also suggests that the position would be different if the advice were held to be negligent for other reasons than that it was wrong and outside the reasonable band of advice. He says that if the letter were held to be insufficiently clear – and negligent for that reason - the test on causation would be, what would the position have been had Ms King made her advice clear. One examines the position had the error that was made been eliminated: Lion Nathan, p. 1445D-F, 1446B.

One problem with that latter approach of course, is there is no evidence as to how Ms King formed her opinion, or what she intended to advise (in contrast with the position in Levicom where such evidence was given by the solicitors concerned). Mr Hext suggests that the court should infer that if Ms King had expressed herself more clearly, she would have advised that EIS’s case could go either way. I do not see how I can draw that inference in this case.

It is also not the case (and as I understand it, it not suggested on behalf of Mr Berry) that Ms King gave no advice, or omitted to advise on a particular point: she did not forget to send the letter for example or omit to deal with Regulation 19. I do not think an analogy can be drawn therefore between this case, and cases where (as happened in Levicom – see the factual finding on negligence at [311] to [313]) solicitors give no advice about a matter on which they should have advised. The 25 May letter contained her advice. The complaint is it that it was negligent and wrong.

Both counsel agreed that if my finding was that positive negligent advice was given (as it is) causation should be considered by reference to the most likely advice that would have been given had proper care been exercised. This will not necessarily equate to the middle of the band: see Lion Nathan Ltd v. C-C Bottlers Ltd [1996] 1 WLR 1438, 1446G-H; Allied Maple Group v Simmons & Simmons [1995] 1 WLR 1602 and Arab Bank v John D. Wood 2000 1 WLR 857, and the observation of Mance LJ at para 23. That is the approach I intend to follow.

It is therefore for Mr Berry to prove on the balance of probabilities first, that he acted on the advice to his detriment, by settling on disadvantageous terms with Polamco; and second, that he would have acted on the “likely” advice, had it been given, by taking a much tougher line with Polamco than he did; by either negotiating or litigating until a reasonably satisfactory solution was reached.

The likely advice that Laytons would have given in my view, had proper care been exercised, is that Mr Berry had a reasonable prospect of defeating the claim that he was restricted to the compensation fixed by clause 12,2; and, that if he did so, he would have a strong claim for substantial compensation (substantially more than three months’ gross commission) on the facts.

Mr Hext takes the point that in EIS’s letter of 20 June 2000 to Laytons describes the risks of litigation as “high”, when explaining his reluctance to litigate.Mr Berry’s evidence before me was that he took the 25 May letter to be pessimistic as to his prospects of success in litigating against Polamco for more than the amount he was entitled to under the Agreement. Though he asked for more in his letter to Polamco in accordance with the advice he was given by Ms King, he was disposed to settle with Polamco because litigation was “not an option”.

Mr Hext cross-examined Mr Berry at length in relation to his case on causation on a number of other grounds: that his letter sent after the advice was not “a brave letter”; that he clearly did not want to upset Polamco, and wanted to “keep them sweet” because he was hoping to keep the Breyden agency business (and the choice he made therefore not to pursue Polamco was determined by that factor, not by the advice he had been given); that he was concerned about costs in the Hellerman litigation, and would, similarly have been concerned at such costs in litigating against Polamco; and that what he would have done (with Polamco) could be tested by looking at what he did do in the Hellerman Tyton litigation. He suggested that Mr Berry would have required a “very strong claim to litigate” against Polamco.

Mr Berry said that Polamco was irritated by the fact that he had been asking for advice, and he was keen to keep the Breyden option open. But, though the Breyden contract had potential (as he accepted) the overall earnings to EIS were small - he put the figure at £2,000 a month in commission payments; and the Breyden opportunity was inconsequential in comparison with a legitimate and substantial compensation claim. He disputed that he had underplayed its profitability and potential.

Mr Berry also said that he had sufficient funds to pursue the litigation and would have done so, even without the benefit of a conditional fee agreement. He was after all, fighting the current litigation on a fee-paying basis. He felt he had been stabbed in the back by Polamco, but he was a businessman, and he had to “go forward”. The loss of the Polamco was obviously a huge blow to the agency. He felt he had no option but to try and make the best of it.

