Malcolm ZoppiSun Oct 15 2023

Referral Agreements: What are they & how can they benefit businesses

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What is an introduction agency agreement?

An Introduction Agency Agreement, also known as a referral agreement, is a contract between two parties: one who introduces or refers potential clients and the company receiving the new clients. The introduction agent will be paid commission if they are successful in bringing business through their introduction- though it’s not uncommon for them only get paid when there’s an actual sale!

What does introduction mean?

For each agreement ‘’introduction’’ can be different. For some it will be when the introduction agent tells the company looking for clients the names and contract details of potential clients. While other agreements it will mean that the introduced clients have to become a customer before the introduction agent has done their job. The later is usually the most common.

Does a referral agreement need to be in writing?

Although the statutory requirements do not require commercial contracts including introducer contracts or referral agreements to be in writing, this does not mean you should not have them in writing. Commercial solicitors suggest that irrespective of how simple referral arrangements, it should be in writing and drafted in a way that satisfies the specific needs of both parties.

Without a written agreement, the potential for litigation can increase. This is because the parties will have to rely on what was orally said by the other party. However, this makes it easy for the other party to claim ‘I did not say that’. This often happens when it comes to the referral fees being paid. This can lead to disputes and both parties having to go to court to solve the situation- which costs much more money that it would have to get the agreement drafted by a UK commercial lawyer.

Why you should get an Introduction agency agreement drafted

Perhaps the most obvious reason is that it can help to ensure that both parties are clear about their roles and responsibilities. This can minimize misunderstandings and disagreements further down the line by ensuring transparency.

Transparency is a key element of why all contracts should be drafted, however, it is particularly important for introduction agency agreement.

This is because the payment terms between the parties must be clear to ensure that the introduction agent is getting compensated for fulfilling their side of the agreement. This means its also important to lay out exactly what the introduction agents obligations are, so its clear to both parties when these obligations have been fulfilled.

An example clause would be: the introduction agent must introduce 5 potential clients to the other party every month and they must be clients who need cleaning services (as that is the services the other party provides). The introduction agent will be paid 10% of the money each relevant introduction spends with the company, when they become a customer. The introduction agent will be notified when each introduced client becomes a paying customer via an email notification.

This offers transparency to both parties in the agreement about what they must do, and this means if any dispute arises it is easy to resolve it by looking at the clause in the contract and acting in accordance with this commission agreement describes.

Scoping out the introducer’s obligations

This is an extremely important clause because the wording of it could determine if the law of agency applies or not.

If the introduction agent can bind the other company in agreements/ contracts, then agency laws will apply. This could happen as some introduction agency agreements will allow the introduction agent to determine the price for the work that the other company will provide the service that the potential client is looking for, and enter into this contract for the other company and then get the referral fee after this has been done.

But because this allows the introduction agent to bind the other company, then other rules will now apply- mainly under the common law of agency. These rules will entail, fiduciary duties of not making a personal profit and not being involved in conflicts of interests. To learn more about the rules of agency click here.

Therefore, it is extremely important to lay down exactly what the scope of the introduction agent’s rules are to avoid creating an agency agreement where they can enter into the contracts for you.

What should be included in an introducer agreement or referral agreement?

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The terms of an introducer agreement may differ from your business sector and whether a specific regulation affects your area of business. It will also differ depending on what you want to gain from the referral agreement.

You may want to include clauses about:

  • Confidentiality:

This term places an obligation on the introduction agent to not disclose any confidential information of the company to anyone else while procuring clients for them. The confidentiality clause is very important in this type of contract because not only will the information about potential clients be confidential information, but the introducer and the other company may have to share other confidential information between themselves. Such information can include commission payment terms, new business ventures, contract information and exclusive jurisdiction terms.

  • Exclusivity clause:

This term may be useful so that the introducer is not working with the competitors at the same time as well. This clause can prevent the introducer from working with certain types of companies at the same time.

  • Introduction:

This clause describes exactly how the introducer is to work and provide introductions to the company.

  • Introduction period:

This clause ensures that the agent is only paid if they have actually introduced the client to the company and also prevents them from being paid in situations where the UK company has not retained the introductions. For example, the introduction agent introduced 3 potential clients to you a year ago and only one of those clients decided to come back to you now. In these situations, the company may not need to pay the agent if an introduction period of 6 months has been set up.

