A referral agreement is a formal contract between two businesses where one party refers customers or clients to the other party for a reward. Many businesses enter into referral agreements because good referrals can be a valuable and reliable source of revenue. 

If you wish to enter into a referral agreement with another business, you should have a contract that protects your interests. Otherwise, you risk damaging the reputation of your business through poor referrals or unhappy customers. This article will highlight seven key clauses to include in any referral agreement. 

1. Nature of the Agreement

Referral agreements should set out the details of the relationship between you and the other business. Who will be the referrer and who will be the referee? How will you or the other business pay each other for the referral?

For example, a builder and a painter have a referral agreement. The builder (the referrer) refers his customers to a painter (the referee). The builder gets a fee for every customer they refer to the painter.

Referral agreements are also used to promote other businesses.

For example, an events planning company advertises the services of a DJ through its network. In return, the events planning company receives a fee for every new customer that the DJ gets as a result of the company’s promotion.

Clarifying the nature of the agreement ensures both parties know their obligations and reduces any misunderstandings.

2. Exclusivity

You may want to include an exclusivity clause that prevents your referral partner from entering into similar arrangements with other businesses. On the other hand, your referral partner may want to prevent you from entering into other arrangements.

An exclusive agreement may restrict future business opportunities for some businesses. However, other businesses may benefit from exclusive referral arrangements.

For example, an event planning business refers their customers to a booking agent who can obtain special rates for venues. For the business, that means more revenue and happier clients. An exclusive arrangement can help the business maintain their competitive advantage. However, the booking agent may feel that exclusive arrangement will prevent them from pursuing other business opportunities. In that case, they may limit referrals from that company under the agreement.

3. Duration of Agreement

The referral agreement should state the duration of the agreement. You may prefer the agreement to be a:

  • short-term arrangement, such as two years; or
  • long-term arrangement, such as an ongoing contract that only ends when one party ends the contract for any reason set out under your agreement.

An ongoing referral agreement is unlikely to have an exclusivity clause or a quota for a minimum number of referrals. The arrangement is flexible, especially for businesses who are looking for a reliable source of customer acquisition.

On the other hand, a short-term agreement may be suitable if you are partnering with a business to promote a time-sensitive event. 

4. Referral Fees

You should set out the exact method for calculating referral fees in the agreement.

For example, if Party A refers a lead to Party B (which later converts into a customer), then Party A may receive a flat fee from Party B.

Alternatively, you can generate referral fees based on commission. For example, Party A can receive a commission based on the percentage of any fees that Party B receives for the next 12 months from customers. 

Set out when the fees are due and payable, as well as a payment method to avoid any payment disputes.

5. Referral Process

Set out how you would like the referral to occur. It can be as simple as one party providing the other party with details of the referral via email. However, you may want an online referral process where customers opt into the referral. 

For example, Party A advertises the gym membership of Party B in their weekly health newsletter. A customer of Party A enters a referral code number when signing up for the gym membership through the newsletter. The referral code lets Party B know that the referral came from Party A. 

You may include details on how you will measure the efficacy of the referral process. Will you only accept leads that match your desired customer persona? How will you measure the return on investment of a customer referral over time? Establish a minimum performance standard so that you do not waste time or money receiving referrals that are not a good fit for your business.

6. Intellectual Property

There should be a clause that allows you or the other business to grant the other a licence to use any relevant intellectual property. A licence allows you to use the marketing resources of another business to make successful referrals. 

For example, you may want to promote a special deal from your referral partner on your website. A licence will allow you to legally display their logo or other materials related to their business so that your customers can make an informed decision to buy services from your referral partner.

The clause should also set out how each party will not disclose or misuse each other’s intellectual property.

7. Confidentiality and Privacy

A referral involves the transfer of personal information such as name and date of birth of a customer. The information should be kept confidential and comply with any privacy laws. A detailed confidentiality and privacy clause helps to clarify how you intend to handle the personal information according to law and the agreement.

Businesses who conduct referrals should inform customers that their details can be forwarded to third parties. Ideally, you should alert customers before they enter any personal details into online forms, such as including a checkbox option for customers to acknowledge that their details may be forwarded to third parties.

You want to avoid any customer dissatisfaction if they found out that third parties have contacted them based on details you gave to your referral partners without their informed knowledge. 

Key Takeaways

Referral agreements can help you formalise a mutually beneficial commercial relationship with other businesses. As a minimum, the key clauses you should include are: 

  1. nature of the agreement;
  2. exclusivity;
  3. duration of agreement;
  4. referral fees;
  5. referral process;
  6. intellectual property; and
  7. confidentiality and privacy.

If you have any questions or need assistance in drafting a referral agreement, contact LegalVision’s contract lawyers today on 1300 544 755 or fill out the form on this page.

Kristine Biason
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