Mr Hext draws attention to a clause in the partnership dissolution agreement entered into on 19 December 2000 which makes provision for suing Hellerman Tyton and Polamco. Mr Hext attaches significance to this because he says that if Mr Berry had genuinely “put up the flag’ in respect of his case against Polamco, why would that clause be included? I find this argument difficult to follow. The fact is that Mr Berry did settle his claim with Polamco almost immediately after he received the 25 May letter. He said in evidence that the particular clause was included on the advice on his accountant who put the agreement together. I accept that it was, and that once he had settled termination terms with Polamco in 2000, he did not in fact consider the matter afresh until he read Mr Bentley’s answer to the question on derogation in the British Agents’ Register in 2004.

Mr Berry’s pleaded case on negligence was that Laytons should have advised him that he had a strong case against Polamco. It is not surprising therefore that Mr Berry’s case on causation was put on the basis that had such advice been given, he would have sued or settled. But I have to assess the whole of Mr Berry’s evidence on these points – in short, why he did what he did, and whether on the balance of probabilities he would have acted differently if (hypothetically) he had received different and more positive advice from Ms King. My understanding of his evidence was not (as Mr Hext suggests) that he would only have pursued a very strong claim. He would indeed have pursued such a claim. But he would also have pursued a claim which was a legitimate one with reasonable prospects of success.

My conclusion is therefore that if the hypothetical likely advice been given, Mr Berry would not have written to Polamco in the terms that he did, and that he would have pursued Polamco, if necessary, by issuing proceedings against them. As he said in his witness statement, and as I accept, the reality of his position was this: “Had I been told that I had reasonable chances of success in a claim against Polamco under Regulation 17 … I would definitely have pursued such a claim.”

Mr Berry’s claim for negligence in respect of the advice given in the 25 May letter about his rights under Regulation 8 has played ‘second fiddle’ to his claim in relation to the advice about Regulation 17 and can be dealt with relatively shortly.

It is said by Mr Knox that the advice given by Ms King in the 25 May letter on Regulation 8 (that the provisions of clause 7 appear to have been drafted with Regulation 8 in mind, and therefore could be said to cover Mr Berry’s entitlement under Regulation 8) was “plum wrong”.

It became apparent during the hearing however, that Mr Berry’s claim under Regulation 8 is not now pursued on a “stand alone” basis, but only as an adjunct to the claim under Regulation 17. This is because there is no provision in the Regulations prohibiting the exclusion of rights under Regulation 8 (in contrast to the position under regulation 17). In those circumstances, clause 13.6 of the 1995 Agreement may well have excluded any recovery by Mr Berry under Regulation 8. In practical terms therefore, Ms King’s advice on Regulation 8, made no difference. Mr Knox accepted therefore that Mr Berry’s claim in this respect was “finely balanced”.

Certainly, the editors of the 1996 edition of Bowstead on Agency were of the view there were good arguments going both ways on derogation, but that the obvious argument – that in contrast to other provisions in the Regulations, there is no prohibition against derogation, and that therefore the parties could agree a provision which did derogate from the agent’s Regulation 8 rights – “seems more likely to be correct.”

What is said by Mr Knox however is that had Mr Berry pursued his claim under Regulation 17, he had nothing to lose by “adding in” a claim under Regulation 8; and had he done so, it is likely that an amount in relation to it would have featured in settlement of his claim. I am unable to accept that argument. It may be, on advice, Mr Berry would have included a “finely balanced” claim for further payment under Regulation 8 for its nuisance value. But that is to ignore the fact that the negligent advice was not causative of any recoverable loss. Moreover, in the likely event (as I consider it to be) that Polamco would have obtained proper advice about what the parties’ rights and potential liabilities were under the Regulations, Polamco would in my view, have been unlikely to agree to pay an amount in respect of such a claim, whether or not it was thrown into the pot with the claim under Regulation 17.

