If you're an introducer or a business seeking to engage an introducer to help you win more work, it’s important to formalize the terms you have agreed in a commercial contract. In this article, Patrick McCallum of Wright Hassall LLP looks at some of the key aspects SMEs should consider when entering into an introduction agreement.
1. Define what counts as an “introduction”
Where an introducer is simply providing a list of contacts to a client upon signature of an introduction agreement, it will generally be accepted that the provision of each of the names on the contact list will each constitute an “introduction”.
However, where the introduction agreement requires introducers to provide introductions to the client on an ongoing basis, there can be more room for discussion as to what constitutes an “introduction”. Clients will want to ensure that “introductions” are confined to those introductions which really add value to their business, by limiting the definition of “introductions” to:
- those which are made in writing by the introducer;
- those within a specific industry or sector;
- those that were not previously known to the client; and/or
- those where the point of contact is of sufficient standing within their business to be capable of entering into a contract with the client.
2. Define what counts as a “relevant contract”
Given that, on most occasions, commission becomes payable to the introducer upon the client entering into a “relevant contract” with a company to which it has been introduced, it’s just as important to define a “relevant contract” in an introduction agreement.
As with the definition of “introduction”, the introducer will want “relevant contract” to be defined widely, i.e. as any contract which the client enters into with any party that the introducer has introduced. However, the client may want to place certain restrictions on this. For example, a contract will not be a “relevant contract” if:
- it is entered into more than [X] months after the introducer makes the relevant introduction (and therefore cannot be sufficiently attributed to the efforts of the introducer);
- it is below a certain value (and therefore, in the eyes of the client, not worthy of giving rise to a commission payment becoming due).
3. Agree the rate of commission
What commission will become payable to the introducer is up for the parties to negotiate and agree. This will either be a fixed fee for providing a contact list or, more commonly, a percentage of the revenue received by the client under any relevant contract.
Where the introducer’s commission is a percentage of the revenue received by the client under any relevant contract, the parties will also need to consider:
- whether commission is calculated on the gross or the net revenue received by the client;
- whether commission will continue to be payable to the introducer or only for the first [X] months/years of any relevant contract.
4. Decide payment terms
The client’s default position will often be that the introducer should only be paid commission on sums actually received by the client. This is what is known as a “paid when paid” arrangement.
The advantage of a “paid when paid” arrangement for the client is that there is less impact on its cash flow if the customer does not pay on time. Of course, the disadvantage to the introducer is that it’s dependent on a third party making full and prompt payment in order to receive its commission. This, in turn, can have a negative effect on the introducer’s cash flow.
The introducer will therefore push to be entitled to commission as soon as the client’s customer places an order with the client. Where the parties meet will depend on their comparative negotiating power.
5. Ensure transparency
The introducer needs to know what commission it is entitled to but is totally dependent on the client providing it with information in order to be able to calculate this.
The parties should agree how frequently the client will report to the introducer on:
- the relevant contracts it has entered into;
- the revenue it has received under such relevant contracts; and
- by its calculations, how much commission the introducer is entitled to.
The level of detail these reports go into is something which will need to be agreed between the parties. For example, introducers may want to see purchase orders and other documentary evidence of orders placed by the client’s customers.
In some cases, the introducer may also require a right to audit the client in order to verify the accuracy of the information contained in the client’s reports.
6. Scope out the introducer’s obligations
From the client’s perspective, the way the introducer conducts itself is of the utmost importance.
If the introducer works hard and promotes the client’s goods and services to a wide variety of businesses, then the client could receive a number of fantastic new business opportunities in the future. If the introducer fails to meet expectations or acts in a way which damages the client’s image or reputation, then the client stands to benefit very little from its relationship with the introducer.
With this in mind, the client should be able to specify clearly what it requires from the introducer and could seek to include the following provisions in the introduction agreement:
- criteria for the types of introductions the client wants the introducer to make;
- a restriction on the introducer acting for other businesses that are in direct competition with the client;
- an obligation on the introducer to make a minimum number of introductions during each year of the introduction agreement;
- a requirement that the introducer only uses the client’s official marketing material when promoting the client and its goods and services;
- a requirement that, where the introducer is permitted to produce its own marketing material, it obtains the client’s consent before using such marketing material; and/or
- an acknowledgment from the introducer that it must not hold itself out as being able to make any contractual commitments on behalf of the client.
7. Address data protection requirements
By its very nature, any introduction agreement will involve the sharing (and therefore processing) of personal data.
Each party will therefore need to assure the other that it has in place adequate data protection measures in place in order to comply with the GDPR and Data Protection Act 2018 with respect to the personal data it is processing in relation to the introduction agreement.
Data protection provisions will therefore need to be inserted into the introduction agreement, with the types of personal data to be shared between the parties (together with eth purposes for which such personal data will be processed) clearly specified.
Clients may also request that, in order to minimise the risk of any personal data breach occurring, introducers only provide them with the business contact details of any individuals as part of any introductions rather than any personal email addresses or mobile numbers.
8. Consider what will happen on termination
It can sometimes seem counterintuitive to discuss how an agreement is going to end before you have entered into it. However, this is always an important talking point which should be addressed at the outset, particularly when it comes to introduction agreements.
The most important item to discuss will be the introducer’s entitlement to commission following termination of the introduction agreement, in particular:
- whether the introducer should continue to be entitled to receive commission in respect of relevant contracts entered into during the term of the introduction agreement;
- whether the introducer should be entitled to receive commission in respect of relevant contracts which are entered into after the date of termination, but which relate to customers to whom the introducer had introduced the client; and
- whether the introducer’s entitlement to continue to receive commission following termination should be contingent on the manner in which the introduction agreement is terminated (e.g. no commission should continue to be payable if the introduction agreement is terminated by the client for cause).
Often, as a compromise, the parties will agree that commission will continue to be payable for a specified term following termination (e.g. 6 or 12 months) potentially at a reduced rate.
About the Author
Patrick McCallum is a commercial contracts lawyer with Wright Hassall LLP - a full service law firm which acts for both regional and national clients across a variety of sectors. Patrick helps clients with their commercial contracts in both a business-to-business and business-to-consumer context.