Law 101

10 Key Legal Concepts You Need to Know When Starting a Business

by GLS GROUP May 05, 2020

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INTRODUCTION 

While most entrepreneurs would have some fundamental knowledge of the law, being able to identify and navigate the legal issues that “move the needle” for new company can be a pain.  

This list is intended to help elucidate some of the most important legal concepts that you should know as a budding business owner, and to help set you up for success in your industry from day one.  

10 THINGS TO LEARN

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1) Contract Enforceability

For business agreements and contracts to be legally enforceable, there must be an exchange of something valuable between parties and an intention to create legal relations.

To put it simply, 4 elements must be fulfilled:

A) Offer
B) Acceptance
C) Consideration
D) Intention by parties to create legal relations

Take for instance, a person is looking to buy a second-hand car and you happen to be moving to another country soon. As a result, you decide to offer to sell your car to him at a price of $1000 (consideration).

The person is delighted and accepts your offer but can only pay you in monthly instalments of $200.

So, you draw up a short commercial contract of sale on your laptop which may set up the presumption of your intention to create legal relations with that person in accordance with the terms of that contract. Both parties then sign the contract. 

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2) Employment Regulations

As employers, you are likely to owe obligations to your staff under the relevant jurisdiction’s statutory labours laws (e.g. the jurisdiction’s employment legislation) and under your employment contract.  

While it is vital to pay close attention to your country’s labour laws to ensure that you don’t run afoul of any regulations, it is equally important to have a well-drafted employment agreement that safeguards your interests as an employer.

A good employment contract should set out the basis for the terms and conditions of employment between you and your employee. It is a legally binding document that sets out the rights and obligations of both parties.

For a better understanding of the key terms you should include in your employment contracts, see this Legal 101s - Employment Issues to learn more.   

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3) Liabilities & Warranties/Representations

Warranties and liabilities often go hand in hand. Both concepts limit contractual risks and provide  parties with certain assurances.

Found in most contracts, warranties/representations are used to show what the seller represents the product or service to be. If a warranty/representation is breached, the non-breaching party may then sue for damages or losses arising from such a breach or perhaps even terminate the contract.

To combat this, provisions with respect to liability can be utilised to reduce the seller’s liability – owing to the breach – to a fixed sum.

Parties may also wish to consider excluding liability for specific types of damages and/or for damages that are disproportionate to the economics of the transaction.

Want to find out how you can utilise these provisions to your advantage? Please click here.

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4) Due Diligence

Let’s say you’re starting a candy shop and you’re looking to load up on Gobstoppers that are not from the iconic Willy Wonka Factory. but from a brand new, albeit smaller company specialising in colourful jawbreakers.

Before you put pen to paper on the commercial engagement, it is best to conduct a detailed examination on the candy offering by the new company. That includes actions like tasting the candy and knowing its properties to ensure that the candy is fit for consumption.

The description above is an example of due diligence which is utilised as a valuable risk management tool for buyers and businesses alike. Conducting due diligence investigations allows you to make informed decisions and avoid ‘bad’ buys or transactions.

The results of such due diligence then affects the drafting of various provisions, including contractual representations and warranties.

This is material as penalties can be imposed if these representations and warranties are deemed untrue or have been breached.

If you would like to know about how you can further safeguard your interests before diving into a commercial relationship with a new party, please click here.

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5) Indemnities

Indemnities are generally located in contractual agreements where the indemnifying party agrees to compensate the indemnified party for losses that the latter incurs arising out of an agreed state of affairs.

They are used as a means of legal protection against the risks associated with a particular state of affairs and typically arise in investment documents or commercial agreements.  

Depending on the probability of risk, it may be prudent to limit your indemnification obligations, in order to reduce your potential contractual liabilities.

On the converse, being the indemnified party can be useful in offsetting any potential losses that you may suffer as the risk is transferred to the other party.

As a rule of thumb, in deciding whether to agree to any request from another party for an indemnity, you should ascertain which party has more control over the indemnified event. It is usually reasonable for the party with greater control over the event to be the indemnifying party.

stakeholder

6) Shareholder Rights

Shareholders’ disputes can be particularly damaging for a company that has just taken flight. Shareholders have rights that are set out in the company’s constitution, general law and the shareholders’ agreement.

Some common examples include the right to get information about the company, general meeting voting rights and the right to sue for wrongful acts.

Detailing shareholders’ rights and obligations in a well drafted shareholders’ agreement is essential for limiting potential disputes and setting out expectations from the outset.

By defining the ‘rules of the road’, everyone is certain about how the important corporate decisions are made and how they affect the company.

As a start-up owner, having a world-class shareholder’s agreement will help make the company more attractive to investors. 

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7) Intellectual Property

If your start-up is based on a novel idea or creation, you will want exclusive protection over that idea/creation to prevent other parties from benefiting from it illegitimately.

Intellectual property rights are designed to grant exclusive rights to creators over the use of their creations of their mind, typically for a certain timeframe.

This helps you to maintain a competitive edge in today’s market as your ideas or creation cannot be legally replicated freely – ensuring that you are the sole owner of that novelty.

If you’re curious about how to go about establishing and safeguarding your intellectual property rights, please read this

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8) Dispute Resolution

Ask any commercial lawyer and he/she will say that this is an absolutely vital provision to set out in any agreement.

Dispute resolution, as its title suggests, dictates the process of resolving disputes amongst parties.

While the default convention is to adhere to the decisions of the courts, many countries are now encouraging companies to resolve legal disputes using alternative dispute resolution means (“ADR”) prior to filing in court.

Some ADR examples include:

Mediation: a procedure where parties convene to mediate their disputes with the help and supervision of an impartial third party who has the necessary trained knowledge.

Arbitration: a confidential proceeding typically utilised by parties to bring their disputes before an objective third party (i.e. an arbitrator) whose decision is binding and enforceable.

Informal Dispute Resolution: senior managers and/or other personnel meeting to discuss and attempting to resolve disputes in good faith and in an equitable manner.

Having these dispute mechanisms in your agreements can potentially help you save time and costs. If you would like our assistance with this, HAVE A FREE CONSULTATION with our GLS legal expert.

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9) Governing Law

All too often, business owners fail to realise the importance of scrutinising provisions that are unrelated to profits and payments – only to be surprised when they find out that they are in an inferior bargaining position in an emerging dispute.

For start-ups aimed at a global outreach, it is highly probable that you will enter into agreements with companies based in different jurisdictions.

In that vein, choosing a governing law and jurisdiction that benefits one the most is a common tactic employed by large corporations.

As a start-up, it is important for you to recognise that governing law clauses can have a big impact on how a contract is enforced as the relevant terms will be interpreted in accordance with the law of the selected jurisdiction.

Your case will have gone to ashes if the law of that selected jurisdiction does not recognise your claim as valid.

At GLS, we have a wealth of legal experts who are able to advise you on situations like these. Scroll to the end of the article to find out more.

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10) Termination

Finally, for a budding start-up, having the right to terminate the contract is essential in diminishing risk that may be potentially detrimental to your business in the event that your counter party does not fulfil his/her obligations.

Termination grants one or both parties the right to end the contractual engagement, under certain agreed upon circumstances.

This is a useful option to exercise in the event that it is no longer practical for parties to continue the contractual relationship.

WHAT’S NEXT?

If you liked this topic, you might also like 15 Powerful legal tips for start-ups.  

*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.  

 

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