House accounts, taking customers back from an agent

The reason why the principal may take back a customer is, sometimes surprisingly, not appreciated by principal and agent alike. 

Customer complaints resulting in a principal doing the work but still paying commission to the agent is obvious. Less so is the fact that by careful selection of customers to become house accounts, a principal can reduce its exposure to the agent on termination. The key in this respect lies in the amount which may be paid by principal to agent for the account taken in-house.

Once the principal has decided to take back a customer, the next question is how?

The first question which a principal needs to ask is whether the agent has been appointed on an exclusive, sole or non-exclusive agent basis. Exclusive agents will have the exclusive right to receive commission on sales to customers within the agent’s exclusive “territory”. The agent’s territory might be a geographical area, or alternatively a group of named customer accounts.  If the agent has an exclusive territory and the account which the principal wishes to take back falls within that territory, the principal will (unless the agency agreement provides otherwise) need the permission of the agent to take the account “in-house”, and that permission will usually come with a price tag.

But it is worth considering the issue of exclusivity carefully. This is because it may well be that the agent is not exclusive, but rather has sole or non-exclusive rights to a particular customer!  If the agent does not have exclusive rights to a particular customer, there may be no need for the principal to take the account back – it will simply be able to sell directly to the customer without paying commission to the agent on the sales which it makes.  Of course, depending upon the strength of the relationship between the agent and the customer, it may be difficult for the principal to muscle in on that relationship and persuade the customer to buy direct, and the principal will still need to pay commission on sales which result from orders which the agent has taken.

Working out whether an agent has exclusive rights to commission on sales to a particular customer is not always straightforward, as often there will not be a written agency agreement in place or, if there is, what has happened in practice is very different to what is said in black and white in the contract.  To work out the status of the agent, the principal will have to look closely at how the agency relationship operated in reality, and how that may have changed over time.

If the principal establishes that the agent has exclusive rights to commission on sales to a particular customer and there is no written agency agreement in place, one way of the principal acquiring the right to take back accounts is to propose a written agreement which provides the principal with precisely such a right.  There is no guarantee that an agent will sign up to such a written agency agreement.  However, with guidance principals can often be successful  in persuading their agents to sign up to written agency agreements.  A properly drafted agreement will not only contain rights for the principal to take back accounts, but also a considerable number of other rights which will protect the principal.

Finally, it is worth the principal pausing before acting in order to consider why it wants to take an account back from an agent. If the answer is that the agent is not servicing that account properly, the principal should consider performance-managing the agent, with a view either to improving the agent’s performance or laying the ground for termination of the agency relationship for the breach by the agent of its duties. 

Emma Roake
Senior Associate

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
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