How to draft a referral contract - 3 top tips

Tip 1: Clearly define referral criteria and exclusions

The cornerstone of any successful referral contract lies in crystal-clear definitions. Ambiguities can lead to misunderstandings and increase the risk of commercial disputes in the future. It’s therefore important to ensure that your referral contract specifies:

1. Qualification criteria - it is important to clearly set out what constitutes a successful referral that will trigger payment to the referrer. The referral contract should define the specific parameters, such as the period following the referral that the company must enter into a contract with that customer for it to fall within the scope of the referral contract.

2. Exclusions - the referral contract should set out any exclusions that would prevent a referral from triggering payment to the referrer. This could include, for example, referrals of leads who are already known to the company or that the company is already in existing negotiations with.

3. Exclusivity terms - the referral contract should set out the position in relation to the exclusivity of the referral relationship - whether it is an exclusive, sole or non-exclusive appointment. You can find out more about each type of appointment by reading these FAQs.

Tip 2: Set out the compensation structure and payment mechanics

The referral contract should clearly outline the compensation structure for successful referrals. Whether it's a flat fee, a percentage of the sale proceeds, or another arrangement, the contract should be a tool to make sure all parties are aware of how and when the referrer will be compensated. Find out more about different compensation structures by reading these FAQs.

Once the compensation structure has been agreed, the payment structure must also be defined. This could include reporting requirements to ensure that the company is regularly reporting to the referrer on the number of successful referrals and sale proceeds made from those referrals, in order to allow the referrer to invoice for the correct amounts. The referral contract should also define clear payment terms, so it is clear when invoices can be raised and how quickly they must be paid.

Tip 3: Include legal protections

As well as the commercial aspects of the referral arrangement listed above, the referral contract can be used as a tool to put in place important legal protections for your business. This could include:

1. Intellectual property - the referrer will likely need to use the company’s intellectual property rights (IPR) to promote its brand and make successful referrals (e.g. the company’s name and logo). A referral contract should therefore include provisions aimed at protecting the company’s IPR and brand. This could include, for example:

   • a right for the company to review and approve (or reject) in advance each proposed use of the company's IPR;

   • a restriction on the referrer from taking any action that would conflict with or be contrary to the company’s rights and interest in its IPR; and

   • a requirement to obtain the company’s prior written approval of any marketing materials which have not been supplied by the company containing the company’s name and/or trade marks.

2. Confidentiality - a company may share sensitive information about its business practices in order to allow the referrer to make successful referrals to it. A referral contract can therefore include a confidentiality clause that specifies that all information shared between the parties during the course of the referral arrangement is confidential and should not be disclosed to third parties.

3. Liability - a limitation of liability clause limits the amount a party has to pay to the other party if they suffer loss in connection with the referral contract. In the absence of a limitation clause, there is no financial limit on the damages a party can ask for, and it is therefore common to include a limitation of liability clause in commercial agreements.

Conclusion

Drafting a referral contract that balances the interests of all parties involved requires careful consideration and clarity. By following these three top tips you can set the foundation for a successful referral partnership. To make the process as seamless as possible, you can use Docue’s referral contract template to easily create a tailored referral contract that reflects your situation. All you need to do is answer a series of simple questions, and Docue’s builder technology will create a bespoke referral contract for you in real time based on your answers.

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