A Brief Introduction About the Referral Agreement
A Referral Agreement is a legal document that is created between two parties when either of them refers to customers or clients to the other in exchange for a monetary benefit or reward of any form. It is a format contract between the two organizations, and it outlines the terms and conditions, along with rules and regulations of the referral understanding between the two organizations and how the same will be executed.
Several organizations around the world collaborate based on a referral agreement, due to the fact that referrals are usually a very good form of business, and both the parties involved can benefit from it in some way or the other.
Who takes the agreement? – People involved
In a Referral Agreement, there are usually two parties involved, the first being the business or organization that will refer the clients and or customers, and the second party being the business or organization that will get the referral of customers and or clients. The first party in the transaction is known as the Referrer, and the second party is known as the Referee in legal terminologies.
One of the most important aspects to note about this agreement is the fact that the same outlines the individual interests of both parties while at the same time, taking into account those of both the organizations combined.
Purpose of the Referral Agreement – Why Do You Need It?
The main purpose of this agreement is to establish a legal understanding between both the organizations and to make sure that the interests of the individual parties, along with the collective, are protected at all points in time.
A Referral Agreement is such a legal tool that has a wide application across different industries. The major reason behind this being the fact that every industry around the globe works on the referral business model at some point in time or the other. Some of the most common referral agreements that are used in the industry today are as follows:
- Business Referral Agreement
- Sales Referral Agreement
- Agent Referral Agreement
- Client Referral Agreement
- Referral Commission Referral Agreement
- Loan Referral Agreement
- Marketing Referral Agreement
- Medical Referral Agreement
- Partner Referral Agreement
- Referral Agent Agreement
Although the names of all these Referral Agreement are different, the purpose behind the creation of these are the same; the first party is supposed to refer a mutually agreed number of referrals, in exchange of which the second party will award them either in the form of funds or something else.
Contents of the Referral Agreement – Inclusions
Parties Involved: In this legal agreement, there are usually two parties involved; the first being the company or organization which is supposed to refer the clients or customers, also known as the Referrer and the second being the company or organization who will accept the referrals also known as the Referee.
Effective Date: This section of the agreement outlines the date from which this contract will stand legally binding and also the date on which the same can be dissolved.
Where does it Apply: This agreement is legally applicable within the boundaries of the state, city, or county where it was originally drawn at.
Other Important Sections: While creating a referral agreement, there are a couple of key terms that go into its creation. Some of the very common of them include:
Recitals: In this section of the contract, the first party agrees to refer clients to the second party in exchange for funds or monetary compensation.
Services: This section of the contract outlines the individual duties and responsibilities of those referred by the first party.
Standard Performance: In most contracts, there is no limit on the number of referrals that can be referred by the first party, but there is a provision for standard performance which indicates the minimum number of referrals the first party has agreed to refer, and they are bound to meet this standard performance in the mutually agreed timeline.
Terms: This section of the contract outlines the terms and conditions, rules, and regulations, along with the dates on which this contract will legally come into effect and when the same will be dissolved.
Payment: If, in the discussion, the second agrees to provide the first party with monetary benefits in exchange for referrals, this section will outline the mode of payment and how the same will be executed.
Expenses: Both the stakeholders will have to undertake certain expenses for the whole operation to be executed, and thus, this section of the contract outlines the details of the same.
Notices: If any bills or notices need to be issued by either party for this contract to be formed, this section outlines the details of the same.
How to Draft the Referral Agreement?
A Referral Agreement can be drafted by simply following the steps mentioned below.
Organize a meeting both the parties and discuss upon the terms and conditions of the agreement, such as the total number of referrals that will be shared, until which date the referrals will be shared and most importantly, the number of funds that will be distributed in exchange for sharing the referrals.
Once both the parties have mutually agreed to all the terms and conditions, reach out to a lawyer and ask him to draw up this agreement, either from a pre-existing referral template or creating a new one, according to the specifications discussed.
Get both the parties to sign the contract and get it registered in a house of law, as suggested by your lawyers.
While negotiating an agreement, you need to make sure that your individual interests are protected along with the collective interest as well.
Benefits & Drawbacks of the Referral Agreement
The most significant benefits of having Referral Agreements are as follows.
Benefits of having a Referral Agreements
- The contract clearly outlines the individual responsibilities, duties, and limitations and therefore makes sure that both parties are well aware of them at all points in time.
- This is document acts as legal proof and thus can be produced in court if there is a need in the future.
Cons of not having Referral Agreements
- In the absence of a referral agreement, neither of the parties has legal proof of an understanding taking place between two entities, and thus if the matter is ever brought to court, both parties stand to lose.
What Happens in Case of Violation?
In the case of violation of a referral agreement, certain remedies come into effect, and in a few cases, the contract is dissolved, and a new set of terms and conditions are agreed upon.
A Referral Agreement may stand to get violated under any circumstances, and thus it is always advisable that you cross-check the details before signing on the dotted lines. Here are some of the vital details that you need to check.
Although the core concept of creating a Referral Agreement does not mention that you need to maintain exclusivity, it is always better from a business point of view to undertaking the same. Either of the stakeholders can introduce an exclusivity clause in the contract if they want, but you need to make sure that the terms outlined in the same not conflict with the individual interests of both the parties involved.
Duration of the Contract
Another important thing that you need to take note of is the duration of the contract. In the case of Referral Agreement, you the option of choosing from either a short term or a long term one.
A short term Referral Agreement indicated that the same would be valid for two years or less, and a long term Referral Agreement will be valid for five years or more. Another type of contract is the ongoing referral contract(1), where the total duration is not mentioned, and it can be terminated with only a two-month prior notice.
One of the most interesting aspects of an ongoing Referral Agreement is the fact that in most cases, there won’t be any minimum of referrals that need to refer, and also an exclusivity clause will not exist. These type of contracts mainly work on a pay as you go structure and is therefore quite flexible when it comes to small and medium scale establishments.
If in case you are promoting a time-sensitive event or product, it is always best to stick to a short term contract.
A Referral Agreement document is designed in such a way so that both the parties involved in the transaction and or understanding are mutually benefited at the same time. It can be in the form of a referral fee, finders fee, or even a share in finders fee percentage. Since this contract is a legal document, the same is legally binding(2) in court and is meant to protect both parties in the event of a dispute, violation, and or misunderstanding.