There are a number of reasons why parties to a joint venture might prefer a purely contractual arrangement (rather than establishing a separate legal entity in which they invest):
- The parties may prefer to retain control over their own assets, business and employees, rather than transferring them to a joint venture vehicle.
- There will be fewer administrative and filing requirements when establishing a purely contractual arrangement.
- A contractual joint venture avoids the relative formality and permanence of a corporate structure. A purely contractual arrangement is likely to be easier to terminate and unwind than a joint venture operated through a separate legal entity.
- A contractual joint venture has no effect on the direct taxation of the joint venture parties as there is no transfer of their respective businesses to a separate legal entity.
Types of contractual joint venture
The term contractual joint venture covers a number of different types of unincorporated venture. Examples of where a purely contractual arrangement might be used include:
- Research and development or technology collaborations.
- Joint tenders for a particular project under a bidding or consortium agreement.
- Construction or property development projects.
- Resource sharing arrangements.
- The development of a new product.
- Strategic alliances.
- Projects where the participants make their contributions at different stages of the project.
Purpose of the venture
The parties should each 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:
- What is the main or sole purpose of the venture?
- Is the purpose of the venture to carry out a specific project, for example to tender for a particular project or the development of a specific property?
- Is it intended that the project will be ongoing for an unlimited period of time?
- What are the parties’ commercial and strategic objectives?
Before the parties enter into the final contract documentation regulating their relationship in relation to the venture, they may need to put in place preliminary documentation or give consideration to protecting their respective commercial interests during the negotiation period. Accordingly, they will need to give consideration to the following:
- Do the parties wish to have a period of exclusive negotiation?
- Consider entering into confidentiality undertakings.
- Where the proposed venture involves collaborating in a bid or similar opportunity, should there be some form of agreement by each party that they will not proceed with the opportunity alone, including by agreeing not to submit a separate, independent bid (where a bidding or consortium agreement is contemplated)?
- Will heads of terms in respect of the proposed arrangement or collaboration be negotiated?
Structure of the venture
If the parties have decided that a contractual arrangement is the most appropriate structure, still query whether:
- Is there any risk that the contractual joint venture would be considered to be a partnership?
- ensure that the participants do not carry on any business in common, that neither party has authority to bind the other;
- ensure that any profits accrue to each participant separately rather than jointly to the participants;
- avoid joint and several liability for business debts; and
- ensure that the different businesses and assets that make up the joint venture are kept separate, and remain under the ownership of the relevant participant in the venture rather than being merged.
- Is the venture a strategic alliance that will involve one of the parties taking a minority shareholding in the other party, or cross-shareholdings of the parties being taken? If so, consider minority protection issues.
Role and contributions of the parties
It will be important that the parties are 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.
- What will each party’s role be in the venture?
- Will each party be carrying out a specific part of the project in its own separate business?
- Will one party be, for example, tendering for the entire project and appointing the other party as a sub-contractor for a part of the project? If so, a back-to-back subcontracting agreement may be required.
- What duties and obligations will each party have?
- What rights will the parties grant to each other and to third parties (for example, licences to use intellectual property)?
- How long is the relationship between the parties intended to last?
- How will the costs of the project be borne:
- at the outset, for example during an initial tendering phase?
- if the first phase of the project is completed successfully, for example a tender is successful and the main project begins?
- What are the ongoing funding commitments required from the parties?
- In what proportion will the fees generated from the project be allocated?
- Where the parties are jointly selling or marketing what they are working together on, will there be a marketing budget, marketing plan or business plan? What will the parties’ respective responsibilities be under them, and what process will be used to update them from time to time?
Documents regulating the relationship
The documents that the parties enter into governing their relationship will, to some extent, depend on the nature and extent of the projects that they will be working on together.
The agreement that regulates aspects of the relationship between the parties typically covers areas such as the preparation of an annual business plan for the venture, key project targets, restrictive covenants and lines of communication between the parties. The relationship aspects may be dealt with in a number of ways:
- A collaboration agreement covers the relationship of the parties and the operational details of the project, where there is a single project being undertaken; or
- uses a framework structure to provide for multiple or successive projects under one contract, which typically envisages that matters such as the parties’ respective contributions for a particular project will be agreed between the parties in a statement of work.
- The parties may opt to enter into a framework agreement governing their relationship at the outset, which envisages that the parties will enter into separate supply of services/sub-contracting agreements on a project by project basis.
It will be important to ensure that the project scope and the parties’ responsibilities are covered in sufficient detail in the operational aspects of the documentation.
Key areas that may need to be addressed in the collaboration agreement, include:
- The object and scope of the venture, including the territory in which it will be carried out.