In the result therefore, Mr Berry’s claim under Regulation 8 fails.

I mention this only because it is briefly raised in Mr Hext’s closing submissions. It was not however an issue which featured at trial. Suffice to say that in my view the bases on which the claim is made (that Mr Berry misread the letter of 25 May both as to what he could claim from Polamco, and as to his prospects, and it was this that caused his loss, or that he was negligent in not pursuing a claim against Polamco) are misconceived. I reject the claim that he was negligent, and that his claim should be discounted on that basis.

Mr Berry claims compensation assessed at (at least) £400,000 plus interest either on the King v Tunnock presumption, or on a normal valuation in accordance with Lonsdale; or, that on the basis his claim would have settled at a reasonable discount to this figure (say £300,000 plus interest or such lower figure as I assess the claim would have settled at on a sensible basis), less the amount of compensation actually paid under clause 12.2, that is £47,811.

It is accepted by the parties that this is a “loss of a chance” case. Mr Berry, through Laytons’ negligence has lost the chance of bringing proceedings or negotiating a settlement with Polamco in respect of his claim for compensation under Regulation 17. The question is not whether Mr Berry would have succeeded in his action against Polamco. The measure of damages is the value of the loss of a chance. This may involve consideration of the value of the claim at a notional trial date or a notional settlement date (if there is a material difference). I have to make proper allowance for the probabilities of success and other contingencies.

I accept that, generally, where the original action raises serious issues both on liability and quantum, the evaluation of the loss of the chance becomes more difficult and speculative. In this case however, my findings on liability themselves involve a consideration of Mr Berry’s prospects of success against Polamco. These therefore provide a proper basis in my view, for my evaluation of the chance which Mr Berry has lost. I have already indicated that he had reasonable prospects of success in relation to a claim under regulation 17.

I have to consider therefore what the likely outcome would have been if Mr Berry had pursued a claim against Polamco. Inevitably, this is a somewhat speculative exercise, but my view is that it is likely that the case would have settled at a discount after a period of negotiation (as did the Hellerman Tyton claim). Indeed both sides in this case suggested this was the likely outcome.

From Mr Berry’s perspective, on the basis of my findings on liability, he would or should have received advice that he had reasonable prospects of winning on liability and then strong prospects of receiving a substantial sum under Regulation 17. He would not however have received advice that his claim was risk free. The issues in relation to Regulation 19 and the quantification of compensation under Regulation 17 were not clear cut enough in my view to have led him to litigate if a reasonable compromise was on offer. And he was not in a financial position where the cost of litigating and losing made no difference. Mr Berry’s approach to the Hellerman Tyton litigation reveals so it seems to me, a pragmatic attitude. Mr Berry claimed about £134,000 for compensation under Regulation 17. The matter was eventually resolved following mediation in August 2005 by payment to him £100,000 (inclusive of interest and costs). After deductions for costs and insurance premiums Mr Berry was left with about £66,000 which he said in evidence, he regarded as a reasonable settlement figure.

Polamco’s likely position obviously has to be considered too. Polamco was a fairly substantial business. I think it reasonable to assume that had Mr Berry pursued the matter, it would have taken specialist legal advice about its potential liabilities and the prospects of litigation on these matters. That advice is likely to have been, for the reasons I have already given, that potentially, Mr Berry had a very valuable claim against them. At the first point at which it would have taken advice, the decision in King would have appeared to put Mr Berry in a relatively strong negotiating position. Polamco would have been well aware of the valuable nature of the agency, the gross commission earned and, possibly (if a net figure was under consideration) the sort of costs of earning that commission. It had (as Mr Knox has said) a lot to be grateful to Mr Berry for. Mr Berry grew the turnover of Polamco’s connector backshell business from £18,000 to £3million in 9 years. Polamco would have known therefore that the clause 12.2 figure was a low figure in comparison with the potential claim under Regulation 17. Polamco (in inevitably somewhat careful language) had acknowledged his contribution in its letter to him of 6 June 1999. But the figures really spoke for themselves.

