Understanding the Legal Side of Business Collaborations

Collaborations are a strategic pathway to growth and expansion for small businesses. They offer a way to tap into new markets, share expertise, and access business resources. However, if you’re not careful, collaborations also come with risks, including legal disputes and financial loss.

To ensure your collaborations are successful and mutually beneficial while minimising risk, it’s essential to ensure your safety by conducting your legal research and due diligence.

This involves prioritising well-drafted contracts, intellectual property protection, and procedures for dispute resolution.

How to Draft a Business Collaboration Agreement?

Drafting a written contract for a business arrangement might seem intimidating, and as a small business, you might not have the means to hire a lawyer to help you with that process. While it is best to seek legal advice, you can do some legal research and groundwork on your own:

Is a Written Contract Necessary for Collaborations?

A written contract is necessary for even the smallest of collaborations. Understanding how to handle contracts is critical for any business owner, especially small business owners who might not have an entire legal team to rely on.

To protect the interests of your business, you must never overlook the importance of having your agreements on paper. Without a written agreement, your collaborator could make false claims to unfairly benefit from your business.

For example, they could claim that you agreed to give them a larger share of the profits or that you were responsible for covering certain expenses that were not actually your responsibility.

The importance of having a drafted and signed collaboration agreement lies in ensuring that all parties involved are aware of and have agreed to their respective responsibilities and benefits within the agreement.

Key Legal Clauses Every Collaboration Agreement Needs

Responsibilities of each party: You must clearly define the roles and responsibilities of each party in order to minimise the chance of disputes arising.

Define who owns the intellectual property (IP): This is one of the most crucial aspects of your collaboration agreement because Intellectual property (IP) is a valuable asset, and if your agreement doesn’t clearly state who owns it and how it can be used, it could lead to misunderstandings and costly disputes down the line.

Financial contributions and payment terms: Money is a very sensitive topic, so the agreement must explicitly state who covers the costs for each aspect of your collaboration. Additionally, it must stipulate how revenue will be shared and how each party receives compensation.

Termination clause: What happens if the partnership ends? The agreement should also highlight who has the power to terminate the contract.

Dispute resolution: The Contract must clearly specify the procedures that need to be followed in case of disputes. It should mention which preferred methods would be used, whether negotiation, mediation, or arbitration.

Confidentiality/Non-Disclosure clause: This clause protects sensitive business information that will be shared between both parties during the collaboration.

Common Mistakes to Avoid in a Collaboration Agreement

Using generic contracts: You can find reliable contract templates online, but you must always go through them carefully and ensure to customise them based on your project, as well as the parties involved in the collaboration.

Not conducting thorough research on laws: Certain laws govern collaborations, and you need to be aware of these to ensure that your agreement is legally sound and enforceable.

Failing to include a dispute resolution clause: This could potentially lead to costly litigation. For instance, stipulating that matters will be dealt with through alternative dispute resolution methods like mediation or arbitration allows you to resolve disputes privately without the lengthy and complex court process.

Dispute Resolution in South African Business Collaborations

South African businesses entering into collaborations should familiarise themselves with key dispute resolution laws. This knowledge empowers entrepreneurs to understand their legal protections and responsibilities when engaging in projects with other entrepreneurs.

Key Dispute Resolution Laws in South Africa

• Arbitration Act 42 of 1965: Allows businesses to resolve disputes outside of court through arbitration.
• High Court Rule 41A: Encourages mediation before litigation in business disputes.
• Companies Act 71 of 2008: Regulates disputes between shareholders, members, directors and the mergers and takeovers of companies.
• Constitution of South Africa (Section 34): Ensures you have the right to access courts for dispute resolution, and implements fair legal processes in commercial conflicts.
• Labour Relations Act 66 of 1995: Governs disputes that involve employees.
• International Arbitration Act 15 of 2017: Aligns South African arbitration laws with international commercial arbitration.