Our clients often ask us questions about joint venture agreements, so we compiled all the answers to common questions in one handy advice post.
Click to jump to individual joint venture agreement FAQs:
- What is a joint venture?
- What could happen if there is no JV agreement in place?
- Can a JV agreement be oral?
- What format or structure should a JV agreement take?
- Do you really need a solicitor to draw up a JV agreement?
- What key terms and conditions, or clauses, should be in a JV agreement?
- Do you need to register a JV agreement? If so, what’s the registration process?
- What are the alternatives to a JV agreement?
- Do you need a JV agreement for tenders?
- Can there be a JV agreement between more than two parties?
- Can you have a JV agreement with a foreign company?
- Can you make a JV agreement with profit sharing?
- Who can enter a JV agreement?
- Can Harper James Solicitors help with negotiating a JV agreement?
- What are the rules or governing laws that apply to JV agreements in English law?
- How can an amendment or extension be made to a JV agreement?
- What is the relationship between a JV agreement and the articles of association of a JV company?
- How does a letter of intent (or heads of terms) relate to a JV agreement?
- Disputes and termination
- Differences between joint venture agreements and …
- What’s the difference between a JV agreement and a partnership?
- What’s the difference between a JV agreement and a memorandum of understanding?
- What’s the difference between a JV agreement and a shareholders’ agreement?
- What’s the difference between a JV agreement and a teaming agreement?
- What’s the difference between a JV agreement and a joint operating agreement?
- What’s the difference between a JV agreement and a consortium?
- What’s the difference between a JV agreement and a distribution agreement?
- What’s the difference between a JV agreement and a licensing agreement?
- What’s the difference between a JV agreement and a collaboration agreement?
- Clauses in joint venture agreements
- How are representations and warranties used in JV agreements?
- Can a non-competition clause be used in a JV agreement?
- Can a non-disclosure clause be used in a JV agreement?
- Can intellectual property clauses be used in a JV agreement?
- Can an exit clause be used in a JV agreement?
- Can an exclusivity clause be used in a JV agreement?
- Should a JV agreement include details about duration?
- Can an arbitration clause be used in a JV agreement?
What is a joint venture?
A joint venture (‘JV’) is an arrangement between two or more parties, to carry on a project or business activity together.
What could happen if there is no JV agreement in place?
Where there is no written JV agreement, a non-contractual JV may arise if the parties agree they are in an arrangement to carry on a project or business activity together. This intention can in some circumstances be inferred from the facts, circumstances and conduct of the parties.
To establish a non-contractual JV, in addition to an understanding between the parties, there must also be:
- a common undertaking such as contributing asset, capital, or skill for a specific business purpose;
- a common interest; and
- some control over the JV.
However, it is very risky to pursue a JV with another party without a written JV agreement. This is because the JV agreement, amongst other matters, specifies the responsibilities of parties, as well as the profit and loss distribution between the parties. The JV agreement also has clauses which are important for protecting the parties and their commercial interests.
Where a dispute arises in an arrangement with no written terms, the court will impose terms based on its interpretation of the parties’ intention. If there is no evidence of what the parties intended, the court will impose terms it considers fair. This may lead to the parties receiving a decision which is unsatisfactory for one or both parties. Read more about this in our advice post, Joint Venture Disputes: Why They Arise and How You Can Resolve Them.
Can a JV agreement be oral?
Considering there are no formal requirements to establish a JV, a JV agreement can be oral if the parties have expressed an intention to enter an arrangement with each other for a business activity.
Whilst parties will have established basic terms of operation such as the general responsibilities, it is unlikely that they will have reached a detailed oral agreement which covers the parties’ arrangements on matters such as distribution of assets when the JV ends (or is terminated). For this reason, we would advise that you put in place a written JV agreement which clearly sets out the terms of the JV. By agreeing these matters in advance, you will avoid the time-consuming task of trying to decide these matters when circumstances are more pressing – such as in the event of a dispute.
What format or structure should a JV agreement take?
When establishing a JV, you must decide with the other party whether the JV will establish a separate legal entity.
If a separate legal entity is not established, the JV is a purely contractual co-operation agreement (‘contractual joint venture’).
If a separate entity is established (‘JV entity’), the parties must then decide on the legal form it will take. This means the JV entity could either be a:
- company (limited liability company);
- limited liability partnership (‘LLP’); or
- partnership (or limited partnership).
