How does a commercial agent “acquire” a customer for a principal?
This article focuses on Regulation 7(1)(b) and the circumstances in which a Court would conclude that a commercial agent has “acquired” a customer for their principal.
Under Regulation 7(1) of the Commercial Agents (Council Directive) Regulations 1993 (“the Regulations”), a commercial agent is entitled to receive commission on commercial transactions concluded during the period covered by the agency contract where:
- The conclusion of the transaction resulted from the act of the agent (eg the agent dealt directly with the customer’s order); or
- The transaction was concluded with a customer whom the agent has previously acquired as a customer for transactions of the same kind.
If a commercial agent can show they have “acquired” a customer, they would be entitled to commission on repeat orders placed by that customer (for transactions of the same kind) up to termination of the agency contract, whether or not the commercial agent had any direct involvement in those repeat orders. The commission sums involved can be quite considerable.
So how does a commercial agent go about “acquiring” a customer? Surprisingly, in the 21 years that the Regulations have been in force the Courts have not had to directly consider this issue, although there has been some consideration by the Courts of the similar concept of a commercial agent “bringing the principal new customers”, in deciding whether a commercial agent is entitled to an indemnity payment under Regulation 17 on termination of the agency contract. On that point, the Court decided that “bringing the principal new customers” required the commercial agent to show they were instrumental in obtaining the business of new customers for the principal. Logically, one would expect a similar outcome from the Courts when considering whether a customer has been “acquired”.
Where the commercial agent is solely responsible for a new customer placing business with the principal, it should be straightforward for them to argue they “acquired” that customer. Examples of this could include the commercial agent:
- Introducing customers that they have dealt with before to a new principal where those customers have had no previous dealings with that principal; or
- Identifying, contacting, visiting and obtaining orders from a new customer who has not dealt with the principal before, without any input from the principal.
At the other end of the spectrum, where the commercial agent has little or no input in the principal obtaining business from a customer, it would be difficult for them to argue they have “acquired” that customer. Examples of this could include:
- The principal asking a commercial agent to visit and look after an existing customer who has done business with the principal for a number of years; or
- A new customer who has contacted the principal directly and has placed an order with the principal before any involvement by the commercial agent, although the commercial agent is subsequently asked to visit and look after that customer.
In between these two extremes is a considerable grey area, where much is likely to depend on the level of involvement of the commercial agent in “acquiring” the customer. In general, the Court would consider what happened at the outset of the business relationship between the customer and the principal. It would be difficult for the commercial agent to argue they had “acquired” a customer that had previously done business with the principal, although it might be possible to argue this in the situation where a customer had done business with the principal in the past, but not for a considerable period of time and the commercial agent has persuaded the customer to resurrect their business relationship with the principal.
The level of involvement of the commercial agent in obtaining business from a new customer for the principal is likely to determine whether they “acquired” that customer under Regulation 7(1)(b). This should not have to mean that there was no involvement of the principal in obtaining the business, but rather that the business was obtained mainly due to the efforts of the commercial agent (e.g. the commercial agent was instrumental in obtaining the business). Some examples of this could be:
- The principal receives an enquiry from a potential new customer. This could come from a trade show, by telephone or via the internet. The principal passes the enquiry on to the commercial agent, who follows it up by contacting the potential new customer, arranging a meeting, visiting them and taking an initial order; or
- The commercial agent identifies, contacts and visits a potential new customer but the customer places their first order directly with the principal.
Until the Courts make a decision on this issue, there will be uncertainty as to precisely what involvement a commercial agent has to have in order to “acquire” a customer for the principal. That is not necessarily a bad thing, as it gives scope for arguments to be raised about commission entitlement and for commercial settlements to be reached in order to avoid costly Court proceedings. The commission sums involved can be quite considerable so if there is any doubt about whether a commercial agent has “acquired” a customer or customers, the commercial agent and the principal could save considerable time and money by getting legal advice.
NB It is yet to be decided by the Courts whether the rights granted to a commercial agent by Regulation 7 can be overruled by contrary provisions in an agency contract. Watch out for this type of provision as it might be enforceable by the principal.