Agreements as Important Tools in Business
According to the Malaysian Department of Statistics, new business registrations in Malaysia rose by 5.3% during the COVID-19 pandemic. These businesses use various contracts to operate efficiently and legally.
In Malaysia, business agreements come in various types and formats. Each type serves a unique purpose. Understanding and leveraging them as tools can go a long way in protecting a company’s interests, preventing legal disputes, and ensuring business growth and success.
A properly drafted and implemented business agreement has the following benefits:
- Reduce the amount of conflict that arises throughout the course of normal business activities.
- Useful for managing company expectations and avoiding or mitigating liability.
- Provides standards for responding to issues that may arise in any business decisions
- Establish a strong foundation for the business relationship
There are numerous types of business contracts to accommodate various situations, objectives and transactions. This article will examine 11 agreements commonly used in a business’s operations.
(1) Partnership Agreement
When starting a business with others, ensure everyone understands the company’s operation from the start. A partnership agreement is the optimal legal document for this purpose. A partnership agreement involves two or more individuals who want to manage and operate a business to generate profits.
This agreement stipulates:
- Partners’ roles and obligations
- Outlines the ownership stake in the partnership
- Determines the profit and loss distribution of each partner
- Important rules about the management and conduct of the partnership
(2) Non-Disclosure Agreement (“NDA”)
Non-disclosure agreements are common in corporate settings. It offers legal solutions to business owners if trade secrets or sensitive information are disclosed to third parties by any organisation member.
This agreement is helpful when all parties to a transaction recognise the importance of maintaining confidentiality. When parties sign an NDA, they agree to enter into a confidential relationship to safeguard the information described in the NDA. Breaching an NDA often subjects the party to a civil lawsuit.
(3) Employment Agreement
The employee and the employer sign this contract and outline the terms and conditions of employment. This generally includes crucial information about the employment and establishes what both parties expect from each other when the contract commences.
The key important clauses included in an employment agreement are responsibilities and duties of both employer and employee, compensation, salary and bonus package, the duration of the employment and grounds for termination.
(4) Indemnity Agreement
An indemnity agreement is a contract that shields one transaction party from risks or liabilities from the other party. It’s also called a release of liability or waiver of liability.
This is handy when contract parties undertake risky activities, enabling risk transfer to the other party. This agreement shields the indemnified party from any claims, damages or lawsuits brought by unrelated third parties. The following are examples of risky business deals:
- Hiring a third party to perform a service for your company
- permitting a third party to use your property or equipment
- performing potentially dangerous activities on your property
It is important to carefully review the terms of an indemnity agreement before signing it. The agreement should clearly define the scope of the indemnity, the events that trigger the indemnity and the limits of liability. Ensuring the indemnifying party has the financial resources to cover potential losses or damages is also important.
(5) Independent Contractor Agreement
This is a contract between an independent contractor and their client explaining the conditions for the contracted work. If your business needs to hire someone without the need to employ them permanently, this agreement will be handy. It prevents misunderstandings about an individual’s employment status, tax liabilities, and compensation for the job, and it safeguards and maintains all parties responsible for completing the agreed job.
As most independent contractors typically work on a single project for their clients on an as-needed basis, this agreement specifically defines the work to be performed, who is obligated for it and when it must be completed and delivered.
This agreement benefits both parties, allowing the business to access specialised skills and expertise while providing the contractor greater flexibility and control over their work.
(6) Non-compete Agreement
Non-compete agreements prohibit employees from engaging in certain business activities during and after employment. Under the terms of the non-compete agreement, the employee is prohibited from engaging in direct or indirect competition with the company for a specified period following the termination of their employment.
A non-compete clause may forbid an employee to do the following:
- working for a competitor
- creating a business that sells the same products or offers the same services as their former employer
- recruiting former colleagues to join their new business
- abusing proprietary trade secrets and importing client lists in their new employment or business
(7) Joint Venture Agreement
Joint ventures are often confused with partnership type of business. However, the primary difference is that a joint venture is used for one single business activity for only a specified period. In contrast, a partnership is a long-term relationship in a business.
The parties to a joint venture agreement share commercial objectives and agree to pool their resources to attain those objectives. Large and small businesses can join forces through joint ventures to complete larger projects that either could manage on their own.
Although a written contract is not required by law to establish a joint venture, it is highly recommended to do so to ensure that all parties are dedicated to the partnership and understand their roles and responsibilities.
At a minimum, your joint-venture agreement should contain the following information:
- The purpose of the joint-venture
- formation process
- distribution and allocation of profit and loss
- contribution of each party
- parties’ respective responsibilities for the venture’s success
- meeting schedule to decide on important matters
- members’ respective voting rights
(8) Security Agreement
This agreement gives the lender a legal claim on the pledged asset or property. Creditors are often reluctant to provide credit to businesses without the execution of a security agreement. Therefore, security agreements are integral aspects of doing business. Borrowers secure loans by providing collateral to the creditor, which the creditor can then sell or dispose of if the borrower defaults on the loan.
Financial covenants, repayment schedules, and insurance coverage stipulations are prevalent in a security agreement. This agreement serves as a contract outlining the conditions for securing debt and the steps to take if the debtor defaults.
(9) Franchise Agreement
A franchise agreement is a contract between the franchisor (the party that has developed a successful business model and wants to branch out via franchising systems) and the franchisee (the party that wishes to start a business using the franchisor’s model). Through this agreement, franchisees are granted permission by the franchisor to use the franchisor’s trademarks, trade secrets, brand names and other proprietary business information to operate a franchised business.
A franchisee’s obligations and promises to the franchisor for using the franchisor’s brand are spelt out in this contract. Franchise agreements benefit both parties by outlining what each is committing to regarding business operations, quality control measures, fees to the franchisor and dispute resolution procedures.
(10) Agency Agreement
An agency agreement is a business agreement between a principal and an agent. An agent is a person who carries out work on behalf of a principal. The principal is the individual or organisation that employs the agent to carry out certain jobs or projects on their behalf.
By entering into this agreement, the agent agrees to undertake the project, and the principal agrees to delegate certain obligations to the agent so that the agent can act on behalf of the principal under the specific circumstances outlined in the agreement.
The use of agency agreement can be considered in the following situations:
- outsourcing vendors
- retaining legal counsel
- collaborating with realtors
- Engaging accounting and marketing services
The agency agreement typically contains information about the scope of the agency relationship, including the specific tasks or responsibilities that the agent will undertake on behalf of the principal. This may include tasks such as marketing, sales or customer service.
Additionally, the agreement may specify the compensation or commission the agent will receive for their services and any expenses the principal will reimburse. Other key provisions that may be included in this agreement include confidentiality clauses, non-compete clauses, and dispute resolution mechanisms.
(11) Shareholders Agreement
A shareholder agreement specifies the operation of a company and controls the relationship between the company and its shareholders. This agreement is intended to protect all shareholders, outlines the rights and responsibilities of both majority and minority shareholders, and guarantees that they are treated fairly.
It is the basis upon which the company is established, as it specifies how the business will be managed and issues between the shareholders will be resolved. A solid and successful shareholder agreement will include the duties of shareholders, voting rights, how stock can be sold or transferred, and the distribution of dividends at the end of each fiscal year.
We discussed the top reasons you need a proper shareholder agreement here.
If you are a business owner, consider seeking legal advice before entering any business agreement. A lawyer can review the agreement and identify any potential issues or areas of concern. They can also guide in negotiating favourable terms for the business and ensure that the agreement is legally binding.