For more information and an overview of setting up a company, read our advice post, The Honest Guide To What You Do And Don’t Actually Need A Solicitor For – Part 1: Setting Up A Business.
Do you really need a solicitor to draw up a JV agreement?
You don’t necessarily need a solicitor to draw up a JV agreement for a simple, low risk arrangement. An example of a low-risk arrangement is a JV between two acquaintances to sell cakes in a one-off cake sale. One party may provide the venue for selling, such as a personal premise, whilst the other provides the cakes. Given that this is likely to be a small, short-term arrangement, with little legal, tax and regulatory implications, you may not need a solicitor to draft the JV agreement.
However, large risky JVs require detailed clauses to adequately protect the interests of the parties. For these JVs, we would always recommend a solicitor’s input on drafting the JV agreement. A risky JV may consist of a JV in which one or more of the parties to the agreement contributes a large amount of finance, or a valuable asset towards the JV . Alternative, if a JV entity takes the form of a company, consideration will need to be given to the rights and interests of the shareholders.
What key terms and conditions, or clauses, should be in a JV agreement?
A good JV agreement will cover the following matters:
- the name of the JV;
- the parties to the JV;
- the exact purpose of the JV;
- duration of the JV;
- the structure of the JV;
- method of profit and cost division between the parties of the JV;
- the contribution of each party to the JV;
- the duties and obligations of each party to the JV;
- the rights the parties grant to each other and third parties;
- the rights of each shareholder if the JV is a company, or the rights of the partners if the JV is a LLP;
- the JV’s tax treatment;
- dispute resolution mechanism;
- confidentiality undertakings;
- warranties and representations given by the parties;
- termination and exit clauses; and
- governing law and jurisdiction of the JV agreement.
Do you need to register a JV agreement? If so, what’s the registration process?
A JV agreement does not need to be registered. However, if a JV entity is established, the relevant registration rules apply.
With regards to a partnership, no registration of the JV entity is needed. However, the provisions of the Partnership Act 1890 must be complied with.
A limited liability partnership JV must comply with the Limited Liability Partnerships Act 2000 and will need to be registered with the Register of Companies.
Similarly, a JV which is a company must comply with the Companies Act 2006 and will need to be registered with the Register of Companies by sending the necessary documents and fees to Companies House.
Consideration also needs to be given in relation to registration requirements with HMRC. We cover which kinds of businesses need to be registered with HMRC, and how they should be registered, in our advice post, The Honest Guide To What You Do And Don’t Actually Need A Solicitor For – Part 1: Setting Up A Business.
What are the alternatives to a JV agreement?
An alternative to a JV agreement may be to pursue the business activity as a partnership. Like a JV, a partnership allows a business to combine the specialism of its partners. A partnership agreement will specify the rights of partners, their obligations and responsibilities, in addition to distribution of profit and costs. As companies and individuals can enter into a partnership, a partnership is a viable alternative to a JV.
However, the key difference between a partnership and a JV is that a partnership is established with the intention that the partners are jointly conducting business for long-term goals. For this reason, a partnership is suited to bringing two or more parties together as owners of a single business enterprise. In contrast, a JV is more suited to bringing together two parties for a specific business project.
A second alternative is to pursue a merger with another party to expand resources, skills, and technology for profit. Like a partnership, this is more suited for broader, long-term business plans, as opposed to more singular project-based business goals. Find out more about our mergers and acquisitions (M&A) legal services, and read our M&A FAQs.
A third alternative is a strategic alliance. This is a legal agreement between two or more companies/parties to share access to their technology, trademarks, or other assets. Unlike a JV, a strategic alliance cannot establish a separate entity. A strategic alliance is particularly useful for companies/parties wanting to quickly gain a new area of expertise or access to new technology or market. However, compared with a JV, strategic alliances have a limited scope and are generally limited to the function of giving companies/parties access to emerging technology.
Do you need a JV agreement for tenders?
To make a tender for a contract with a third party, you may decide to enter a JV agreement with another party to work together on the preparation and submission of the tender. By establishing a JV to win new business, the parties benefit from a bigger pool of resources, skills, and knowledge to complete the work obtained from a successful tender. In addition to setting out the distribution of profits between the parties to the JV, the costs of preparing the tender and completing the work can also be allocated between the parties.