I also think it reasonable to assume that Polamco would have taken a commercial view of the costs of litigating on the one hand, and endeavouring to reach a settlement that offered Mr Berry less than the full amount he might have claimed entitlement to under Regulation 17 on the other. The amount at stake to Polamco was not such as to make litigation an attractive prospect in my view if Mr Berry had shown that he was willing to compromise, which, as I have said I have formed the view he was likely to have done.

It is more difficult to assess how long it would have taken the parties to reach a settlement. The Hellerman Tyton negotiations appeared to have taken considerable time (it settled in 2005 after mediation). But I do not consider that is necessarily a reliable guide to what would have happened in this case. One of the issues raised in that case (the quantification of a claim under Regulation 8) took some considerable time to pin down on the facts since it raised issues as to which contracts would come to fruition. However, I do not consider settlement would have been particularly swift in this case either. Polamco would have had available to it the arguments on liability and on the amount of compensation raised by Laytons in this litigation.

Having regard to the issues each side is likely to have raised, as well as the merits of the claim and the prospects of the potential litigation, in my view the case would have taken about 2 years to settle.

It is relevant in this context, to consider the approach on valuation in various cases post King v Tunnock since it is against that background that negotiations would have taken place. Cases subsequent to King v Tunnock did not adopt the two year gross commission approach to compensation under the Regulations. However it was recognised that the measure of damage was the value of the agency and that in certain circumstances, compensation could be substantial (see the cases cited at paragraph 96 iii) above).

In Barret HHJ Bowers declined to follow the lead of the Scottish court in applying the French two year rule of thumb. But it was his view that the agent’s entitlement was for the loss of the value of the agency immediately before the date of termination and that compensation was for “the notional value of that agency on the open market...” (see 575G).

In Ingmar Morland J held that he was bound by King v. Tunnock, but declined to apply the two year approach on the facts because it would have resulted in an excessive windfall to the claimants. The average gross commission for the previous three years was £105,810.98, and a two year purchase would therefore have been £211,621.98. In the event, the sum awarded in that case (calculated by reference to the salaries and management charges of the commercial agents) was substantial: £183,600 in respect of an agency which had lasted 7 years, required technical expertise on the part of the agents, and which had shown a lack of profitability in the early years.

In Tigana, Davis J, identified a “balance sheet” of relevant considerations, which informed the calculation of compensation for the agent’s loss: see paras 89 and 108. Neither party in Tigana argued that the court should adopt a valuation approach. It was recognised that the purpose of Regulation 17 was to prevent the principal from being unjustly enriched at the expense of the agent by retaining for itself without payment the entirety of the benefit of the goodwill to which the activities of the agent had contributed, and to compensate the agent for the loss of a beneficial agency contract. It was also recognised that in a very meritorious case, it would be appropriate to award more than the maximum available under the indemnity provisions in regulation 17(3): see paragraphs 90, 98(5) and 106. Davis J did not think it would be wrong in principle in all cases for an English court to award compensation by reference to gross commission (paragraph 106). He had particular regard to the fact that the principal had retained for itself the “substantial benefits” of the customers introduced by the agent, and for that reason alone took the view that the agent was entitled to significant compensation under Regulation 17.

He took account amongst other matters of the continuing availability of the customers to the principal, that the agency came to an end by the choice of the principal and not the agent, the length of the agency, and that in practical terms, the agent was restricted to an extent by their ability to offer the product to customers, given they had established a connection with the principal. In the event on the facts he awarded the agent net commission for the period of its agency (15 months) – a total of US$452,346 (see paragraph 108). By way of a check, he had regard to whether the award was fair and proportionate (observing that Morland J had adopted a similar approach in Ingmar).

Although therefore different approaches were adopted, and Polamco could no doubt have pointed to the fact that the English courts had not followed the King v Tunnock approach, in my view none of these cases would have provided any comfort to Polamco as to whether or not EIS would be entitled to substantial compensation on the facts relating to this agency.

