Five of the most important provisions in a joint venture agreement
The use of joint ventures in the construction sector continues to rise. Very often it’s about sharing the risk as much as pooling skills and resources.
In the UK, the increasing use of frameworks in infrastructure projects has dictated the need for more JVs. Internationally, the need to link up with local partners is often another imperative for such collaborations.
There are a number of ways of establishing JVs. In construction and infrastructure projects, the most common form is the contractual one. Others include establishing a separate limited company or forming a limited liability partnership. The contractual JV is often described as a consortium. Here, no new legal entity is formed. The parties will enter into a JV agreement which regulates the rights and responsibilities of each party within the JV.
It is imperative that the JV agreement regulates the parties’ relationships effectively and that there are adequate mechanisms to deal with the JV coming to an end, either naturally or in the event of a fall-out.
So what are the common provisions that need to be included in a JV agreement?
The participation shares
Some JV agreements cover the circumstances of making a bid as well as running the contract if awarded. Others split these two out so that there is a pre-bid agreement and, in the event of an award, a JV agreement.
Most important is the provision as to how the parties will share the profits and losses. These are usually described as the participation shares. This provision will also contain an indemnity whereby each consortium member agrees to indemnify the other to the extent of its participation share.
The participation share provision should also deal with the circumstance where one member defaults or leaves the consortium, leaving two or more parties. For example, how will the leaving party’s share be allocated?
Management of the JV
A management committee structure will typically be put in place with one or more representatives from each consortium member. There will be provision for what is to happen if the committee cannot agree, with an “escalation” provision pushing such issues up to a more senior individual within each company. A commercial/project manager will usually be appointed from one of the member companies to run the day-to-day affairs of the JV.
Arbitration may keep any disputes from the public eye and in most cross-border JVs will be the preferred dispute provision
To avoid conflicts of interest, it is always sensible for the management committee members to be separate from those tasked with the day-to-day delivery of their part of the JV.
This will provide for the setting up of the JV bank account. The members are likely to be asked to contribute to the extent of their participation percentages up to a level set by the management committee and kept under review. Then, when sums are paid by the employer, they go straight into the JV bank account. There will be provision for how these funds are to be distributed, with agreed costs, overheads and sometimes a management fee coming ahead of the allocation of profit. The JV agreement is also likely to provide for a regular audit of the operation of this account.
The agreement will provide for the circumstances in which a member will cease to be part of the JV - on default or otherwise. Default will be defined. It is likely to include insolvency and material breach by that party. What is a material breach or not remains a regular source of dispute.
The provision must also identify what is a remediable event of default or not, and what is to happen to the defaulting party’s share of profit or losses, as well as its participation share.
It may be that plant, materials, intellectual property or resources of the defaulting party are required to complete the project. It therefore makes sense to detail an agreement that the continuing members can use such assets and resources beyond the exit of the defaulting party with an obligation to account for them.
The dispute provision, where the escalation provisions have been exhausted, will state either litigation or arbitration. The latter may keep any disputes from the public eye and in most cross-border JVs will be the preferred route. If the agreement adequately and clearly covers allocation of risks, the chances of having to invoke this may be significantly reduced.
Lindy Patterson QC is a partner in Dundas & Wilson