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?
Referral agreements are also used to promote other businesses.
Clarifying the nature of the agreement ensures both parties know their obligations and reduces any misunderstandings.
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.
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.
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.
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.
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.
Referral agreements can help you formalise a mutually beneficial commercial relationship with other businesses. As a minimum, the key clauses you should include are:
- nature of the agreement;
- duration of agreement;
- referral fees;
- referral process;
- intellectual property; and
- 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.
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