Working with another business can create opportunities that would be difficult to achieve alone. You might combine expertise to develop a new product, enter a new market, bid for a larger contract, or share resources to reduce costs. But collaboration also means relying on another business to deliver on its commitments.
If you are considering a collaboration, this guide explains what a collaboration agreement should include, and the key legal and commercial issues to consider before you start working together.
If you are planning to collaborate with another business, our joint venture agreement solicitors can help you put an agreement in place that protects your interests and supports your commercial objectives.
Jump to:
- When are collaboration agreements used?
- Do you need a collaboration agreement?
- What should you include in a collaboration agreement?
- How should profits, costs and revenue be shared?
- What happens if one party breaches a collaboration agreement?
- Can a collaboration agreement be transferred to another business?
- What happens if one party becomes insolvent?
- Summary
When are collaboration agreements used?
Businesses don't always have the resources, expertise or market reach to achieve their objectives on their own. Collaborating with another organisation can be an effective way to accelerate growth, whether that's by developing a new product, combining specialist knowledge, entering a new market or delivering a project that would be difficult to undertake independently.
Unlike a merger or acquisition, a collaboration allows each business to remain separate while working towards a shared commercial objective. The relationship might last for a few months while a specific project is completed, or it could continue for many years as part of a wider strategic partnership. Where the arrangement is more integrated or involves shared control, a joint venture agreement may also be worth considering.
Collaboration agreements are particularly common where businesses want to share investment, expertise or resources without creating a new company. For example, two technology businesses might work together to develop software, a manufacturer could partner with a distributor to enter overseas markets, or professional service firms may collaborate to bid for larger contracts.
While the commercial opportunities can be significant, collaboration also creates new legal and commercial risks. You are relying on another business to fulfil its commitments, protect your confidential information and contribute fairly to the project. A collaboration agreement provides the framework that allows both parties to work together with confidence, knowing they have already agreed how the relationship will operate if circumstances change.
Do you need a collaboration agreement?
It is possible to collaborate without a formal written agreement, but doing so leaves both businesses exposed if expectations diverge or the relationship breaks down. At the beginning of a new venture, it's easy to assume everyone shares the same understanding of how the collaboration will work. The reality is, commercial priorities can change surprisingly quickly, a project may become more expensive than expected, one party may contribute more time or resources than originally anticipated, or valuable intellectual property may emerge that neither business considered at the outset.
Without a written agreement, resolving these issues often becomes far more difficult. Each party may have a different interpretation of what was agreed, increasing the likelihood of costly disputes and damaging what may have been a valuable commercial relationship.
A well drafted collaboration agreement isn't about preparing for failure. It's about creating certainty. By documenting each party's responsibilities, financial commitments and expectations from the outset, you reduce ambiguity and allow both businesses to focus on achieving their shared objectives rather than worrying about legal uncertainty.
It can also strengthen the relationship itself. Clear expectations encourage better communication and provide an agreed process for making decisions, resolving disagreements and adapting the collaboration as the project evolves.
What should you include in a collaboration agreement?
There is no standard collaboration agreement. A collaboration to develop new technology will require different terms from a joint marketing campaign or a long term strategic alliance. The agreement should reflect how the parties will work together rather than relying on generic template wording.
Scope
The agreement should clearly define what the collaboration is intended to achieve, what each party will contribute and which activities fall outside the arrangement. Setting these boundaries from the outset helps avoid misunderstandings later.
Intellectual property
If either party brings existing know-how, software, trade marks or other intellectual property into the collaboration, the agreement should confirm that those assets remain their property unless agreed otherwise. It should also deal with ownership of any new intellectual property created during the collaboration and whether either party can continue using it after the collaboration ends.
Governance and decision making
The agreement should explain how decisions will be made and who has authority to make them. It should also set out reporting requirements, approval processes and any governance arrangements needed to keep the collaboration running smoothly.
Financial arrangements
If the collaboration involves funding, shared costs, revenue or profit sharing, the agreement should explain how these arrangements will work.
Confidentiality and liability
Businesses often share commercially sensitive information during a collaboration. The agreement should include appropriate confidentiality obligations and set out each party's liability if something goes wrong.
Disputes and exit
The agreement should include a process for resolving disputes and explain how either party can bring the collaboration to an end. It should also deal with practical issues such as returning confidential information, completing ongoing work and any continuing rights to use intellectual property.
Taking the time to tailor these provisions to the collaboration is usually far less expensive than resolving disputes later.
How should profits, costs and revenue be shared?
Many businesses instinctively assume that profits should be divided equally, but that isn't always the fairest or most commercially sensible approach. One business may provide funding while the other contributes specialist expertise, existing customer relationships or valuable intellectual property. Those different contributions should be reflected in the commercial terms.
The agreement should explain not only how profits will be shared, but also how costs will be managed throughout the collaboration. It should be clear who is responsible for funding the project, what happens if additional investment is required and how unexpected expenses will be dealt with.
It's equally important to agree how revenue will be collected and accounted for. Where one business is responsible for receiving payments on behalf of both parties, the other may require reporting obligations or audit rights to ensure financial transparency.
Addressing these issues at the outset helps prevent disagreements if the collaboration becomes more successful than expected or less profitable than either party had hoped.
What happens if one party breaches a collaboration agreement?
Even the strongest commercial relationships can encounter difficulties. The key is ensuring the agreement provides a sensible framework for dealing with problems before they escalate into formal disputes.
Not every breach should have the same consequences. Missing an administrative deadline is very different from disclosing confidential information, failing to deliver key services or misusing another business's intellectual property. A well drafted agreement should distinguish between minor issues that can be remedied and serious breaches that may justify bringing the collaboration to an end.
Many agreements require the defaulting party to correct the breach within a specified period before further action can be taken. Where that's not possible, the agreement may allow the innocent party to recover financial losses or terminate the collaboration altogether.
It is also common to include a dispute resolution process requiring senior representatives from both businesses to meet before court proceedings are considered. In many cases, preserving the commercial relationship is far more valuable than winning a legal dispute.
Can a collaboration agreement be transferred to another business?
Businesses often enter collaborations because of the particular expertise, reputation or resources of the organisation they are working with. If that business is sold, restructures or wishes to transfer the agreement to another group company, the other party may not be comfortable continuing the relationship with an entirely different organisation.
For that reason, collaboration agreements commonly restrict assignment or transfer unless the other party gives its consent. Where a business sale takes place, it may be necessary to enter into a novation agreement so that all parties formally agree the transfer of rights and obligations. Thinking about these issues before they are needed helps avoid disruption if ownership changes during the lifetime of the collaboration.
What happens if one party becomes insolvent?
Insolvency can have significant consequences for a collaboration, particularly where one business is responsible for providing funding, specialist expertise or technology.
Most collaboration agreements include provisions allowing the other party to terminate the agreement if a formal insolvency process begins. Ending the relationship isn't always the most practical solution. Depending on the circumstances, the remaining business may need continued access to intellectual property, project materials or partially completed work in order to minimise disruption.
The agreement should therefore consider what happens if insolvency occurs. This might include dealing with ownership of work completed before insolvency, returning confidential information and ensuring that key intellectual property rights remain protected.
Although insolvency may feel like a remote possibility at the start of a collaboration, planning for it can significantly reduce uncertainty if financial difficulties arise later.
Summary
Collaboration agreements help businesses work together with confidence by setting clear expectations from the outset. Whether you are developing a new product, entering a new market or combining expertise, a well drafted agreement can protect your interests and reduce the risk of disputes.
If you are planning to collaborate with another business, our joint venture agreement solicitors can help you put an agreement in place that supports your commercial objectives.
