What You Should Know About Common Types of Commercial Contracts

What You Should Know About Common Types of Commercial Contracts

In the previous article, I set out some simple concepts of a contract, various forms of contracts (written, oral and implied) and tips for signing a contract. In this article, I will explain the common types of commercial contracts that parties usually enter into in their day to day business.

Different Types of Commercial Contracts

Employment Contract

It is basically a legal document that sets out the scope and conditions of the employment terms and you should sign an employment contract every time you offer an employment position to a new employee.

It usually contains the personal details of the employee, starting date, salary and commission (if applicable). You may add other specifications such as health benefits, grievance procedures, entitlement for vacation and sick leave, etc.

If the job requires the employee to create a new invention or product, you should add a clause on ownership of ideas and inventions.

A restraint of trade clause i.e. a clause that prohibits the employee from engaging in a business that competes with your business after he leaves employment is generally not enforceable.

However, a non-solicitation clause i.e. a clause that prohibits the employee from poaching your other employees to join his business is enforceable.

Independent Contractor Agreement

These type of commercial contracts are used when you hire a contractor to perform certain works during a fixed period of time, usually for a specific project or campaign.

Contractors are not considered employees of your company, hence they are responsible for filing their own taxes and are NOT entitled to employee benefits such as EPF and SOCSO.

Since they are not your employees, you do not have full control on how the work should be done or the working hours of the contractors, other than those requirements that you have specifically set out in the agreement. Because of this, your obligations as a hirer are much lesser than your obligations as an employer.

Please do not mask an employment contract as an independent contractor agreement to avoid the obligations that an employer should have.

Partnership Agreement

When two or more individuals come together to form a partnership;

  • Whether it is a limited liability partnership (under the Limited Liability Partnerships Act 2012); or
  • Conventional partnership (under the Partnership Act 1961);

It is advisable to have a carefully drafted partnership agreement to set out the terms of the business relationship.

These type of commercial contracts should set out the profit and loss sharing arrangement, the responsibilities of each partner, proper procedures for changes and termination of the partnership.

Confidentiality Agreement/Non-Disclosure Agreement

This agreement is relevant in the event you plan to disclose a trade secret or sensitive commercial data, which can be protected as “confidential information”.

This is particularly useful when you are at the stage of evaluating a potential business opportunity or collaboration with another party, where both parties want to share confidential information with each other confidently, knowing that they are bound by an obligation to keep it secret.

Some examples of confidential information include client list, recipe, business plan, marketing plan, drawing/design of a product, sales forecasts, minutes of meetings, etc.

Website Terms and Conditions and Privacy Policy

These two are the most basic documents that form commercial contracts that every online business should have on their website.

Website Terms and Conditions basically sets out the parameter in which users/visitors of the website can do on the website, and is, in fact, a contract between the website owner and the users/visitors.

It usually contains clauses that grant users/visitors a right to use website materials, impose acceptable use obligations, limit warranties and disclaim liabilities to the extent allowed under the law.

A privacy policy, on the other hand, is essentially a document that sets out how the website owner processes personal data collected via the website.

Under the Personal Data Protection Act 2010, every data user (a person who collects personal data) must:

  • Obtain consent from the data subjects (persons who data are being collected or processed);
  • Give notice to the data subjects;
  • Process data only in accordance with the privacy policy;
  • Keep data for a reasonable period of time and keep it secure; and
  • Destroy old data when no longer in use.

Shareholders’ Agreement

A shareholders’ Agreement is a legal document drawn up to govern the relationship between members or shareholders of a private limited company.

This agreement is intended to make sure that all shareholders are treated fairly and that their rights are protected so as to protect their investment in the company. It sets out the:

  • Shareholders’ rights and obligations;
  • Regulates the sale of shares in the company;
  • Describes how the company is going to be run; provides an element of protection for minority shareholders and the company; and
  • Defines how important decisions are to be made.

You are encouraged to put in place a shareholders’ agreement immediately once your company is incorporated and the first set of shares is issued.

This is to prevent a situation where the relationship between the parties gets worse and they end up fighting for their rights and entitlements because there is no shareholders’ agreement in place.

Although the company’s constitution will help to some extent, a fully considered and well-drafted shareholders’ agreement can act as a safeguard and give you and your fellow shareholders more protection against these types of scenario.

Share Purchase Agreement (SPA) and Share Subscription Agreement (SSA)

Scenario 1

Sam Sdn Bhd has 2 shareholders, (A) and (B). (A) intends to sell his shares to (C), who is a new investor to Sam Sdn Bhd. SPA is an agreement that records the sale/purchase of shares from an existing shareholder (A) to a new shareholder (C) in a private limited company.

After the transaction is completed, (B) and (C) will remain as shareholders and (A) will be out of the picture.

Scenario 2

A new investor, (C), wishes to invest in Sam Sdn Bhd. (A) and (B) do not have the intention to sell their shares. In order to bring (C) in, they have decided to increase Sam Sdn Bhd’s paid up capital. (A), (B) and (C) will enter into an SSA, which records the issuance of fresh shares in Sam Sdn Bhd to the new investor (C).

An SPA is similar in nature to an SSA. The only difference is the subject matter of the agreement.

An SPA is signed when there is a transfer of shares from a shareholder to an investor. While an SSA is signed when there is a fresh issuance of shares and all existing shareholders remain in the company.

IP Agreements (Assignment, Licensing)

In the tech industry, assignment and licensing agreements play an important role in determining who owns and develops a product.

An assignment agreement is signed when the IP owner transfers all his ownership to a party. Whereas a licensing agreement is signed when the IP owner grants exclusive or non-exclusive permission to a party to use his patent, trademark, software, etc. However, the IP owner still retains the ownership in the IP.

About the author:
This article was written by Edwin Lee Yong Cieh, Partner of LPP Law – law firm in Kuala Lumpur, Malaysia (+6016 928 6130, [email protected]). 
This article was first published in CHIP Magazine Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
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