A strong referral program is great for business. It strengthens your network of suppliers and helps to establish your business as trustworthy and reliable. However, the downside is that your business’ reputation depends on the quality of service provided by those to whom you have referred your clients. A Referral Service Agreement allows you to manage this risk by setting out the expectations of each party in relation to service.

Why should I use a Referral Service Agreement?

It is logical to want to grow your business by using referrals. It not only allows mutually beneficial commercial relationships to flourish, but it can also be valuable to the business financially. If, however, you and your referral partners have no formal Referral Service Agreement in place and merely rely only verbal arrangements to assist one another in making referrals, you may find these informal relationships difficult to manage.

Your business’ reputation relies, to some extent, on the consistent performance of all referral partners. If your referrals are not performing, your business will suffer as a result and your clients will lose trust in your business in the future. By formalising the partnership into a Referral Service Agreement, it will be much easier to manage the risk of underperformance or lack of communication.

A legally drafted Referral Service Agreement will make it possible to manage the relationships you have with your referral partners by quantifying and valuing different leads, and defining the circumstances under which referral fees may apply.

What should be included in a Referral Service Agreement?

For a Referral Service Agreement to be legally effective, it should touch on a number of key issues, including the following:

Defining the Parties  – Who is going to be the referrer and who is going to be the referree? This makes a difference, so it is important to be as clear as possible from the outset.

Referral Fees – Typically, a referral fee structure will be founded on a quid pro quo basis. This means that if you refer a client to one of your referral partners and that client then converts into a paying client, you will be financially rewarded for providing the lead. What makes a fair referral fee? Does it make more sense commercially to receive a percentage of all referral work, or is a fixed-fee a more sensible structure?

Payment and Accounting – It is important to have a clear method for calculating the fees and payment for referrals. Payment and Accounting explains how fees are calculated, whether or not any time limitations will apply, and what the steps are to pay this fee, i.e. what method of payment etc.

Performance Levels – Referring your clients to another business requires you to place an incredible amount of trust in that business to perform to a certain minimum standard. Anything less may result in damage to your own business’ reputation. To manage this level of performance, clear indicators should be identified in your Referral Service Agreement, as well as procedures for monitoring their maintenance.

Conclusion

Drafting a strong Referral Service Agreement is extremely important if you want to safeguard your business’ reputation. Part two will go into more detail on the kinds of terms that should be drafted into any Referral Service Agreement. If you’re in need of assistance in drafting or reviewing such an Agreement, contact LegalVision on 1300 544 755 and speak with one of our experienced contract lawyers.

 

Lachlan McKnight

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