5 Things to Consider for a Joint Venture Agreement (with Templates)

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Date Created: 9 Jun 2020
Last Update: 12 Jun 2020

 

 

 

What is a joint venture?

 

A joint venture is a business arrangement where 2 or more parties agree to combine their assets and resources with the aim to fulfill a specific business activity. In a joint venture, parties are responsible for all things associated with this particular business activity, including the profits, losses and expenses etc. However, apart from the joint venture, the parties and their own personal businesses are not affiliated in any other way.

 

For more information on joint ventures, please visit: https://docpro.com/cat33/setup-of-business-entity/joint-venture-agreement.

 

Before you decide to set up a joint venture agreement, it is important to keep a few things in mind:

 

1. Purpose and Objective of the Joint Venture

 

You should decide on what the joint venture you would want to accomplish and the goals of this business.

 

Decide with your business partner(s) the specifics of the business venture: Where will you be doing the business? How will you be doing it? What are the main business goals? Be as specific and detailed as possible so that all parties in the joint venture are clear and in agreement to avoid future disputes.

 

Also consider if a joint venture is necessary. Are joint ventures what you would need or want? Would other alternatives suffice? For example, consider having a co-operation agreement, license agreement, supply of goods/service agreement, merger or acquisition etc instead. Would these agreements fit your current business needs already?

 

2. Background of Your Partner

 

Background of your business partner: Research well into the partner/company that you will be working with and find out the values and vision that they hold to see if they align with yours. Learn about their corporate culture and compare them with your own and your own goals. Examine the past business deals/ joint ventures that they did to see if they are reliable business partners.

 

This due diligence process is important because your own reputation can be detrimentally affected by the acts of your business partner, even if the acts are not related to the particular joint venture itself. Make sure that your partner is someone that you can trust and are comfortable working with.

 

Foreign partner: If your partner is located in a foreign country, remember to take the time to discover the culture and business etiquette of your partner’s country. For example, the business culture in China and the US will differ significantly. Learn how to read contracts and how partnerships work in your partner’s country to behave accordingly. Learn about the differences between you and your partner’s cultural values and perspectives to avoid unexpected disagreements that stem from cultural differences between you and your partner.

 

 

3. Terms of a Joint Venture Agreement 

 

Before setting up any business, it is fundamental for businesses to create a detailed joint venture agreement with their partners. There are a number of areas that the agreement should cover:

 

a. Objectives and business plan

 

The agreement should first make clear the objectives and business plan of the joint venture. 

 

b. Structure

 

It should highlight the structure of the joint venture with regards to the ownership structure, voting rights, governing body and legal system etc. What are the duties of each party and what are their rights?

 

Joint ventures can be established in various structures. The more common cones include joint venture companies, partnership, limited liability partnership (LLP) or a contractual relationship. It is important to be clear on the structure of the joint venture as each structure will require different drafting in the relevant legal agreements and procedures.

 

It will depend on various factors when deciding which joint venture structure to adopt for the joint venture and depends on the specific circumstances surrounding the particular business venture. These factors include tax, liability, regulatory issues, jurisdictional matters, the management or employment structure, formalities in terms of publicity and administration, legal requirements etc.

 

c. Composition of the team - management, operations and accounting

 

It should also denote the composition of the management team of the business and the key players, including company secretary, board members, and executive team members etc. It is also important to clearly state the operations and accounting responsibilities of each partner. Who will be running the day to day operations and who will be doing the bookkeeping and record-keeping? Plan ahead so your business can be set up smoothly.

 

d. Finances

 

The plan should also specify the financial contributions of each partner. What will be the parties' respective equity share? How will the parties continue to finance the joint venture? It is also important to establish any guarantees that any party has entered into in order to support the financing of the joint venture. If there is one, the joint venture agreement should also clearly specify how the liabilities under the guarantee/bond/indemnities will be shared by the parties. Making all economic matters clear and transparent will prevent disputes in the future.

 

Here is an example for a clause for liabilities in relation to guarantees and bonds:

 

“Guarantees and Bonds

 

Unless the Participants agree otherwise, the Participants severally shall provide guarantees and bonds in proportion to their respective shares in the Services sufficient for the total of guarantees and bonds required of the Joint Venture by the Client. The Participants severally shall be responsible for any administration and required extensions of the guarantees and bonds they have provided.”

 

e. Intellectual property contributions

 

The plan should also denote intellectual property contributions of each partner for the joint venture as well as how these intellectual property rights are to be shared/owned by respective partners.

 

f. Profits and Losses

 

It is also important to allocate the profits and losses of the joint venture. How much will each of the partners get from the joint venture? How much of the losses will each partner be liable to? Is it all equally shared or does it depend on the value that each partner is bringing to the table? This should be clearly defined and discussed among the partners to prevent any hard feelings in the future regarding profits and losses.

 

g. Liabilities

 

The plan should also show the liabilities of each partner and their relevant indemnities. Parties need to decide whether any of them will be indemnified against all potential liabilities arising out of the joint venture agreement. If any dispute does arise however, parties to the joint venture would usually be required by contract to provide information/evidence to defend third-party claims against other parties regardless of whether they are indemnified.

 

Here is an example on the clause specifying on parties’ indemnity:

 

"Liability

 

Each of the Participants will indemnify and keep indemnified the other Participant(s) against all legal liabilities arising out of or in connection with the performance, or otherwise, of its obligations under this Agreement.

Schedule 3 to this Agreement sets out the Works or Services for which each Participant is responsible.