Both sides have adduced expert evidence on the value of EIS as at March 2000. Ms Jennifer Nelder gave evidence for Mr Berry and Mr Charles Lazarevic for Laytons. Ms Nelder is a chartered accountant and is an expert in share and business valuation with over 20 years experience. Mr Lazarevic is a chartered accountant with very considerable experience in forensic accounting, including valuations. The experts were instructed to value the agency following the approach laid down by the House of Lords in Lonsdale in 2007.

The assistance of such evidence in this case is somewhat limited it seems to me. Even if Mr Berry’s case had gone to trial, it is common ground that the trial would have taken place before the decision in Lonsdale. Expert valuation evidence was not obtained or considered by the courts in any of the cases which considered compensation under the regulations. In Tigana for example, Mr Justice Davis considered that the courts, inevitably, had to adopt a somewhat broad brush approach. Moreover, the valuation of any business is always somewhat subjective as both experts agreed. Nonetheless, it is to be noted that the evidence does in my view demonstrate the agency had a significant or substantial value. I shall consider the experts’ conclusions and the principal differences between them in case I am wrong about the significance of their evidence.

Both experts had extensive and relevant experience and I considered them to be helpful, careful and fair in their approach. There were few differences of principle between them. The principal differences so it seemed to me arose because Ms Nelder paid closer regard to the specific facts and issues relating to EIS and was prepared to accept (but not uncritically) information given to her by Mr Berry about various matters, whereas Mr Lazarevic was not, and adopted a more theoretical approach. Generally, I preferred the evidence of Ms Nelder where she and Mr Lazarevic differed.

The Lonsdale approach involves considering the present value of future returns by reference to the price that someone would pay for the income stream which the agency would have generated net of costs (effectively, the potential profit or net income). Ms Nelder did this by reference to the past pattern of commissions and costs incurred in generating them using management accounts and other information including information from Mr Berry. Ms Nelder’s original valuation on that footing was £576,000 to £648,000 (based on a net profit of the Polamco agency of about £144,000 x 4 to 4.5). Mr Lazarevic’s valuations on a number of different bases ranged from about £75,000 to £269,000 (based on a range of net annual earnings of about £31,000 to £59,000).

The experts agreed that the maintainable levels of annual commissions from the Polamco agency going forward were of the order of £200,000 per annum. The difference between Ms Nelder’s valuation and that of Mr Lazaravic is attributable to two matters, broadly. First to the fact that Mr Lazarevic’s lowest valuation was based on the value which was placed on goodwill by the partnership when Mr Swift, the former partner, was paid for his share in EIS at the end of 1998: £48,000 was paid by Mr Berry and Mr Jones to Mr Swift in December 1998 for buying out his 40% interest in the EIS business. This shows, so it is said, that the overall goodwill in the whole EIS business was worth just £120,000, of which only two thirds, i.e. £80,000, was referable to the Polamco agency. I would reject this as a basis of valuation. This was simply the price fixed by the 1995 partnership deed between Mr Berry and his partners. His evidence was, and I accept, that the figure was a somewhat arbitrary one, set at a figure the then partners could afford, with a view to it providing an amount for the family of any partner if he died. It was not fixed by reference to a valuation of, or the value of EIS’s goodwill. Mr Swift did not ask for more when his interest was bought out. It does not in my view reflect a true valuation of the business either as at 1999 or 2000.

Second, insofar as Mr Lazarevic adopts the Lonsdale approach, the difference between the experts is largely attributable to how they have calculated the costs which a hypothetical purchaser would need to incur to maintain the agency, a matter which affects the net profit figure for the valuation.

There was also a difference between the experts on the method of calculating the multiplier. Ms Nelder’s multiple was based on the required rate of return given the nature of the business. She applied a multiplier of 4.25 (as an average of 4 to 4.5) to the net income of Polamco agency, applying it to profits before tax. Mr Lazarevic’s multiple was based on comparable transactions. He applied a multiple of 3.956 to earnings before interest and depreciation. If the depreciation charge was included as a deduction and interest was also included (to make a direct comparison with Ms Nelder’s figures) his multiple increased to 4.1. This difference was therefore relatively insignificant whichever method was adopted

The principal issues between the experts on the calculation of costs by a hypothetical purchaser are the apportionment of EIS’s costs between the Polamco agency, and its other two agencies (for Hellerman Tyton and Habia); the appropriate deductions for management salaries, notional office cost reductions; the deduction of unnecessary consultancy costs; certain risk factors and an issue on net assets.