However, it is possible to make a tender with another party without establishing a JV. One alternative is to enter a teaming agreement. A teaming agreement is a contract regulating the rights and obligations when one party (‘Party A’), submits a tender to a third party and subcontracts with the other party (or parties) to the teaming agreement. Whilst this enables the parties to combine their capabilities for the tender, it also means they can share the costs of preparing the tender. Entering a teaming agreement, rather than a JV agreement, allows the parties to retain control over their respective work, and avoids having to make shared decisions as is common when working closely with another party in a JV.
Can there be a JV agreement between more than two parties?
Yes, a JV agreement can be between two or more parties, provided all parties sign the JV agreement. It is also possible for a non-contractual JV (a JV arising in the absence of an agreement) to arise between two or more parties, provided there is sufficient evidence from the parties’ conduct that they intended to enter a JV arrangement.
However, a JV between multiple parties is significantly more complex. As there will be multiple parties, it’s crucial to include detailed provisions on the rights of each party, particularly with regards to exiting the JV. Similarly, with multiple interests involved, there is a higher chance of disputes, so an efficient dispute provision is essential. To ensure the provisions of the JV agreement are drafted appropriately to meet the needs of multiple parties, legal advice is key.
Can you have a JV agreement with a foreign company?
Yes, a JV agreement can be established with a foreign company. In addition to the legal and tax considerations raised by the structure of the JV, additional considerations arise from a JV agreement with parties from different jurisdictions.
You’ll also need to consider the following, amongst other matters:
- whether the JV will be located in a different jurisdiction;
- whether there are restrictions on foreign investment, ownership, or control;
- whether any law applying to the foreign party renders any part of the JV agreement void or unenforceable; and
- which law governs the JV agreement and which country will resolve any dispute.
To ensure all the necessary details have been considered, it’s highly advisable to seek legal advice with regards to the foreign laws that may apply to the JV.
Can you make a JV agreement with profit sharing?
A profit sharing agreement usually specifies the ratio by which the parties to the JV agreement will distribute profits and losses. A profit sharing agreement is common in partnerships, as the parties will decide how to distribute profit and loss at the outset.
As a profit sharing agreement deals with profit and loss distribution – a matter already dealt with within a JV agreement – you won’t typically need a separate profit sharing agreement.
However, if the parties wish to enter a separate profit sharing agreement, it’s important that the ratio of distribution is the same as that specified in the JV agreement.
Who can enter a JV agreement?
A JV agreement can be made between any legal person. A legal person includes individuals, limited liability partnerships, limited companies, and the individual entities forming a general partnership.
Given this, a JV agreement can be made between a company and an individual; two individuals; or between two partnership firms.
Can Harper James Solicitors help with negotiating a JV agreement?
Yes. If you‘ve decided you would like to establish a JV, we have a team of specialist lawyers who can help negotiate the JV agreement. Read more about our joint venture agreement services here. All of our solicitors come from top UK law firms, so we have the expertise to advise on the legal and commercial elements of establishing a JV, which include the negotiation and drafting of the JV agreement.
What are the rules or governing laws that apply to JV agreements in English law?
JVs are a unique arrangement in that there is no law specifically governing these arrangements. Instead, depending on the structure of the JV you choose, a combination of common law, company and partnership law, competition law, intellectual property law, and tax law will govern the JV agreement.
When establishing a JV, it’s important to consider the different types of laws that the JV will be subject to. Seeking legal advice will help ensure you’re aware of all the applicable laws and that the JV is not breaching any such laws.
Some general laws you should be aware of include:
- Competition rules
When entering a JV agreement, you should ascertain whether the JV will fall within the scope of competition laws.If the JV involves a structural change which constitutes a merger, you must identify whether:
– the JV’s turnover exceeds £70million; or
– whether the JV results in the parties holding 25% or more of the market combined.If either of these thresholds are met, it’s advisable for you to notify the Competition and Markets Authority (CMA), to receive confirmation that the JV can continue. This prevents issues arising later in the arrangement if the CMA opens its own investigation and requires the parties to divest part of its market share.
- Financial reporting
If the JV establishes a separate entity, such as a LLP or a company, the JV will need to have accounts prepared annually and must file a confirmation statement with Companies House under the Limited Liability Partnership Regulation 2008 and Companies Act 2006 respectively.
- Trading disclosure
Again, if the JV is a LLP or a company, you must ensure you have disclosed your registered address and a place where the JV’s records can be inspected.
As you will be seeking to make a profit from a business activity carried out by the JV, you will need to be aware of the tax obligations. If the JV is a company, the JV will pay corporation tax. However, if the JV is a LLP, a partnership, or a purely contractual JV, each individual person will pay income tax.You should also seek further legal advice to learn about the tax obligations you may face upon disposal of your interest in the JV, and any exemptions you or the JV may be eligible for.
