This article is written by Hemnaag pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. 

Introduction

A finder’s fee also known as referral fee or referral income is a commission paid to an intermediary of a transaction. An intermediary is a person who arranges business between the interested parties, a middleman, or a mediator. The finder fee is rewarded because the intermediary discovers the deal and brings it to the attention of interested parties. For example, if the intermediary arranges a meeting between the buyer and seller of a business they might receive a reward for arranging the meeting between the parties. (i.e)“A” has a car which needs to be sold and “A” does not have any buyers, “A”, asks “C” to find a buyer for his car and he shall pay him some reward for his work “C” finds a potential buyer for “A’s” car. Here “C” is an intermediary and he gets his reward which is the finder’s fee. This can also apply to businesses that seek and gain investors through referrals from others.  

Through this article, the author will explain the importance of a finder’s fee in a business and the important clauses that must be added in a finder’s fee agreement. 

Who pays this fee? 

Depending on the nature and circumstances in which the deal is established, the finder’s fee is paid by either of the parties i.e. the intermediary and the mediator. Usually, the party who initiates the process pays the fee. This means that in most cases the company or the party who created the finder’s agreement will be paying these costs to intermediaries.

Benefits of a finder’s fee agreement

• Saves time 

We all have the same 24 hours in a day but one who uses it efficiently is what matters. In today’s busy world, we don’t have enough time to do all the work by ourselves.  However, a finder’s fee agreement helps to save time and to make use of it efficiently. This ensures that an intermediary brings customers to you and at the same time you can focus more on your line of work. This saves a lot of time and the growth of the business can be multiple. 

• Role of intermediary in finding potential client or customer

An intermediary could make both the parties fulfill their requirement to the fullest. An intermediary could also bring potential clients into a business. Potential client refers to a person who is interested in your product/service and at the same time has the willingness or in need of your product/service.

• Advertisement

Advertisement increases the possibility of reaching its customer. An intermediary facilitates such advertisement through which the reach of the company is increased. In addition to bringing the client into a business, the resource of your company is used efficiently and on other hand, through the intermediary, the risk factor of spending on advertisement is reduced. In other words, this assures the money spent on advertisements is on the right track.

• Division of work 

Division of labour can reduce a lot of time and effort making sure everything is controlled by the business. And an intermediary can take care of it. This can make the workload of the employees decrease at the same time the work given to an employee is done on time and efficiently.  

• Customer satisfaction 

There is a saying “customers are the real owners of a business”. So customer satisfaction also plays a major role. When will a customer be satisfied? Only when he or she is left with a wide range of options to choose the right suitable one for them they are satisfied. Without intermediaries, such an advantage can’t be enjoyed.

• Low-risk factor 

A business lacks its flow when there is procrastination, miscommunication, and lack of advice, and so on. But through the participation of an intermediary, risks can be reduced with the wide range of opportunities and professional advice provided by an intermediary.  

 

Important clauses in the finder’s fee agreement 

• Recitals

This clause gives the background information of the parties, the context of the agreement, and information on the agreement itself.

Illustration; “A” has a car which needs to be sold and “A” does not have any buyers, “A”, asks “C” to find a buyer for his car and he shall pay him some reward for his work “C” finds a potential buyer for “A’s” car. Here “C” is an intermediary and he gets his reward which is the finder’s fee.

Recitals (Sample)

1. Brief introduction about “seller” (A).
2. Brief introduction about “intermediary”(C).
3. The seller has a car that needs to be sold out and the seller can’t find a buyer for his car.
4. The seller has approached Intermediary to find him a buyer for his car he has agreed to pay him a reward for the same.
5. Agreeing to the terms and conditions hereunder the parties have entered into this agreement. 

• Purpose

This clause contains;

• The purpose of the agreement.
• Role of the parties. 
• The acceptance of the parties 
• Details of the referrer and the referee are mentioned.

Purpose (Sample)

The intermediary has agreed to bring a potential customer/buyer/client to a transaction between the seller/company for the agreed reward amount hereunder this agreement to sell his ___ to ___(referee). 

• Duration of the agreement

The finder’s fee agreement should state the duration of this agreement. The agreement can be short-term or long-term. A short-term agreement may be suitable if you are partnering with a business to promote a time-sensitive event.

Duration of the agreement (Sample)

This agreement shall be effective on the date of signing of this agreement (effective date) up to  ____ time period from the effective date. This agreement will not be automatically renewed.

• Finder’s fee

The finder’s reward must be mentioned here. The time duration or period of payment should also be specified. The method of calculation of the reward amount should be mentioned here.

Finder’s fee (Sample)

1. The intermediary is rewarded only if the client/buyer/referee enters into the transaction between the company/seller. (short term business transaction)
2. The intermediary shall be rewarded ___(amount) on or before____(days) from the date of the transaction between the company/seller and referee. (long term business transaction) 
3. The intermediary shall be rewarded ___(amount) on or before____(days) from the date of the transaction between the company/seller and referee for a single referee.
4. Reward calculation
5. The intermediary is paid __% from the transaction amount including all the tax.  

• Payment method

The full detail of the payment method must be mentioned (i.e) cheque, bank transfer, etc

If a bank transfers the account detail of the party must be mentioned.

Payment method (Sample)

The reward amount is paid to the following Bank Account of the Intermediary:

Name of the Bank:

Branch;

Account Holder Name;

Account No;

IFSC;

• Confidentiality

The information shared by the parties must be confidential. The time period with which the information to be kept confidential can also be mentioned here.