  • Relevant territories:

This is a relevant clause for businesses that are spread around and not just based in one place. This clause lists the territories in which the agent is to procure clients and introduce them to the company.

  • Relevant contract:

This clause details what kind of contracts have to be formed with the introduced clients for the agent to be rewarded under the fee agreement.

  • Duties of the agent

This is a really important aspect of the fee agreement as the agreement has to clearly establish what exactly counts as an introduction and when it is deemed to be rewarded by an introductory payment. This allows the agent to know their deliverables and also the other business to have reasonable expectations so they avoid any future disputes.

  • Introduced client criteria

This will specify what type of clients should be introduced, for example which industry they should belong to. This is a really important aspect of the agreement because the introductions made by the agent have to be relevant and suitable for the company.

It would be counterproductive to introduce the wrong type of person to the other business. For example, a client that does not need the services provided by the company would not be in the best interests of the company or introduction agent as neither will get paid as a result because the client will not become a customer.

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Therefore, it is useful to have a list of criteria or guidelines for the agent to follow and adhere to while working on the introductions.

  • Termination

During the term of the agreement, there may be issues between the parties and they may choose to terminate the agreement. There needs to be clarity on how the relationship between the parties can be ended, which usually entails a written notice at the very least.

This clause will include any post termination obligations on either side. This will include that the agent may still be paid the commission payment for any introductions that become a relevant contract within a certain period of time after termination. This will also ensure that confidential information is deleted immediately after termination and that despite this confidentiality will survive termination.

  • Introductory commission:

This is the payment that the parties agree the introduction agent will receive for the introduction of the potential clients. This may be a specific percentage of the revenue that client brings to the company or a fixed fee. The commission agreement is central to an introducer agreement and must be carefully considered by the parties.

How to structure the commission payments in an introducer relationship?

Introducers should always get compensated for their good work it it leads to successful introductions. There are many options and a uk contract lawyer will explain these to you in order that the most effective referral agreement can be drafted for your requirements. It is crucial that the commission structure is commercially viable.

The amount can be either a fixed fee, which will be based upon how much data you provide the other business with regards to persons they could turn into customers. Or it could also take form as percentage of any revenue that results from a potential introduced client becoming a new customer via this referral process. The latter is often used as this means the other business is only making payment if the introducer agreement was successful!

You should also consider addressing data protection requirements

Generally speaking, a proposed introducer agreement involves the sharing of information about a person who needs the other businesses services/ business. This means that one party will be gathering personal information about the introduced clients and sending it to the other party, which in accordance to privacy laws requires certain procedures to be complied with.

Consequently, both parties must ensure that they have implemented appropriate data protection procedures in place with respect to any information pertaining their agreement. The provision of this section should be integrated into the entering contract and define types or purposes for sharing personal details between counterparties as well ensuring compliance by each party at all times during its term.

What are the advantages of an introduction agreement?

Marketing is only one way of getting new clients, but does not always lead to positive results, while costing a lot of money. This is where an introduction agreement can come in handy, and benefits both parties.

An introduction agreement can be used by the receiving company to get new clients, while only having to pay for finding those new clients if they become paying customers. This is a cost effective way to build a business’ clients base while still being able to plan the cost of acquiring these and being more in control- which is not the case with traditional marketing.

An introduction agreement can be useful for the introduction agent for several reasons. The most obvious one is that the introduction agent can make additional income without having to spend hours servicing a customer. They simply have to pass over the information of clients whom would be likely to become customers of the other company. If the introduction agent does this well and the introduced clients become paying customers they can receive a percentage of the amount the customer has spent.

An introduction agreement can also be useful because it can allow the introduction agent to create a one-stop-shop. The agreement can be used to create a relationship with other businesses which the introduction agent knows their clients need. This means the introduction agent can offer their clients a fuller service by referring the clients in the background. The introduction agent will likely get a bigger commission while also being able to market their business as being able to service the full of their clients needs.

Therefore the benefits of an introduction agreement are threefold:

  1. It helps to build trust and credibility between the companies.
  2. It can lead to increased business opportunities and growth.
  3. It can provide a cost-effective way to find new clients.

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

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