EM Law are experts in drafting, negotiating and advising clients on joint venture agreements. Our lead contract lawyer is Neil Williamson who has extensive experience in advising clients on a wide range of commercial law matters.
A joint venture is a commercial arrangement where different people or businesses come together and combine resources to achieve a common objective. Joint ventures can be incorporated or unincorporated. Incorporated joint ventures create a new company whereas unincorporated joint ventures, the most common of the two, do not. This note focuses on unincorporated joint ventures.
Unincorporated joint ventures do not exist as separate legal entities and include contractual joint ventures where the participants agree to associate as independent contractors, rather than as shareholders in a company or partners in a legal partnership.
Although it is not technically necessary to put anything in writing to form this type of unincorporated joint venture, problems can arise if no written contract is drawn up. This is because the joint venture agreement, amongst other matters, specifies the rights and obligations of the parties, and what will happen if difficulties arise.
Joint venture agreements are likely to be highly specific but are expected to cover the following matters:
• The object and scope (including duration) of the venture.
• Financial and other contributions of the parties including funding arrangements and contracts with third parties.
• Arrangements for calculating and dividing revenues or profits (if any).
• Responsibility for losses and liabilities to third parties and indemnity arrangements.
• Management and decision-making processes.
• Transferability of participations.
• Provisions for resolving disputes.
• Termination arrangements.
There are a number of reasons why parties might prefer a purely contractual arrangement rather than establishing a separate legal entity or partnership. The parties may prefer to retain control over their own assets, business and employees, rather than transferring them to a joint venture vehicle. A contractual joint venture is also a less formal option and, as well as fewer administrative and filing requirements, will arguably be easier to terminate than a joint venture operated through a separate legal entity.
When the parties have decided that a contractual arrangement is the most appropriate structure, although a separate joint venture is not being set up, there will be a number of other, initial structuring points that may need to be addressed. If the venture is a cross-border venture then the legal and tax considerations from the other jurisdiction will need to be taken into account. Parties also need to make sure that the contractual joint venture will not be considered to be a partnership. By their very nature, joint ventures frequently involve some degree of sharing returns from the activities and from the related costs and there is often a concern that, contrary to the intention of the parties, the arrangements may be held to be a legal partnership. It is therefore common practice to include an express declaration of an intention not to create a partnership. In these circumstances it is also usual to provide that each party acts for its own account as principal and, except where specifically provided in the agreement, has no authority to bind the others. Profits should also accrue to each participant separately rather than jointly.
Not being a partner in the legal sense, a participant in a purely contractual arrangement will not have statutory responsibility for the liabilities and obligations of the joint venture and for acts and omissions of its co-venturers. However, any participant will be exposed to claims and liabilities, which could be unlimited, as a consequence of both its own activities and those of other participants for whom it has expressly assumed responsibility or is vicariously liable for under the joint venture agreement.
Parties should be clear from the outset as to the main aims of the venture as this will determine what the contractual obligations between them ought to be. Parties should decide what the sole purpose of the venture is and whether the venture is designed to carry out a specific project or be ongoing for an unlimited period of time. In addition, the parties should be clear on their commercial and strategic objectives. The parties must be clear as to their respective roles in, and contributions to, the venture, and what they are each prepared, and able, to contribute. This will assist greatly in the negotiation and drafting of what may be quite complex joint venture documentation.
For any questions you may have concerning joint venture agreements contact Neil Williamson.
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