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One of the most important tools that businesses enter into is a contract. A contract is a binding agreement that usually underpins a transaction or an exchange of goods. A contract also allows either party to seek a remedy if the other party does not uphold their obligations under the contract. This can only be undertaken if the contract has been drafted properly and contains the correct clauses that allow it to be held up in court. One type of contract is a referral agreement. This article will outline the key clauses for a referral agreement and why you should include one in your contract.

What Is a Referral Agreement?

Sometimes businesses will recommend or refer customers to other businesses in exchange for a fee. The agreement that underpins this transaction is called a referral agreement. A business might refer customers to other businesses, as they may not have a particular good or use it as a source of income. For example, a lawyer might refer a matter to another lawyer in exchange for a fee. This might be because the lawyer does not have the expertise to deal with the particular problem at hand.

Key Clauses

Terms of the Agreement

The most important clause of any contract is the terms. Making sure the terms of the agreement are fair and true is therefore crucial. The terms include the name of the parties and what the contract is about. The contract should thus have clear wording and this should be unambiguous. This is because a court is not able to uphold a contract that has unambiguous wording. The terms of the agreement must also include the date the parties signed the agreement and the fee for the referral. These particulars may seem elementary but are key to ensuring the agreement is valid and beneficial to both parties.

Exclusive Referral

Another key clause you should include in your referral agreement is one that refers to exclusivity. An exclusivity clause means either party is not able to enter into referral agreements with other parties. This strengthens the relationship between yourself and your contracting partner and allows you to dominate the particular industry you are in. Without an exclusivity clause, your contracting party could enter into referral agreements with other parties. This could cause you to lose revenue through a loss of referral fees. 

Intellectual Property

Another important clause to include is one regarding intellectual property. For example, if you refer a customer to another business, you may want to use their logo for marketing purposes. This means your contracting partner should licence you to use their logo. The intellectual property clause will detail exactly what you can and cannot use. For example, your contracting party may not want you using their slogan.

If you find yourself using your contracting party’s intellectual property without their permission, you could be infringing on legal issues. This could cause the contract to be cancelled or you may be sued.

Termination Clause

A clause you should always include in your referral agreement is a termination clause. A termination clause allows either party to cancel the agreement in certain circumstances. Usually, parties can activate a termination clause when either party breaches the agreement. Alternatively, the termination clause could be more comprehensive and include circumstances where either party has found a better contracting party.  The importance of the termination clause is to make sure that either party can exit the agreement if it is best for their business. 

However, you must ensure you only activate the termination clause when the circumstances specified in the contract are met. Otherwise, this could mean you have repudiated the contract. If you repudiate the contract, you have technically breached the terms of the contract and can be liable for damages. If you are unsure if you can terminate the contract, you should consult a lawyer.

Key Takeaways

One of the most popular contracts a business will enter into is a referral agreement. This agreement allows a business to refer a client to another business in exchange for a monetary reward. The popularity stems from the opportunities that come through revenue. Some businesses may not stock a particular product or have the expertise to solve a client’s issue, so they will use a referral agreement. However, as they are legal contracts, a referral agreement needs to have certain clauses in case there is a dispute between the parties. If the contract is not foolproof, it may not hold up in court. The key clauses that a referral agreement should have are:

  • terms of the agreement;
  • exclusive referral;
  • intellectual-property; and
  • termination.

If you need any legal assistance with a referral agreement, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can either party terminate the contract through a termination clause?

Yes, as long as the conditions are met, either party can terminate the contract.

Can I have a referral agreement with more than one business?

Yes, but this is unlikely as the businesses with which you have the referral agreement will not want the other businesses to take their potential clients.

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