08/02/2017
Whether you are a large organisation or an SME, for some construction projects it makes sense to team up with another business. The most common vehicle used to make this happen is a joint venture.
A joint venture is ideal in situations in which a company lacks the resources to take on a project. By entering into a joint venture, it can pool resources with others and pitch for large, high-profile tenders. Joint ventures also allow a start-up or SME to benefit from the financial stability and reputation of a larger, more established organisation and provide a vehicle for UK companies to take on construction projects off-shore if they are unfamiliar with the local language and market.
What is a joint venture?
A joint venture is typically an agreement between two entities to pool resources for the purpose of a particular project. There is no merger of the businesses; each maintains its separate functions with the joint venture being dictated by a comprehensive agreement between the parties.
Parties to a joint venture can provide labour, land, capital, supplies and intellectual property to the project. It is imperative to the success of the joint venture that each company shares the same vision, desires the same outcome and can resolve disputes swiftly.
Setting out the initial joint venture agreement
Getting parties to agree on a shared vision is often the first hurdle that needs to be overcome before a joint venture can proceed. It is crucial that parties seek legal advice in the first stages. An experienced construction lawyer will get the parties to consider:
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how many shares the parties to the joint venture will each own
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how the joint venture will be managed and run
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what funding will be used, both initially and long-term
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the resources and assets each party will provide
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how profits will be distributed
To ensure the client’s confidence, it is often a good strategy to install a specific group to oversee the joint venture and provide a central point of contact. Due diligence may also need to be carried out on:
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the company if the other party is unfamiliar with it
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the business or assets to be transferred by the joint venture
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the JVC itself, if it is an existing subsidiary of one of the parties
Much of the scope of the due diligence required will depend on the structure of the joint venture. Options include:
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a limited liability company
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a conventional partnership
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a limited liability partnership (LLP)
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a contractual agreement
Professional advice is valuable at this point as tax considerations will play a major role in deciding the best type of structure for the joint venture.
Dealing with disputes in a joint venture
Disputes and deadlocks can plague joint venture agreements and adversely affect their profitability.
Corporate joint ventures will be set up so that through the use of voting rights, key decisions can only be taken when all parties reach agreement. This may result in deadlock, so when drafting the contract, the parties should consider which key issues will require unanimous consent. Such matters may include:
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approval of the business plan
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amendment to the joint venture agreement
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material amendment to the proposed development
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admission of a new joint venture partner
Because many joint ventures involve off-shore contracts, arbitration is often used as a dispute resolution method, especially if multiple parties are involved in the project. However, mediation can be just as effective for smaller, local projects. To ensure disputes do not drain the parties to a construction project joint venture, a disputes resolution clause should be clearly drafted in the agreement, with reference to how arbitration or mediation can proceed and a provision detailing when compensation can be claimed in the event that one party suffers damage following the dispute.
Final words
Joint ventures provide an effective way for construction companies and businesses to join forces with an entity that can provide the additional skills, resources and capital required to take on a particular development project. To ensure the project runs smoothly and each party receives the maximum return on their investment, expert legal advice should be sought from the beginning of the venture. If a dispute or deadlock does develop, a well-drafted joint venture agreement and expert legal advice can prevent matters spiralling out of control, helping to ensure the profitability of the project for both parties.
Fisher Scoggins Waters are a London based law firm who specialise in construction, manufacturing and engineering law. If you would like more information about joint ventures or joint venture disputes, please phone us on 0207 993 6960.