Apportionment of costs. In Ms Nelder’s opinion, although commission from Polamco amounted to just under two thirds of EIS’s turnover, the costs should be apportioned equally. She reached this opinion on the basis of information provided by Mr Berry. A Polamco unit was two or three times more expensive than a Hellerman unit, and Habia cable was sold by the metre. Turnover alone was therefore not a relevant guide on costs. Moreover the products were complimentary. EIS was therefore able to offer a complete package of connector parts for a cable harness assembly. The time spent on selling and ‘maintaining’ customers was roughly equivalent. The costs attributable to each agency were therefore roughly equal (therefore £56,000 of “maintainable” annual costs of £168,000). Mr Lazarevic thought turnover and customer numbers was a more reliable guide, and pointed to the absence of evidence on this point. In particular, the absence of customer files or other documents which would establish what the costs attributable to each customer were.

However the court does have evidence, namely that from Mr Berry, and he gave a rational explanation for the split of costs in evidence which I accept. So far as the absence of documents is concerned, Mr Hext also complains that Mr Berry appears to have disposed of most of the files. I do not regard that as significant. Albeit there has been a delay in bringing this action to trial, the documents would have been available in 2000 if the claim had been made then. In any event, I am not persuaded either that the files would have provided a definitive answer to the questions I am now considering (Mr Berry’s evidence was that matters were dealt with somewhat informally: formal visit reports were not always made, and he himself only made a note if something substantive happened) or that the parties would necessarily have embarked on the sort of audit and analysis which may have been necessary to arrive at actual figures attributable to each agency on such documents as were available. The cost of doing so would have been very considerable, if not prohibitive, and it was Ms Nelder’s evidence that it would be unusual to go into that level of detail in a valuation, which was a different process from due diligence.

Management salaries. The issue here concerns the correct level of salaries for EIS partners or their notional replacements where the partners received a profit share in addition to salary. In summary, Mr Lazarevic’s view was that the amount attributed to salary was too low, and did not reflect the true cost that a notional purchaser would have to pay for persons of equivalent ability to the partners, in particular Mr Berry. Mr Lazarevic accepted that the assessment of this was a difficult exercise and that he had limited information, but he had regard to Mr Berry’s considerable experience in this field.Ms Nelder was prepared to accept from Mr Berry that the cost of employing staff to perform the work of Mr Berry and Mr Jones would have been £56,000 including NIC (i.e. the amount they were paid). This reflects the salary of a more senior engineer/manager and a more junior sales engineer (a sales engineer, Mr Golding, was employed in 1999 and 2000 to replace Mr Swift). She discounted Mr Golding’s salary of £32,000 by £4,000 since it contained an exceptional bonus element for a specific project.

I myself would not regard the figures for salary as too low. I think Ms Nelder is right when she says that the likely going rate is not a theoretical matter to be looked up in a book but is a matter of knowledge of the market place and industry at the relevant date, and none of the categories used for the purposes of comparison by her or Mr Lazarevic were exactly comparable. Mr Berry’s view was as she said, corroborated by an actual salary paid to an arm’s length third party, Mr Golding, and was supported by salary surveys during the relevant period (for example, £30,000 - £35,000 was within the lower quartile paid to a managing directors at companies with a turnover of up to £0.5million: therefore comparable to EIS). She firmly rejected the suggestion that one should assume the average rate when considering such material since that would imply that such an average would always be appropriate regardless of the individual factors pertaining to the agency (as she pointed out in evidence, when asked why she did not adopt the ‘mean’ figure, she does not have 2.4 children).

Office costs, Ms Nelder was prepared to accept that a notional purchaser could reduce office costs by about £16,000 by transferring administration to sales staff. I would not accept this. Although EIS was not a large agency, it seems to me that an administration function would still need to be carried out, and paid for.