Confidentiality (Sample)

The company agrees to keep confidential, and will not disclose to any third party, the identity of the finder, without written authorization from finder (which authorization can be provided by email or telephonic text message); provided, however, that the company may disclose and discuss the identity of the finder with any customer introduced to the company by the finder. The company agrees to keep strictly confidential any general, market, competitive or financial information which it may receive in the course of transacting business with the finder.

• Termination

This clause mentions the time period of the agreement and also the agreement can be terminated by the parties mutually or by a single party by sending a notice to the other party.

Termination (Sample)

This agreement gets terminated in case the following occurs:

1. This agreement shall stand terminated once the obligation under the agreement has been fulfilled by the parties.     
2. Both the parties can terminate this agreement in case of any breach of this agreement by either party by sending a notice. 
3. In case the parties mutually agree to terminate this agreement.

• Representation and warranties

The representation and warranties of both the parties under this agreement are mentioned here. Warranty is a kind of promise given by both parties to each other.  

Representation and warranties (Sample)

Each intermediary and company/seller represents and warrants that:

1. It has the right to enter into this agreement and the right to grant the rights and licenses granted herein.
2. It is not a party to any agreement, contract, or understanding that would prevent, limit or hinder its performance of this agreement.
3. During the term, it will not enter into any contract, agreement, or understanding which is in conflict or which would interfere with the full and complete performance of any of the duties or grants hereunder.
4. It is not a party to any pending claims or litigation which might affect its performance of this agreement.

• Governing law and jurisdiction 

The law governing the policy will be given in this clause. The laws of the state if any amendment is passed are also mentioned. The court in which the parties approach if any dispute arises in this agreement.

Governing law and jurisdiction (Sample)

These terms and conditions and the transaction contempt hereby shall be governed by and construed and interpreted in accordance with the laws of the state of _____ India. Any action seeking legal or equitable relief arising out of or relating to this Agreement will be bought only in the court of ____.

• Dispute resolution 

• How the parties resolve a dispute arising out of this agreement should be specified here. The applicable rule, act, or regulation will be mentioned. 
• If the parties decide to arbitration, the rules, arbitration procedure, language, and venue, etc will be specified 
• If litigation, court to be approached, governing laws, etc will be specified.

Dispute resolution (Sample)

1. Any dispute arising out of this agreement or relating to the interpretation of the terms of the agreement shall be resolved by the arbitration process. 
2. The arbitration process shall be conducted by a sole arbitrator and shall be appointed by both parties mutually.
3. The proceeding of the arbitration shall be conducted in english and the venue of the arbitration shall be_____.

Case law

M/S Digikore Studios Ltd vs. M/S Escosoft Technologies Ltd.

This appeal is directed against the judgment dated 02.08.2013 delivered by the learned Single Judge of High Court of Delhi which in turn was a petition under Section 34 of the Arbitration and Conciliation Act, 1996

Brief facts 

1. The dispute between the appellant and the respondent was based on an agreement dated 27.11.2003 entered into between them. The said agreement has been styled as a novation agreement and the same is in turn based on an earlier agreement between the appellant (DSL) and a company located in Wellington, New Zealand, Gtoyz Management Company Ltd. (G TOYZ). The earlier agreement was dated 31.05.2003 and was subsequently amended on 08.08.2003. We are, therefore, concerned with two agreements, one between G TOYZ and DSL and the other (novation agreement) between DSL and the respondent herein (ETL). The agreement between G TOYZ and DSL requires the appellant (DSL) to commission a 2D animated TV series and feature movie ‘Kung Fu Millionaire and PIPSQUEAKS’. By virtue of the novation agreement between DSL and ETL, the work of preparing the 2D animated TV series and the feature movie was transferred to ETL. For doing so, DSL charged a finder’s fee of 1.07 crores. The said finder’s fee was to be paid in installments. The first installment of `42.5 lakhs of which was paid by ETL to DSL at the stage of signing the novation agreement.
2. Subsequently, the arrangement between G TOYZ and ETL did not work out. As a result of which, ETL raised a dispute claiming a refund of the part payment of the finder’s fee from DSL. It is that dispute which went before the Arbitral Tribunal.
3. On the side of the appellant (DSL), it was claimed that the contract between G TOYZ and ETL failed on account of bad workmanship on the part of ETL. Therefore, it was contended that DSL was not liable to refund the finder’s fee.
4. On the other hand, it was contended on behalf of ETL that the contract between ETL and G TOYZ had failed because G TOYZ did not provide the mobilization fund. Therefore, they were entitled to claim a refund of the finder’s fee from DSL.

The reward given by the Arbitration Tribunal

The Arbitral Tribunal examined all the issues together and returned a clear finding of fact that the agreement dated 27.11.2003 could not be executed because of the non-availability of necessary funds with G TOYZ and not on account of any fault which could be attributed to ETL.

It is, therefore, clear that the conclusion given by the Arbitral Tribunal that DSL was liable to refund the finder’s fee, cannot be faulted, once these findings of fact have come on record.

The learned Single Judge concluded that the conclusion arrived by the Arbitral Tribunal was a plausible interpretation of the relevant clauses and, therefore, the same could not be interfered with. The appeal was dismissed but there shall be no order as to costs. The pending applications were also disposed of. (see here)

Conclusion 

One of the biggest challenges every entrepreneur could face in today’s business is finding a potential customer that may come to an end by entering into a finder’s fee agreement.  By executing a finder’s fee agreement in your business you can save a lot of time and the money is invested in the right source, you shall also get potential clients to your business the foremost thing your client/customer gets satisfied with. The amount of time and effort that it takes to gain new clients or customers has substantial value, so; by paying a reward to an intermediary by entering into a finder’s fee agreement it can be efficiently fulfilled.

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