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General Corporate

What are the Key Points to Check in a Customer Referral Agency Agreement?

General Corporate

What are the Key Points to Check in a Customer Referral Agency Agreement?

It is common for companies to entrust the sale of their products or services to agencies. For the entrusting company, this not only reduces the cost of maintaining their own sales staff, but also provides the benefit of having an immediate, ready-to-work force. Therefore, this is particularly an effective option for accelerating business, especially for startup companies.

There are various types of agency contracts, but in this article, we will explain the key points of customer referral type agency contracts, which are designed for companies that entrust sales activities to agencies.

What is an Agency Agreement?

An agency agreement is a legal contract, but what exactly does it entail? In the following, we will explain the basic structure and types of agency agreements.

The Structure of an Agency Agreement

An agency agreement is a contract in which a company (the principal) entrusts the sales activities of its products or services to an agency. The agency receives a commission in accordance with the conditions stipulated in the contract as compensation for its sales activities.

Types of Agency Agreements

Legally, there are three types of agency agreements:

  • Sales Representative agreement
  • Brokerage agreement
  • Customer referral agreement

Sales Representative Agreement

In a sales representative agency agreement, the agency purchases products, etc., from the principal and resells them to the end user. Therefore, a sales contract is established between the principal and the agency, and another sales contract is established between the agency and the end user.

The sales type is often used in agency agreements for selling products, such as manufacturers. On the other hand, when an IT company is the principal, the object of sale is often a system or service, so the sales type agency agreement may not be suitable.

Brokerage Agreement

The brokerage type of agency agreement is often used when an IT company is the principal. In the brokerage type, the agency acts as an agent for the principal to conclude contracts. The role is similar to that of a real estate broker.

Unlike the sales type agency agreement, in the brokerage type, the principal and the end user directly conclude a contract.

Customer Referral Agreement

Similar to the brokerage agency agreement, there is the customer referral type of agency agreement.

In a customer referral type agency agreement, the agency introduces prospective customers to the principal, and each time a transaction occurs with that customer, the agency can receive a referral fee.

The difference from the brokerage type is that in the customer referral type, the principal itself conducts the negotiations and contract conclusion. Therefore, it is sufficient for the agency to secure an appointment for the negotiation.

For companies that can allocate a certain amount of sales personnel as the principal, or companies that want to build a trust relationship with customers by handling everything from negotiations to contract conclusion themselves, the customer referral type may be suitable.

The customer referral type of agency agreement is also often used by IT companies.

Key Points to Check in a Customer Referral Agency Agreement

When entrusting a customer referral to an agency, it is essential to conclude an agency agreement with them. The crucial points in the agency agreement are the scope of the work to be entrusted and the provisions regarding the commission to be paid to the agency.

The following will explain the main clauses of a customer referral agency agreement. In the clause examples, “Party A” refers to the client, and “Party B” refers to the sales agency.

Clause on Referral Services

1. Party A shall introduce prospective customers of the product to Party B.
2. Party A does not grant any agency rights to Party B.
3. All expenses related to the services, including other costs, shall be borne by Party B.

The essential clause in a customer referral agency agreement is the one defining the content of the work to be entrusted. It is important to ensure that there is no ambiguity in the scope of the work.

Since this agreement is a customer referral agency agreement, the first clause states that “prospective customers will be introduced”.

The second clause is particularly important in a customer referral agency agreement. As explained above, unlike a brokerage type, the client themselves conduct negotiations and contract conclusion in a customer referral type. Therefore, no agency rights are granted to the agency.

One thing to be careful about in agency agreements is the trouble of the agency acting as if they are the agent of the client, receiving money from the customer, and running away with it.

If the agency has been talking to the customer as if they are the agent of the client, or if they have handed out business cards to that effect, there is a risk that the client may be held responsible by the customer.

Therefore, as a client, it is necessary to clearly tell the agency not to make any representations that could lead to misunderstanding. Moreover, it goes without saying that given these risks, it is essential to choose a trustworthy agency.

The third clause in the example is a cautionary provision that the agency should bear the costs incurred in their sales activities. Even minor matters related to financial burdens can easily lead to trouble, so it is desirable to clearly define them in the contract.

