Commercial agreements with commercial partners
When you trade beyond the borders of your country, you will encounter issues that are unique to the global trading landscape. Taking a proactive approach, particularly considering the types of commercial agreements that will need to be put in place with your international partners, can put you one step ahead. Each business and each commercial transaction is unique. This section introduces the different types of commercial agreements that may suit your business needs.
What is an agreement?
An agreement or a contract is essentially an understanding or arrangement between two or more parties (either individuals or entities) that sets out the respective rights and obligations of each party within the transaction.
Agreements form the backbone of business arrangements and transactions. The key to getting an agreement right is to ensure that the agreed position is clearly documented and suits your business needs (e.g. does it allow your business to do what your business wishes to do) and to control or minimise your risks (e.g. which party will cover claims and losses when things go wrong).
Setting out or negotiating these details at the outset are crucial as they can make or break a deal. It is also important that the terms are set out clearly and in an unambiguous way so that each party clearly understands their rights and obligations as well as the expectations of the other party.
There usually isn’t a one size fits all agreement, and it is generally recommended that each agreement be specifically drafted and tailored to your particular circumstances and transactions.
Types of Commercial Agreements
There are several types of commercial agreements, and each serves a different purpose.
If you are planning to discuss confidential information with potential business partners, investors, manufacturers or customers, it would be prudent to enter into a confidentiality agreement (or non-disclosure agreement) with them prior to the disclosure. A confidentiality agreement may be unilateral (where the confidentiality obligation is on one party) or mutual (where both parties are required to keep the disclosed information confidential). Confidential agreements can be particularly important in circumstances where trade secrets, new technologies and commercially sensitive information (such as client lists) are disclosed.
In preparing confidentiality agreements, it is important to clearly define the confidential information that is to be disclosed and how it may be used by the other party.
Manufacturing of products are often outsourced to a third party given that businesses often do not have the capacity or funds to manufacture in-house. In these circumstances, having a manufacturing agreement in place which clearly defines the rights and obligations of the manufacturer is crucial. Manufacturing agreements can often be complex but should cover all aspects of the transaction from product specifications and material procurement to payment and delivery. It should also include terms in relation to consequences of product defects or failure. It is also essential to include terms which govern and restrict the use of a particular design or IP.
Supply and Distribution Agreements
Supply and distribution agreements commonly arise in circumstances where a supplier or manufacturer engages a distributor to sell their products at a wholesale or retail level. This often involves the distributor purchasing products from the supplier or manufacturer and reselling these products. Such agreements can be exclusive (where a distributor is granted the right to be the only seller of the products) or non-exclusive (where there are multiple distributors of the same products), and be restricted to a particular geographical area or customer channel. For exclusive supply and distribution agreements, it is particularly important to include key performance indicators and the consequences of not reaching those targets, such as termination, or conversion of the granted rights to non-exclusive.
Intellectual Property Assignment and Licence
If you have purchased or sold a business with IP assets, or engaged someone to create a product or certain material for you, an IP assignment may be needed. An IP assignment is used to transfer ownership of IP rights (such as trade marks, copyright, designs and patents) from one party to another.
If, however you have permitted someone to use or exploit your IP but not transferred the ownership of your rights, a licence agreement may be appropriate so that you remain in control of your IP. For example, provisions of trade mark licences will often be included in manufacturing or distribution agreements to allow the manufacturer or distributor to use the trade marks to manufacture or promote products. However, ownership of the trade marks will remain with the original owner.
Businesses often engage consultants with specialist knowledge or skills to assist with a particular project or business need. This arrangement can be formalised through a consultancy agreement which covers, amongst other things, the scope of services, deliverables and IP property created by the consultant. If this aspect is not covered, under the laws of some countries (such as Australia) ownership of such IP will stay with the consultant.
Importance of a Written Agreement
While agreements can be verbal or written, it is best practice to have a written agreement in place for certainty. A written agreement will clearly outline what has been agreed to and the obligations of each party. A written agreement would also give you something concrete to rely on should a contractual dispute arise.
Enforceability and Local Requirements
If your business arrangements extend beyond Australia, it is important that your dealings and agreements also comply with the local laws and regulations of the foreign jurisdiction. It is recommended that local advice is sought given that local laws and regulations between each country are often quite different to Australia. Legal issues regarding import/export controls, IP and tax law are especially important.
Having appropriate commercial agreements, especially with international business partners, will help you run your export business smoothly and with more certainty. Putting an agreement in place prompts you to consider the specific details of your commercial arrangements and assist with risk management.
This article is written by Sylvie Tso, Principal at Spruson & Ferguson.