High Fives and Fist Bumps – What should parties take note of in a Collaboration?
As we continue to grapple with the uncertainty arising from the pandemic, many businesses have been innovating to adapt to the “new normal”. One thing we have noticed, especially among successfully funded startups and SMEs, is the increasing trend for businesses from different industries to collaborate with one another. Typically, the aim of such collaborations would be to curate a more holistic product, to create services with closer integration with other services, and to improve the overall customer experience.
Unlike typical joint ventures which involve a creation of a new business entity, an exchange of equity and deeper integration between parties, collaborations are contractual agreements between parties to work together on specific projects or goals.
Collaborations between two parties often start out with the friendly exploration of business synergies and the exchange of some (potentially sensitive) data, in which case having Mutual Non-Disclosure Agreements signed would be a good first step prior to disclosure.
Working on a term sheet to capture the essential terms of the collaboration would be a useful next step, to allow parties to focus on the practical expectations and obligations in the contractual relationship. While term sheets are used as a prequel to a more formal collaboration agreement down the road and are therefore generally non-legally binding, certain selected terms can and should be made specifically enforceable to protect the respective parties’ interests.
In this article, we explore the common features of a collaboration (for services) and what businesses should consider before entering into one:
- Intellectual Property
A common collaboration between businesses could involve either creation of a new website as a platform, jointly used marketing content or data, or simply the use of one party’s brand in the other party’s existing website or mobile app. Where new forms of intellectual property are created, such as when a new brand is produced, it is crucial for parties to address at the outset the ownership of the intellectual property.
In the situation where one party’s brand will be featured by another party, especially to the wider public, it is important to distinguish the specific brand or logo that is being licensed for use in the collaboration, and to restrict the use of license for purposes specifically related to the collaboration only. Parties could go a step further by ensuring that any material containing the other’s intellectual property must be approved prior to use.
- Party’s obligations/commitment
As the nature of collaboration involves commitment by both parties, it goes without saying that both parties’ obligations, be it monetary or in-kind contributions of effort or resources, should be specified in the agreement. Having a clearly-defined scope of roles and responsibilities would form the solid foundation to the collaboration. While general platitudes of ‘mutual co-operation in good faith’ are common, listing out specific commitments and actions that are vital to the success of the collaboration will yield greater clarity and manage expectations between parties.
Collaborations between businesses could also involve a revenue-sharing mechanism, or the payment of a fee or commission by one partner to the other. Computation of revenue share or fees payable could become complicated in a collaboration. Taking refunds as an example – in the event that a refund to customer needs to be made after payment of the fee or commission to partner, how will such refunds be taken into account? Will the commission also be refunded?
The payment mechanism and terms have to be thought through by both parties in different potential scenarios, in order to safeguard both parties’ interests and to reduce the risks of legal disputes.
- Collaboration costs
It is not uncommon for parties to spend months developing the project only for the collaboration to fall through midway. While the premature termination of the project is never intended from the beginning, each party may have incurred significant time, money and resources in the collaboration.
Hence, while the general approach is for each party to bear its own costs, parties can consider negotiating upfront on how the costs and expenses that have already incurred be shared or apportioned, in the event the project is terminated, especially if it is due to the fault or omission of a particular party. This aspect is often neglected resulting in a party having little or no recourse to recover the costs incurred.
An exclusivity clause in a collaboration agreement prohibits the parties from entering into collaboration of similar nature with any other parties. In other words, the parties agree to collaborate exclusively with one another only.
However, a commitment of such nature needs to be contemplated carefully. Exclusivity clauses can be useful, but the scope of exclusivity needs to be clearly defined. Having a wide or loosely drafted exclusivity clause could inadvertently result in unanticipated roadblocks if a party intends to enter into collaborations with other 3rd parties even where it is not directly competing with the other collaboration partner.
- Sharing of Personal Data
Collaboration between two parties could also involve the collection and processing of personal data by either party (sometimes, both), or sharing of customers’ personal data to the other party. In this regard, it is important that both parties understand clearly their obligations and responsibilities under the Personal Data Protection Act 2010 (“PDPA”).
Broadly speaking, PDPA requires the data user to procure consent of the data subjects before collecting, processing and disclosing their personal data to other parties. The Retention Principle under the PDPA further limits the period of time a data user can keep the personal data, and the onus is on the data user to ensure that all personal data will be destroyed if the data is no longer required.
Hence, the collaboration agreement should also address each party’s obligations in respect of data protection, to avoid breaching the PDPA.
The list above is non-exhaustive and there are many other aspects that parties need to look into before entering into a collaboration or alliance, depending on the nature and objectives of the commercial relationship. Do consider the various technical and practical aspects of a collaboration carefully before “high-fiving” your way into one, because unlike a casual relationship, once you enter into a legally binding collaboration agreement, one cannot simply just “take a break” and walk away without consequences!
This article was written by Shawn Ho and Ee Lyne Chong. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.