Value added tax (VAT) may also be a relevant concern if the JV supplies goods and services made in the UK by a taxable person in the course of its business.
- Civil Procedure Rules
It is not uncommon for parties to a JV to find themselves in a dispute. Whilst the parties can resolve this in court, the civil procedure rules require parties to comply with pre-action protocol and to consider alternative dispute resolution before initiating legal proceedings.You should therefore be aware that attempting to resolve any dispute by arbitration or mediation is important before you decide to pursue an action in court. Find out more about our dispute resolution services here.
How can an amendment or extension be made to a JV agreement?
There are several options for amending a JV agreement. You can use a supplemental agreement, make an addendum to the JV agreement, or use a deed of amendment or variation.
A deed of amendment/variation (also sometimes called an addendum) to a JV agreement works the same as an addendum to any other contract. The addendum should detail specific terms, clauses and definitions which need amending (or are being elaborated on) from the original contract, to render the change legally effective. To give legal effect to the amendment, all parties to the joint venture must agree and sign the addendum or the process in relation to the amendment of the JV agreement as set out in the JV agreement must be followed. The addendum must also be clear as to which terms and clauses are being amended.
We’d recommend that you seek legal advice when amending a JV agreement, due to myriad problems arising from loopholes created by poorly drafted deeds of amendment/addendums.
A supplementary (or supplemental) agreement is an addition to the original JV agreement, usually for the purposes of expanding the scope or nature of the JV agreement. In the context of a JV, a supplementary agreement is commonly used to agree further additional work or to extend the duration of the JV.
What is the relationship between a JV agreement and the articles of association of a JV company?
The articles of association of a company is the document governing the company by stating, amongst other matters, the purpose of the company, the rights and responsibilities of its members and directors, and the way in which the company must operate as a whole.
A JV will only have articles of association if the JV is a company. Whilst the Companies Act 2006 provides model articles for private companies, there are special model articles for a JV entity with one minority and one majority shareholder, and a JV entity with multiple shareholders.
Where there is a company JV, the articles of association will supplement the provisions of the JV agreement. Whilst the JV agreement covers responsibilities of the party, and profit and loss distribution, the articles of association address dividend payments, and operative matters such as voting and general meetings. It is also worth noting that the articles of association is a public document as it is required to be filed at Companies House, whereas a JV agreement is a private document between the parties to the JV.
How does a letter of intent (or heads of terms) relate to a JV agreement?
A letter of intent, or heads of terms, can be used to outline the agreement between parties before the JV agreement is finalised. The letter of intent therefore states the material terms agreed between the parties and reflects the parties’ expectations and intentions in relation to the JV. It should be noted that a letter of intent is not legally binding, unless otherwise stated and therefore it is not legally enforceable. It is however a useful document to be referred to when drafting the JV agreement.
Disputes and termination
How do you terminate or cancel a JV agreement?
How a JV is terminated (ie, the ending of JV before the passing of the duration period) will be governed by the provisions set out in the JV agreement. A well-drafted JV agreement will contain a comprehensive provision of how the parties can exit the JV, to facilitate swift resolution. The provisions will usually allow termination in the following events:
- agreement between the parties to terminate;
- expiry of the fixed term of the JV, or completion of the specified project;
- sale of shares or interest by one party to the other (exit);
- material breach of the JV agreement which has not been remedied to the satisfaction of the non-breaching party;
- insolvency of a party to the JV;
- change of control of a party to the JV, or a change of control of a company JV; or
- unresolved deadlock on a material issue.
Possible methods of termination may be:
- Consensual termination
Usually, the assets are distributed by returning the asset to the party that acquired or funded the asset. Alternatively, the assets are sold to the highest bidder.
