Paying referral fees – disclosure to the client must be overt

Referral fees paid by a solicitor are inherently fraught with peril, as they present a challenge to the solicitor’s independence. Unfortunately such fees are becoming more common as real estate agents increasingly expect them as part of any referral. 

Solicitors should be aware that when paying a referral fee, disclosure of that fact is mandatory[1] - see guidance statement No.03 Paying Referral Fees. When receiving referral fees, the informed consent of the client is required - see guidance statement No.04 Receiving Referral Fees .

Practitioners should keep in mind that the reason behind disclosing the payment of the referral fee is to ensure that the client is aware of the circumstances of the transaction, and that the solicitor has a business relationship with the referring party. This means that disclosure is unlikely to be effectively given by limiting it to ‘fine print’, footnotes or a general disclaimer.

Although the courts have not yet considered this issue, given the ubiquity of the practice of paying referral fees such a consideration is likely in the near future. Some guidance as to their probable attitude can be gleaned from the cases involving unusual or advantageous clauses in costs agreements, which the courts have largely regarded as needing to be specifically drawn to the attention of the client in order to be enforceable. 

In McLaren v Wiltshire[2] Martin J noted the importance of fiduciary duties in contracts between solicitors and clients and cited the observations of Mahoney JA in Law Society of New South Wales v Foreman[3]:

“… that there be full and frank disclosure to the client of all information known to the solicitor which the client should know, and that if there be aspects of the contract in respect of which the solicitor may be in a position of advantage with respect to the client, then those matters be brought to the client’s attention so the client can decide whether or not to enter into the contract.”

It is likely that a similar attitude will be taken towards disclosure of referral fees, and that such disclosure should be overt and demonstrably so, in order to discharge a solicitor’s ethical duties.[4]

The foundation of the relationship between solicitor and client is one of trust and honesty, and is not served by locating important details in areas of the agreement less likely to be the subject of scrutiny. Practitioners who fail to fully and frankly disclose the payment of referral fees can expect little sympathy from courts and regulators.