Consultant costs. These were about £6,000 per annum and were paid by EIS in 1998 and 1999. Mr Lazarevic included them as costs for the purposes of the valuation, whereas Ms Nelder did not. The consultant concerned was, it appears a friend of Mr Berry, who he took on on a part-time basis. In the event the consultant died before he could establish himself with EIS customers, and contributed little to the business in any event (Mr Berry’s evidence was that he did not cover his salary or expenses). When he died in February 1999, Mr Berry did not try to replace him. I see no reason to suppose that a notional purchaser would have considered it necessary to replace him either.

Regulation 8. An issue was raised as to how a payment under Regulation 8 would affect the Regulation 17 entitlement. I think Mr Lazarevic’s eventual position was that the effect was neutral; and it would only be necessary to make an adjustment if the court made an award under Regulation 8. In view of my findings on liability it is not necessary for me to consider that point further.

Competition and the threat of reduction of customers. These matters were only raised by Mr Lazarevic in his supplemental report but he regarded them as significant. In essence he suggested the risk of competition from EIS to the notional new agency, and the narrow customer base of Polamco customers would make a hypothetical purchaser extremely cautious about purchasing the agency. He would therefore reduce the relevant multiplier by up to 25 per cent to take these risk factors into account. On competition, I think it wholly unrealistic to suppose that post termination, Mr Berry/EIS would have been able to compete with the notional purchaser in selling Polamco products given the specialised nature of the business, the length of time Mr Berry had been selling Polamco products, the success of those products and the products concerned (with their long lead in time, and the “designed in” element) even assuming no ‘non compete’ clause was included in a sales agreement by the purchaser of the agency. It was Ms Nelder’s view that such a clause would normally be included, and I see no reason to suppose that it would not have been in the circumstances pertaining to this agency. As for the narrow customer base, I am not persuaded that it was a significant risk factor here as Mr Lazarevic suggests. Although EIS was dealing with four main customers, they were long term customers, with no central purchasing policy and Mr Berry dealt with separate purchasing departments within those businesses. As Ms Nelder points out, there will always be a risk that a principal will terminate the agency or reduce its customer base. Nonetheless, compensation is available as a matter of law, based on the value someone might pay for the net income stream of that agency.

Net assets. It was agreed by the experts that the relevant net assets retained by Mr Berry should be deducted from the value of the agency as a whole. Ms Nelder was of the view that those attributable to the Polamco agency are of the order of £41,000 (see the calculations in paragraph 4 of her supplementary report). This would lead to a reduction of her “top” valuation of goodwill, from £612,000 to £571,000. Mr Lazarevic would have deducted £68,094. The difference between them is as to whether the cash retained by EIS was surplus to requirements or not. Mr Lazarevic’s view was that if it was surplus to requirements, the partners would not have left cash in the business. Ms Nelder did not regard this sum as necessary working capital, She took account for example of the fact that the money had earned interest on deposit (and had therefore been held over a period), the regularity of debtor payments, and that the number of business creditors was tiny. Having regard to those matters, I am not persuaded on the facts the cash retained was necessary working capital: I do not think it can simply be assumed that it was, simply because it was left in the business.

It seems to me therefore that the value of this agency’s goodwill, valued in accordance with the Lonsdale approach was very substantial indeed: in my view, of the order of about £500,000 or more on the basis of Ms Nelder’s valuation which I have substantially accepted. As Mr Knox pointed out in closing submissions however, even if certain upward revisions for costs are made (adopting Mr Lazarevic’s approach for example to salaries, assuming salaries of £45,000 for Mr Berry and £30,000 for Mr Swift/Golding, and a 50/50 costs split) the net Lonsdale figure would still be very substantial (of the order of about £372,000).