- Sale of interest
A provision that may be included in the JV agreement to facilitate the sale of shares is the ‘tag along and drag along rights’ provision. This enables one party to sell its shares in the company JV to a third party, provided the third party purchases the shares of all the JV parties. As interest of all the parties is sold, the JV is terminated. Another provision enabling the sale of shares is the ’put and call option’. This provision allows the holder of the option (usually all the parties to the joint venture) to give notice and require the other shareholders to buy or sell their entire shareholding. The price payable for the shares will be dictated by the agreement, such as ‘fair price’ or by a specific formula. By buying the entire shareholding, or requiring a holder to buy the entire shareholding, the JV arrangement will be terminated. A third provision which enables sale of shares is the ‘Russian roulette mechanism’. This allows a party (Party A) to serve notice to the other party (Party B), for Party A to sell its shares at a price specified in the notice. Party B has a period of time to either accept the offer and buy the shares of Party A, following which it will become the sole owner of the company JV entity. Alternatively, Party B can reject the offer. If the offer is rejected, Party B must sell its shares to Party A for the price specified in Party A’s original notice. Again, in a JV with two parties, this would result in termination of the JV. Another provision which enables the sale of shares is a ‘Texas/Mexican shoot out’ provision. Through this provision, Party A can serve a purchase notice on Party B stating that it is willing to buy out Party B at a specified price. Party B has a period to serve a counter-notice indicating either an intent to sell at that price, or to buy Party A’s interest at a higher price. The parties then continue to bid for the other’s shares until one party agrees to sell their shares. Again, in a JV with two parties, this would terminate the JV.
- Winding up
A JV can also be terminated by winding up. Whilst a court can order a winding-up, the JV agreement may include a procedure for voluntary liquidation. Upon liquidation, it is usual for the assets of the JV to be distributed to the party that contributed them.
When drafting a termination provision of a JV agreement, it is important to consider the impact of termination, in addition to events in which a party may terminate the JV. Consideration should also be given to any provisions which are to survive termination.
Is withdrawal possible from a JV agreement?
Whether a party can withdraw from a JV agreement will depend on the terms of the JV agreement. It’s common for a JV agreement to contain an exit clause, enabling a party to withdraw from the JV and realise its interest.
If included, an exit clause will generally allow a party to sell its interest to either another party of the JV, or a third party. The method of sale is likely to be the same as the mechanism used for selling an interest in the JV on termination of the JV. These mechanisms include the ‘put and call option’, ‘Russian Roulette’ and ‘Texas/Mexican shoot out’ as described above. Provided there are multiple parties to the JV, when a party sells its interest to another party of the JV, the selling party can exit whilst the JV can continue operating.
It is important to remember than when selling shares to a third party to exit the JV, pre-emption rights may apply to the transfer of the shares. Pre-emption rights entitle the shareholders of the company the right to be offered the transfer shares before they are offered to a third party who is not already a shareholder of the company. These rights are normally set out in the company’s articles of association. In order to comply with the pre-emption rights, the exiting party will normally need to offer its shares to other shareholders of the JV, before offering to a third party in accordance with the process normally set out in the company’s articles of association. Additionally, as part of the purchase of the shares, the third party who purchases the shares is usually required to enter into a shareholders’ agreement or deed of adherence to an existing shareholders’ agreement of the company which will include an obligation on the third party to comply with the terms of the joint venture agreement.
Is dissolution possible with a JV agreement?
Dissolution is possible with a JV agreement if the JV is a partnership or a LLP. A partnership JV can be dissolved by merely ceasing business. A LLP can be dissolved by selling the interest or by winding-up the LLP JV by majority vote of the partners. The dissolution provisions are normally set out in the partnership agreement or LLP agreement of the partnership or LLP.
What is involved in JV agreement dispute resolution?
Read our advice post, Joint Venture Disputes: Why They Arise and How You Can Resolve Them. You can also find out more about our comprehensive dispute resolution services, from our expert dispute resolution solicitors, Ashley Mott, Mark Gudgeon, Ian Carson, and Michael Key.
Deadlocks can be severely hindering for the business of a JV. It is therefore important the JV agreement contains a provision to resolve any dispute and deadlock. This is particularly helpful when there is a company JV with some shareholders who are not party to the JV agreement. If a dispute arises between these shareholders and the JV members, the dispute resolution mechanism can facilitate swift resolution and enable the JV to continue normal business.
The first decision which must be made by the JV parties is what law and jurisdiction will govern the agreement. Any dispute that subsequently arises will thus be subject to the pre-agreed law and jurisdiction.
Two possible dispute resolution provisions that may be included in a JV agreement are arbitration and mediation. Read more about these methods in our advice posts, Types of alternative dispute resolution methods: choosing the best one for your business, and What is Alternative Dispute Resolution?