Clause on Sales Commission

If a contract for the use or sale of the product is concluded between Party A and the prospective customer, Party A shall pay Party B a referral fee equivalent to ●% (including tax) of the product price stipulated in the contract.

In a customer referral agency agreement, it is important to clearly define the point of achievement, i.e., under what conditions a commission will be paid.

The following can be considered as points of achievement:

  • When negotiations are conducted
  • When a contract is concluded with the customer
  • When payment is received from the customer

The above clause example stipulates that a commission is generated when a contract is concluded between the prospective customer and the client, which is rather advantageous for the client. On the other hand, the percentage of the referral fee may be higher.

On the other hand, it is also possible to stipulate that a referral fee is generated when actual negotiations are conducted with the prospective customer. However, in this case, there is a risk that the agency may bring appointments from customers with low prospects of receiving orders.

For example, cases where it is clear that the customer has no intention of using the company’s products or services, or cases where the customer agrees to negotiate only because they are asked by an acquaintance of the agency. Therefore, as a client, it is safer to set the condition for the generation of a referral fee not at the time of negotiation but at the time of contract conclusion.

If the implementation of negotiations is to be the point of achievement, one countermeasure is to define in detail the attributes of prospective customers (gender, age, industry, business scale, etc.) to be referred to in the agency agreement.

Clause on Payment Method

1. The referral fee shall be paid by Party A by transferring it to the bank account designated by Party B by the end of the following month for the contracts concluded with prospective customers by the end of the previous month. The transfer fee shall be borne by Party A.
2. By the ●th day of each month, Party A shall notify Party B in writing of the number of contracts concluded with prospective customers and the referral fee from the 1st to the last day of the previous month.

This clause example defines the timing and method of payment of the referral fee. Particularly important is the payment due date stipulated in the first clause.

In the above clause example, it is assumed that the referral fee for the contracts concluded (meeting the conditions for generating the fee) between the client and the prospective customer from the 1st to the last day of the previous month will be paid by the end of the following month.

Clause on Contract Period

1. The effective period of this Agreement shall be ● years from the date of conclusion.
2. Unless either Party A or Party B notifies the other of any objection one month before the expiration of the period, this Agreement shall be automatically extended for ● years, and the same shall apply thereafter.
3. Notwithstanding the termination of this Agreement, in the relationship between the prospective customers introduced by Party B to Party A during the effective period of this Agreement, this Agreement shall remain effective as long as there is a contract between the prospective customer and Party A.

Regarding the contract period between the client and the agency, if the client wishes to continue receiving orders, it is common to automatically renew the contract as in the second clause of the above example.

On the other hand, in cases where the client wants to entrust the agency temporarily but wants to train their own sales staff in the future, or in cases where the client is not sure how much results the agency agreement will bring because it is their first time, it is possible to not include the automatic renewal clause in the second clause of the example and to set the contract period in the first clause of the example shorter.

Also, the third clause in the example stipulates that the effect of the agency agreement continues to a certain extent even after the expiration of the contract period.

It is common for agency agreements to include general clauses such as confidentiality obligations. These obligations need to be observed even after the contract period has expired, so it is necessary to keep the effect of the contract to a certain extent.

Summary: Consult Lawyers when Drafting Agency Agreements

While it’s not limited to IT companies, it’s common to entrust the sale of self-developed tools, apps, etc. to sales agents.

When drafting an agency agreement, business judgment is necessary, and it’s important to arrange the contract. Therefore, when creating an agency agreement, we recommend consulting with a specialist such as a lawyer.

Introduction to Our Firm’s Measures

Monolith Law Office is a legal office with high expertise in both IT, particularly the Internet, and law. When effectively utilizing agency contracts, it is necessary to create a contract. Our firm handles the creation and review of contracts for various cases, from companies listed on the Tokyo Stock Exchange Prime Market to venture startups.

Managing Attorney: Toki Kawase

The Editor in Chief: Managing Attorney: Toki Kawase

An expert in IT-related legal affairs in Japan who established MONOLITH LAW OFFICE and serves as its managing attorney. Formerly an IT engineer, he has been involved in the management of IT companies. Served as legal counsel to more than 100 companies, ranging from top-tier organizations to seed-stage Startups.

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