In some cases, it may be appropriate to assess what the total claim would have been worth at the notional date at trial, and then discount it as appropriate. In Harrison v Bloom Camillin (2001) PNLR 7 for example, the court adopted that approach. But it had not been addressed on, or assessed damages on the basis that the action would have settled, and doubted whether, on the facts, it would have made a difference (see pages 237-8). In other cases, it may be more appropriate to have regard to the overall merits, the size of the initial claim and the discounting factors (or contingencies) that the parties themselves would have been likely to have in mind when settling their claim. In this case, I think it more appropriate to adopt the latter approach since I have found (and both parties agree) it is likely that Mr Berry’s case against Polamco would have settled before trial. I must determine therefore what, in my judgment, the case would have been likely to settle for.

I doubt whether either side would have considered it necessary or would have been prepared to go to the expense of obtaining expert valuation evidence for the purposes of conducting a negotiation and reaching settlement. I think it is much more likely that the parties would have adopted a broad brush approach to settlement, attempting to factor into any negotiations the various issues which may have arisen, and the perceived strengths and weaknesses on both sides. Mr Berry would in my view have made a claim for two years’ gross commission (that is, a claim for £400,000) on a King v Tunnock basis, and I agree with Mr Hext that is likely that Polamco would have argued for a lower multiplier.

I do not think the position on negotiation would have been much affected by the decision in Tigana. Although Davis J identified the check list factors he had in mind (at paragraph 89) and bore them in mind when reaching his conclusions as to the amount to be awarded, he did not in fact give any detailed reasons for deciding it was appropriate in that case to award remuneration for the period of the agency in that case, a matter dealt with only briefly at paragraph 108; and as I have said, he adopted a broad brush approach. He also said that the factors identified were not an exhaustive list, and the weight to be given to each factor would vary from case to case.

Mr Knox put the matter this way. So far as settlement is concerned, if the merits of a case are 100 per cent in favour of a party the court can infer a party would not have settled for less, and award him 100 per cent of his lost claim. If on the other hand, the merits are less clear cut (say 75 per cent) then the court can infer the parties would have settled for about that amount. In this case, the likelihood is that EIS would have settled at some time in 2001 or 2002. This would have been at about 75 per cent of its regulation 17 claim for gross commission of £400,000. This is because Polamco would have recognised that it made little difference whether one adopted a two year rule of thumb on gross commissions, or a net commissions valuation approach.

Mr Hext invites me to discount the amount awarded to take account of various contingencies: particularly the possibility that the case would be lost, either on the ground that clause 12.2 prevailed or because Mr Berry was not held to be a commission agent and to take account of the fact that, as the parties agree, settlement would have been likely at a discount to the claimed sum. He suggests if the court takes the headline recovery as £400,000 less (£47,811) plus interest, say at 6 per cent for 3 years, of £63,394 an 80 per cent discount should be applied to the notional recovery of £415,583 to take account of the various contingencies, leaving a recovery of £83,116.

I make no discount for the commission agent argument since in my view Mr Berry clearly was a commission agent for Polamco, and there was no prospect of his claim failing on that basis. Parks v Esso Petroleum [2000] Eu LR 23 CA established that the word “negotiate” in Regulation 2(1) is to be given a very wide meaning. It encompasses any activities directly concerned with promoting or arranging of material sales which is what Mr Berry did forPolamco as it would have known.

It is inevitable that an assessment of what the claim is likely to have settled for is difficult, having regard to the many imponderables. I do not think it is possible to provide a detailed break down or analysis of the settlement figure which I give. But I bear in mind the matters identified above, in particular, the overall merits of Mr Berry’s claim, the various factors arising on liability and quantum which I conclude the parties themselves would have borne in mind, the approach of the courts to these matters during the relevant period and the likely approach of the parties to settlement. In coming to that figure, I have not made any further discount for the contingency that Mr Berry might have lost his claim, if it had gone to trial, because that contingency is factored into the figure I have arrived at. Having regard to those matters, I consider that the likely settlement figure would have resulted in a net payment to Mr Berry of £240,000 including interest and after payment of his costs. That equates to 60 per cent of a claim for £400,000 ignoring any claim there might have been for interest on that sum. After deduction of the amount recovered under clause 12.2 he is entitled therefore to judgment in the sum of £192,189, plus interest.