Arbitration allows parties to appoint a third party to make an enforceable decision on dispute. As the third party may be an expert in the field, arbitration can lead to a more accurate decision with a remedy that is more suited to the parties’ situation. For example, in a dispute between shareholders of the company JV and joint venture members, the arbitrator could order the shareholders to sell their shares. A further advantage of using arbitration is the process is significantly cheaper and less confrontational than a court procedure. The parties to the dispute can therefore reach a resolution that is likely to be satisfactory to everyone.
For JVs including a foreign party, including arbitration in the JV agreement is particularly important because an award by an arbitrator can be enforced in many jurisdictions.
Mediation is another form of dispute resolution. Like arbitration it enables parties to resolve their disputes in an amicable manner, however it isn’t a binding procedure. The parties therefore don’t have to use the mediation process and may decide to resolve the dispute in court. While mediation involves a third party acting as the mediator, the parties must reach an agreement themselves. The procedure thus provides a non-confrontational platform for parties to put forward their views, making it highly attractive for everyone if the parties to the JV want to preserve their relationships
Differences between joint venture agreements and …
What’s the difference between a JV agreement and a partnership?
As we mentioned in the above question, What are the alternatives to a joint venture agreement?, a partnership usually establishes a single business enterprise for a broad purpose, whilst a JV is common for specific business activity and tasks.
Despite the arrangement appearing similar, you may find it useful to compare the practical differences as set out below:
|A JV will exist for a limited period, usually until the project or business activity is completed.||A partnership will continue for as long as the partners wish to continue, as it is usually entered into for an indefinite period.|
|Whilst parties share the burden of cost, profits don’t have to be pooled together and divided between the parties. This means, if two parties establish a JV entity to produce a specific product, the parties can sell the product in their respective market and keep their separate profits.||In a partnership, both the profit and costs are pooled before being divided according to provisions of the agreement.|
|There is no legislation imposing default terms in the absence of agreed terms. Instead, the courts will infer the terms from how the parties’ have acted.||In the absence of terms in a partnership, legislation will stipulate certain terms between the partners, concerning aspects like profit and loss distribution. The default position in a partnership is joint and equal liability, and joint entitlement to profits.|
What’s the difference between a JV agreement and a memorandum of understanding?
A memorandum of understanding (‘MoU’) is a non-binding agreement between two or more parties, stating an intended common action by the parties. MoUs are generally not intended to be binding, therefore cannot be legally enforced. This is primarily because MoUs are preliminary to a legally binding agreement.
However as noted above, a JV agreement is legally enforceable and binding on the parties, and a party can therefore take action against another party for a breach of the JV agreement by that party.
What’s the difference between a JV agreement and a shareholders’ agreement?
A shareholders’ agreement is an agreement between shareholders of a company, which regulates the relationship between the shareholders, states their rights and protections, and directs the operation of the company.
A shareholders’ agreement may be necessary if a JV entity takes the form of a company. The shareholders’ agreement is supplemental to the JV agreement and will address matters such as the right to transfer interests in shares, and manages the operation of the JV by detailing the procedure to appoint directors etc. It’s important that the shareholders’ agreement is very specific as to how monetary matters and control will be dealt with, as these are the main interests of the shareholders.
What’s the difference between a JV agreement and a teaming agreement?
A teaming agreement allows one party to make a tender with a third party, with the intent to subcontract with the other party (or parties) of the teaming agreement. Similar to a JV to the extent that parties are able to pool their resources and spread the costs, the roles of the parties differ in a JV. In a teaming agreement, the first party is a main contractor and the other parties to the teaming agreement are the subcontractors. This has the practical effect of limiting the liability of the sub-contractors to the main contractor.
A teaming arrangement has the added benefit of allowing two parties to work together, without having to handcuff their own control and decision-making power. Teaming arrangements are therefore ideal for parties not familiar with each other, because they reduce the amount of access each party has to each other’s resources and confidential information.
What’s the difference between a JV agreement and a joint operating agreement?
A joint operating agreement (‘JOA’) is an agreement that governs a joint venture structured as an unincorporated association. JOAs are particularly common in the oil and gas industry as ventures in this industry are very high risk and have high costs. By pursuing projects in this industry as JVs, the parties benefit from the high rewards of a successful venture whilst spreading the costs.
For parties seeking to establish a JOA, the agreement can be based on the international industry standard, ‘Joint Operating Agreement‘, produced by the Association of International Petroleum Negotiators (AIPN). Using this as a foundation of the agreement ensure the clauses crucial to the industry are included, and adequate protection is provided for the parties.
What’s the difference between a JV agreement and a consortium?
