Joint Ventures, whilst offering many benefits, can be susceptible to disagreements, disputes and conflicts – hence the importance of a Joint Venture Agreement at the outset.
Firstly, what is a Joint Venture? JVs can be an effective way to manage and reduce the financial risk of a new business venture as well as being a great way to combine resources, knowledge, skills and technology or access new markets and territories.
There are a number of joint venture structures businesses can adopt, including:
- entering into a contractual arrangement;
- specific collaboration agreements between concerned parties;
- establishing a joint venture through a limited company in which each party holds shares;
- a general / Limited Liability Partnership;
- or a traditional Unincorporated Partnership under the Partnership Act 1890
Given that Joint Ventures require participation and contribution of multiple parties, it’s not uncommon for tensions and disagreements to surface.
Common Joint Venture disputes can centre around the management of the joint venture. Conflict can be caused when one side dominates the running of the project. Confusion may also arise from who is actually part of the overall JV management team or through the differing styles of management / leadership within each party.
Although all parties may have the same interests in the Joint Venture, their objectives and desired outcomes may be vastly different. Joint Ventures can involve all sides working in close vicinity of each other, with different working practices becoming a source of tension.
When a Joint Venture has run its course, it’s possible that one party takes market data or lessons learnt through the JV and sets up its own operation in competition – though this is typically taken care of through an anti-competition clause in a Joint Venture Agreement.
Other sources of Joint Venture conflict can include:
- Disagreeing about each party’s proportion of the business and their share of the rewards;
- Each party’s expected level of contribution and input to the Joint Venture’s success;
- Differences over the future direction of the business,
- Tension around introducing a new external party to the Joint Venture.
The need for a robust Joint Venture Agreement
A Joint Venture Agreement can avert disputes, by predicting problems and establishing how they should be taken care of. Depending on the legal form the Joint Venture has taken, a different Joint Venture Agreement will be applicable but our Commercial Solicitors at SO Legal would recommend drawing up a written Joint Venture Agreement either in the form of
- a Shareholder Agreement if the Joint Venture is through a company
- an LLP Agreement if dealing with an Limited Liability Partnership or
- a Partnership Agreement for a traditional partnership.
A written Joint Venture Agreement should clearly lay out factors such as each party’s stake of the business, roles, responsibilities, the management and decision-making processes, future rewards and the exit strategy.
Going in to a JV without a Joint Venture Agreement in place will increase the likelihood of conflict and disagreements and is a serious false economy. The financial cost and emotional burden of addressing and solving disputes will be much higher in the long-run.