Referral relationships are great ways for businesses to generate more leads and expand their network. Referrals can be a great source of new revenue and many businesses are happy to pay those that refer leads to them. If you are referring leads to other businesses and receiving a referral fee in return, you should have a referral agreement in place. Below, we outline: 

  • what a referral agreement is; and 
  • how you can ensure you receive  your referral fee.

What is a Referral Agreement?

A referral agreement is an agreement used to set out the mechanics of a referral relationship and protect both parties interests. It can be used when: 

  • only one party is referring clients; or
  • both parties are referring clients to each other.

For example, you might be referring your clients to an insurance broker, and they might be referring their clients to you if their clients request accounting services. 

If you are considering a referral agreement, there are key clauses you should consider, including:

  • fees;
  • referral process;
  • records and auditing;
  • exclusivity;
  • length of the agreement; and
  • limitation on liability.

The Referral Fee

You will first need to negotiate with the insurance broker about what the referral fee will be and how it will be calculated. To negotiate this, you may consider asking:

  1. whether you get paid every time you introduce one of your clients to the insurance broker, or if you only get paid if one of your clients engages the insurance broker;
  2. how often you will receive the referral fee and whether this be periodically or after each transaction; and
  3. whether you get paid on a fixed-fee basis or by commission.

Referral Process

The referral agreement should provide a clear process for you to provide referrals to the insurance broker. It could be:  

  • sending an email to the insurance broker with your client’s details; or 
  • an online referral process. 

Once you have provided the referral to the insurance broker, it should be very clear that it is their sole responsibility to assess the suitability of any client you refer them to. It must also be clear that at this stage, your responsibilities have ended. 

Records and Auditing

A concern of many businesses providing referrals is that the other business will not tell you when one of your clients engages them and you will end up not receiving a referral fee. This is a valid concern, and one that can be dealt with in your referral agreement.

Your referral agreement with the insurance broker should outline that they agree to keep proper financial records of any transactions they have between you and any of your clients. This includes what transactions they entered into and how much revenue they made from each client. Your referral agreement should also give you the right to audit the insurance broker’s bank account and financial records. This is to ensure they are complying with the referral agreement and are paying you the correct referral fee.

Exclusivity

You should consider whether your referral relationship with the insurance broker will be exclusive in nature or whether you can enter into similar relationships with other insurance brokers. You may be happy to agree to an exclusive relationship because you can be certain that your clients will be in good hands with the insurance broker you have a trusted relationship with. 

However, you could also be limiting your potential referral income by entering into an exclusive relationship. You may be preventing yourself from liaising with other insurance brokers. This is a commercial decision you will need to negotiate with the insurance broker.

Length of the Agreement

The referral agreement will specify the duration of the agreement. The length of the agreement can either be:

  • for a set period of time, such as two years; or
  • an ongoing agreement that will only be terminated when one party does so under the terms of the referral agreement.

A longer agreement will give you the certainty that the relationship will last. However, a shorter agreement will give you flexibility should you want to renegotiate the terms of the contract or if you are in an exclusive referral relationship and you want to deal with other insurance brokers.

Limitation on Liability

Although getting paid might be a key focus of yours, you should also use the referral agreement to limit your liability. You are only providing a referral which includes your client’s contact details and a brief description of what they need. Therefore, if an issue arises, you do not want to be held responsible for the quality of the referral, or any issues the insurance broker has with your referral. When negotiating your referral agreement, you can include clauses to exclude your liability with respect to: 

  • circumstances beyond your contract; and
  • acts and omissions of the insurance broker as well as the client.

Key Takeaways

Providing referrals to other businesses is a great way to assist your clients, and to earn a referral fee and it is a very common way for businesses to incentivise other businesses to give them referrals. If you are providing referrals and want to ensure you get paid, you should consider putting a referral agreement in place. The referral agreement will address the key mechanics of the referral process and what the referral fee is. It will also give you legal rights to audit the other party and exclude yourself of any liability relating to the quality of the referral and the services and products the client buys from the insurance broker. If you need assistance drafting a referral agreement, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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