Each Participant will indemnify and keep indemnified the other Participants against all legal liabilities arising out of or in connection with the performance, or otherwise, of Works or Services deemed by Schedule 3 to be its responsibility.

 

Each Participant is required to co-operate and produce such information as is reasonably required by the Policy Committee in defending any claim made by the Client or any third party arising out of or in connection with the performance or otherwise of the obligations under this Agreement.”

 

h. Dispute resolution procedure

 

The plan should also include the dispute resolution procedure to be adopted when disputes do unfortunately arise. Apart from the common court litigation, there are various other kinds of more efficient and less costly alternative dispute resolutions including arbitration, mediation and negotiation etc. It is important to be clear about which dispute resolution procedure would be prioritized so that even if disputes do arise, parties would be able to settle their differences in a calm and agreed manner.

 

Other information on these alternative dispute resolution can be found here: https://docpro.com/blog/what-are-the-alternative-dispute-resolutions-to-court

 

i. Insurance

 

Insurance is also an important element to include in the agreement. As joint ventures are short-term business partnerships. It is therefore important for parties involved to be insured e.g. worker’s compensation, property insurance, risk insurance etc. Parties should be clear on how the business project is to be insured and what type of insurances will be used and maintained throughout the business venture. It is also important to specify the buyer and maintainer of the various insurances involved in the project for clear record-keeping.

 

Here is an example on the insurance clause of a joint venture agreement:

 

“Insurance

 

Each Participant will maintain insurance coverage as protection against all legal liabilities arising out of or in connection with Works or Services for which each is deemed responsible by Schedule 3.

 

Unless the Participants agree, each Participant individually shall make all reasonable efforts to maintain insurance coverage in the amounts $[XXX] as protection against all legal liabilities arising out of or in connection with the performance or otherwise of its obligations under this Agreement.

 

Each Participant shall make all reasonable efforts to maintain insurance cover in the amounts $[XXX] for public/third party liability insurance and any other insurances necessary to comply with the Services Agreement.”

 

j. Termination

 

The plan should include details of the termination of the agreement. Joint ventures are not supposed to be long-term agreements but are short-termed business ventures with a specific and defined goal. To end the business partnership on a good note, it is important to spell out details of the end of the contractual relationship in the agreement.

 

The clause for termination of the agreement will usually be in the form of a duration clause:

 

“Duration of the Agreement

 

If it has been jointly established by the Participants that the Proposal will not be accepted by the Client or if it has not been accepted by the Client within the period allowed for acceptance in accordance with the Proposal or any extension of that period agreed between the Client and the Joint Venture, this Agreement shall terminate immediately.

 

If the Proposal is accepted by the Client, this Agreement shall continue to have full force and effect and shall continue the same when the Services Agreement is entered into with the Client, until confirmation has been received from the Client that the Services have been completed, or the Services Agreement has been terminated and all accounts relating to the Services between the Joint Venture and the Client and third parties between the Participants are acknowledged as settled.

 

Provided that the terms of this Agreement shall nevertheless continue to bind the Participants to such extent and for so long as may be necessary to give effect to the rights and obligations specified in the Agreement.”

 

4. How to Choose the Right Template for the Joint Venture Agreement

 

There are various elements to look at when choosing the right template for the joint venture. For example, if you are going to be a minority shareholder in the joint venture, you may want an agreement that is in favour of your status. 

 

Here are some agreement templates for setting up a joint venture:

 

If there are:

Template to use

2 parties

 

Equal in shares

https://docpro.com/doc403/shareholders-agreement-equal-shares-in-company-2-parties-neutral

 

2 parties

 

You are the minority shareholder

https://docpro.com/doc366/shareholders-agreement-2-parties-minority-shareholder

 

2 parties

 

You are the majority shareholder

https://docpro.com/doc362/shareholders-agreement-2-parties-majority-shareholder

 

3 parties

 

Equal in shares

https://docpro.com/doc435/shareholders-agreement-equal-shares-in-company-neutral-3-parties

 

3 parties

 

You are the minority shareholder

https://docpro.com/doc365/shareholders-agreement-3-parties-minority-shareholder

 

3 parties

 

You are the majority shareholder

https://docpro.com/doc361/shareholders-agreement-3-parties-majority-shareholder

 

 

 

Other templates for a joint venture agreement and related documents for joint ventures can be found at: https://docpro.com/document-search/joint%20venture.

 

 

5. What are your contingency plans for the joint venture?

 

It is fundamental for parties to discuss exit plans and contingencies before signing an agreement together. You never know when changes may come, whether in the form of government policies, business practice or market environment etc.  

 

Parties thus should always discuss contingencies plans beforehand to mitigate any sudden future changes. Communicate with your joint venture partner and decide on how you are going to react to various changes that may occur during the business, e.g. market changes, new competition, loss of key clients, new regulatory or legal changes, labour, resources and equipment shortages etc. 

 

By discussing contingency plans in advance, you and your partner can establish adaptive processes in the structure of your joint venture down or even incorporate clauses in the joint venture agreement ahead of time. This will allow greater flexibility and adaptability when changes do occur. Moreover, such a discussion can give you an insight as to your prospective business partner’s corporate practices and flexibility, which might be a good indicator of whether he is a good business fit for you.

 

 

Having a joint venture is an important decision that should not be looked upon lightly. Before making this important business decision, remember to think carefully on the purpose, plan and details of the joint venture, choose your partner carefully and draft a detailed and comprehensive joint venture agreement to better protect you and your partner’s interests.

 

Please note that this is just a general summary and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your legal adviser

Keywords:

Joint Venture, Joint Venture Agreement, Business, Contract

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Joint Venture Agreement Template

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