A consortium is an association of two or more individuals, companies, or organisations, with the objective of participating in a common activity or pooling their resources to achieve a common goal. A consortium is usually formed by an agreement or a memorandum of understanding. A key feature of a consortium is that members retain their separate legal status. By highlighting the strengths of each member, a consortium can make a tender more attractive to a third party.
The difference between a consortium and a JV agreement is that a consortium cannot be incorporated as a legal entity. This has two practical implications:
- firstly, in a consortium arrangement, the individual consortium members exercise management control. Contrastingly in a JV, it is the JV itself which exercises management control; and
- secondly, where LLP JVs and company JVs have capacity to enter into contracts, a consortium usually has to set up a special purpose vehicle to enter into contracts.
What’s the difference between a JV agreement and a distribution agreement?
A distribution agreement is where one party (distributor) agrees to sell the manufactured goods in a specific market. The distributor will purchase the goods at the price fixed by the agreement, and sell them at its own price. The distributor keeps the profit it makes from that sale. The benefit of a distribution agreement is that the manufacturer of the goods is able to transfer the risk of low demand for the goods to the distributor. Find out more about our distribution agreement services, and read our Agency and Distribution Agreements FAQs.
A JV agreement is commonly made to combine specialisms and pursue a new venture distinct from the parties’ main business, whereas a distribution agreement facilitates the sale of manufactured through a distributor. Additionally, a distribution agreement will not contain a term specifying how costs and profits will be distributed between the parties. This is fundamental to a JV agreement.
What’s the difference between a JV agreement and a licensing agreement?
A licensing agreement is used by a party (‘licensor’) to grant another party (‘licensee’) the right to use confidential or propriety processes. This enables the licensee to increase its resources for any activity it undertakes.
This is different to a JV as a license agreement does not require the parties to work together when utilising the licensed resource. In fact, the licensor has little control over the licensee and its activities.
One circumstance in which a licensing agreement is particularly useful is when a party seeks to enter foreign markets. A licensor can grant a licensee well-established in a foreign market, the right to use the name and logo of its business in return for a commission or fee. This enables the licensor to extend its reach to a new market.
What’s the difference between a JV agreement and a collaboration agreement?
A collaboration agreement is usually made by two or more organisations working together to improve their existing technologies or to combine their technologies to make something new. The agreement usually sets out the responsibilities, roles, and rights of parties, whilst also managing the overall project.
The key difference between a JV agreement and a collaboration agreement is that the former can establish a separate legal entity, whereas the latter cannot. A collaboration therefore enables parties to pool resources and effort for an agreed project, without complicating the arrangement by requiring parties to exercise control jointly. The arrangement is therefore ideal for parties unfamiliar with each other, and for parties reluctant to reveal significant amount of confidential information to the other.
Clauses in joint venture agreements
How are representations and warranties used in JV agreements?
Representations and warranties are statements of fact made by the parties about their position in the JV, namely concerning who assumes responsibility for assets and liabilities. This enables information to be disclosed, whilst also providing avenues of redress in the event that the JV is adversely affected by a statement being untrue.
Common warranties in JV agreements include representations that:
- the parties have the requisite power and authority to enter into the JV agreement, and any other agreement required for the operation of the JV;
- the parties acknowledge they are responsible for any loss and cost caused by their action;
- the parties are not responsible for loss and cost caused by action of another party;
- the parties are insured against death or personal injury caused to other persons;
- any license and intellectual property granted to the other party, for the purposes of the JV, do not infringe on any third party intellectual property rights;
- there is no litigation existing, or pending against the parties, that may adversely affect the JV; and
- the parties are not conducting their separate business (unconnected to the JV) in a manner that violates the relevant law, and which will have an adverse effect on the JV.
Can a non-competition clause be used in a JV agreement?
Yes, non-competition clauses are very common in a JV agreement. These clauses prevent the parties from engaging in business activities that compete with the business of the JV.
It’s important for non-competition clauses to be limited to a specified period, and to a specified geographical location. This is because non-compete clauses must be reasonable and necessary to protect the legitimate interests of the parties in order to be enforceable. The meaning of reasonable will depend on the facts and circumstances of the business of the JV. But, generally speaking, a clause which prevents a party from conducting competing activity for a period of 5 years after termination of the JV would normally be viewed as unreasonable and therefore would be unenforceable. However, a clause preventing competing activity for 2 years after termination is more likely be viewed as reasonable, and therefore is more likely to be enforceable.
