In the business world, it is critical to establish a system of rules that govern and speak on the enforcement of obligations. Businesses should ensure that their interests are protected and contracts exist to afford such protection and ensure the survival of a business.
Here are four contracts that are crucial for every business to not only minimize risk but to protect both you and your business by helping you understand your rights and obligations in relation to the transactions.
1. Service level agreement
A service level agreement is a documented or written agreement between a service provider and a customer that identifies both the services required and the expected level of expected service. It is the primary agreement that regulates the relationship between the service provider and the client.
It should also contain specific payment conditions and terms, including the procedure in the event of a breach of the agreement. As a business, you will either be providing services to a client, or contracting services from another party, so you will more than likely need a service level agreement.
Small businesses more often than not bear the risk when contracting with bigger corporations for service. It is crucial for SMEs to ensure that a service level agreement is in place that will safeguard the interests of their business and highlight the liability for both parties.
2. Employment contracts
Employment contracts are vital contracts that every SME should have. It regulates the terms and conditions between the employer and the employee. Every employer is required by law (Basic Conditions of Employment Act – section 29) to provide an employee with a written contract of employment, not later than the first day of commencement of employment.
It is crucial to know the difference between a fixed-term contract and a permanent contract. A fixed-term contract and a permanent contract are similar, almost identical, except that the contract will stipulate a starting date and an ending date, and terminates on the occurrence of a specified date or the completion of a specified task or project.
Fixed-term contracts, due to the specificity of the project are normally drafted for a few months only. Importantly, a fixed-term contract must indicate a justifiable reason in respect of the period. The Labour Relations Act sets out a list of items that are considered reasonably justifiable but the list is not exhaustive hence each contract is assessed on its own basis.
3. Shareholder agreement or partnership agreement
This agreement regulates the relationship between partners or shareholders in a business. It formalizes the relationship and governs the duties and responsibilities between the partners or shareholders through agreed terms and regulations.
It is used as a mechanism when it comes to the distribution of profit and/or dividends, depending on the agreement. Regarding the sale of shares, it clearly sets out the process, notice, and timelines to be followed.
Both the shareholder and partnership agreement will contain clauses to regulate conduct and processes that need to be followed in the event of disputes or deadlocks, as well as specifically set out how such disputes are to be resolved.
It not only protects the majority’s interests but also the interests of minority shareholders.
The following are key elements in a shareholders’ agreement:
- Shares: This specifically sets out how shares will be bought, sold, or transferred including details of what happens in the event of death or optional/mandatory buying back of shares.
- Voting rights: The agreement will outline the type of decisions that are made and by whom. It could include shareholders’ rights to vote on corporate guidelines, the appointment of directors, and other matters.
- Financial arrangements: The agreement should essentially outline how the company will raise funds. This is often through funding by the shareholders themselves, equity, debt, or alternative means. The financial arrangement will also regulate what happens when a shareholder is no longer able to contribute.
- Pre-emptive rights: Essentially, the shareholders would be entitled to the first offer of newly issued stock before the shares are offered to third parties.
4. Lease Agreement
Lastly, commercial lease agreements are crucial if you will be renting space to operate your business. Small businesses were adversely impacted during the pandemic (COVID-19) as they were caught in predicaments where they were liable to continue paying rentals, as per the lease agreement despite the financial difficulties the business might have experienced.
In terms of our common law, where an agreement has been reached between parties and something occurs beyond the control of one or more of the parties, which makes the performance of their contractual obligations impossible, the principle of supervening impossibility will apply.
Generally, this means that if an event occurs (national lockdown), which does not flow from a deliberate act/omission of the parties (tenant or landlord), which makes it impossible for one party (tenant) to perform (pay rent), then that party does not have to perform. While this might extinguish the contract in extreme conditions, the issue might be temporary, and then obligations are only suspended.
It is crucial to ensure that the lease agreements entered into safeguard the interests of both the landlord and tenant. The above are not the only contracts an SME should have but are rather considered to be the most important ones to safeguard the interests of small businesses. The above also forms part of the agreements Clientèle Legal Business drafts for its clients.