- The duration of the venture or project. What are the milestones or other criteria by which the successful completion of the project can be established?
- If sales or marketing is part of the venture, should the documentation include a marketing plan or a business plan that allocates responsibilities and sets targets for the parties?
- The respective roles and contributions of the parties to the venture, ensuring it is clear that the parties retain ownership of the respective assets they are using in relation to the project and will continue to carry out their own respective businesses separately.
- The allocation of costs as between the parties, including marketing budget (if any) and any ongoing funding commitments of the parties.
- A provision confirming that each party is responsible for its own taxes.
- Contractual dealings with third parties and liabilities to third parties:
- should the agreement include indemnities from each party to the other in respect of any claim by a third party as a result of a party’s actions?
- Arrangements for calculating and dividing profits as between the parties.
- Who will oversee the actual implementation of the project for each party?
- Who will own any intellectual property rights developed during the project? To what extent will the parties have access to, or rights over, confidential information, know how, other intellectual property rights or data developed in the course of the venture or existing apart from it?
- Confidentiality undertakings from each party.
- Will the parties be prevented by restrictive covenants from soliciting one another’s customers and employees or from using data of the other party?
- Procedures for agreeing changes in the project, in particular where the project is likely to be a long term one that may change over time. What veto rights will the parties have against changes?
- What liability scheme should apply between the parties?
- Provisions for resolving disputes between the parties, for example escalation procedures or mediation or arbitration procedures.
- Termination arrangements and ongoing obligations to support existing customers after termination.
- Should there be restrictions on a party assigning its rights or subcontracting its obligations?
- What will be the governing law of the agreement and which courts will have jurisdiction?
- Who will own any intellectual property rights developed during the course of the venture?
- To what extent will the parties need access to, or licenses to use, confidential information, know-how and other intellectual property rights of the other party, whether developed in the course of the venture or existing apart from it:
- during the term of the venture; and
- following its termination?
Operation of the venture
- Who will be the project manager within each of the parties to the venture, with overall responsibility for implementation of that party’s responsibilities in relation to the project?
- Do the parties plan to establish a project committee to deal with issues relating to the joint venture? If so, and the parties wish to avoid any inference that the project represents a business run in common and therefore a partnership, it may be advisable to ensure that the committee does not act as the joint controller of the venture in terms of decision-making.
- What forum and method of dispute resolution will be used in relation to disputes arising under the agreement?
- If a form of escalation procedure is to be used, who (within each party’s organisation) will be responsible for the procedure?
- Would there be a case for providing that certain claims by parties against one another should be delayed until after the project has been completed, in particular where the project is a short term one, in order to avoid the parties being distracted from completing the project?
Care needs to be taken when drafting the provisions in the agreement dealing with termination and the consequences of termination. Disputes often arise in this area where the termination provisions do not deal adequately or clearly enough with key issues on termination such as:
- Ownership of, and the right to use, existing assets and assets generated in the venture, including intellectual property rights and data.
- Restrictive covenants.
- Cost allocation.
- Post-termination obligations to support customers.
There may need to be separate termination rights for the relationship arrangement and the project level arrangements. The parties will need to consider whether termination at the relationship level ought to terminate existing projects or whether it only means that there can be no future projects undertaken by the parties together.
When drafting the termination provisions, a number of areas will need consideration:
- Is the joint venture for a fixed term or indefinite in duration?
- Are there any circumstances in which the venture will terminate automatically, for example:
- the loss by any party of a regulatory approval; or
- the loss by any party of a particular asset; or
- the insolvency of any party?
- Are there any circumstances in which any party will be entitled to terminate the joint venture, for example:
- a change of control of any other party; or
- a material breach of the collaboration or cooperation agreement by another party; or
- by notice of termination given after the expiry of a minimum fixed term?
- Should any party to the venture be granted a right to exit the venture at a particular point in time, for example if its contribution is to be made at an early stage?
- What effect would termination have on any other agreements that form part of the venture?
- What arrangements will apply on termination in relation to:
- intellectual property, confidential information, data and know-how generated in the course of the venture and existing apart from it;
- restrictive covenants between the parties; and
- the discharge of outstanding contracts? In particular, if a party supplies deliverables to another party’s customers, and maintains or supports those deliverables during the life of the venture under a collaboration or co-operation agreement or other agreement, should that party have an obligation to provide that maintenance or support for a tail period when the agreement comes to an end?
For more information on this subject, or for assistance with your contractual joint venture, please don’t hesitate to contact Tony Forster (0117 9453 040) or Barry Riley (0117 9453 042).