Can a non-disclosure clause be used in a JV agreement?
Yes, a non-disclosure clause, also known as a confidentiality clause, can be included in a JV agreement. As two parties are joining their resources and granting another party access to confidential information about themselves, we’d recommend including a non-disclosure clause to prevent the recipient of the confidential information making the confidential information public and exploiting it in any way, subject to agreed exceptions.
It’s common for the non-disclosure clause to also specify that the parties are not permitted to copy the confidential information, or disclose the information to another person. As exceptions will be agreed to enable the JV to operate, both parties should seek legal advice to draft tight exceptions in which the confidential information can be used and/or disclosed.
When drafting the non-disclosure clause, it’s also common to include an obligation on each party to inform the other if there is a breach of confidentiality. This is useful for providing the party an opportunity to take measures quickly to minimise damage that may result from the breach.
Another important consideration is whether the parties will undertake the responsibility of ensuring any of its employees also comply with the confidentiality clause. This is important because, whilst employees have access to confidential information, they are not actual parties to the JV agreement which contains the non-disclosure clause. The employees are therefore not directly bound to comply with the non-disclosure obligation set out in the JV agreement.
A final point to note is that the non-disclosure clause should be stated as surviving the termination of the JV. This means the parties must continue to protect confidential information even after the JV has terminated.
Can intellectual property clauses be used in a JV agreement?
Yes, a clause dealing with intellectual property rights is highly desirable in a JV agreement. As two distinct parties come together for a common purpose, each party will want to grant the other party access to its resources, including intellectual property. The JV agreement should therefore specify the arrangement, and state the details of any licenses granted.
Equally as important, where a JV is established to produce intellectual property (‘New IP’), the JV agreement must reflect the parties’ expectations as to ownership of the New IP. Where there is New IP, the JV agreement may specify that:
- the JV owns the New IP. In this case, you will require a detailed provision about how the rights and interests in the New IP will be distributed on termination of the JV;
- the parties to the JV own and hold an undivided interest in the New IP;
- each party has joint ownership of the New IP, but parties are subject to restrictive covenants which prohibit disclosure to competitors, for example; or
- the New IP is assigned solely to one party and licensed to the JV while the JV is in operation.
It’s also important to include a provision dealing with licenses and intellectual property rights when a party of the JV exits, whilst the remaining parties continue operating the JV. Find out more about our intellectual property legal services.
Can an exit clause be used in a JV agreement?
Yes, an exit clause is highly recommended in a JV agreement. An exit clause enables the parties to exit the JV before the end of the agreed term of the JV in certain circumstances, for example due to deadlock, or a change of control of one of the parties to the JV. By preparing for such events, parties ensure that there will be a quick resolution of the issue, and that any exit by a party causes minimal disruption to the JV.
An exit clause will usually allow a party to sell its interest in the JV. The mechanisms of sale may be ‘put and call’, ‘tag along and drag along’, ‘Russian roulette’, ‘Texas/Mexican shoot out’; which we discuss in the question above, How do you terminate a joint venture agreement?
Can an exclusivity clause be used in a JV agreement?
Yes, the parties can enter into an exclusivity agreement prior to the JV agreement to ensure the parties agree not to negotiate with anyone else in relation to the JV. If an exclusivity agreement is not entered into the terms set out in the letter of intent and such clause will be legally binding on the parties even though the other material terms are not. An exclusivity clause/agreement in this context is different to the non-compete clause which we discuss in the question Can a non-competition clause be used in a joint venture agreement?), which is used to ensure the parties to the JV agreement don’t conduct business that would compete with the JV. This protects the JV’s commercial interest by reducing competition.
Should a JV agreement include details about duration?
A duration clause in the JV agreement can establish a termination date of the JV. This is very important in managing the expectations of the parties and enabling the parties to identify when their responsibilities and liabilities to the JV will cease.
It’s possible for the duration of the JV to be described as the completion of the particular project for which the JV agreement was entered into. This would continue to manage the parties’ expectations and help the parties understand the purpose of their arrangement.
Can an arbitration clause be used in a JV agreement?
An arbitration clause can be included in a JV agreement if the parties agree to this method of dispute resolution. Before including this provision, the parties should be aware that this procedure is binding. As a result, if arbitration is included in the agreement, the parties must use arbitration to resolve a dispute. This is contrasted to mediation, whereby the parties are not bound to pursue mediation for dispute resolution when an issue arises.