Joint ventures can be a great way to pool resources, talent and knowledge into a business – not to mention spreading the risk. But what kinds of joint venture disputes are likely to arise, and how can you resolve them?
Here our dispute resolution solicitor, Ian Carson, shares his insight and experience regarding legal disputes in joint ventures.
The basics: what is a joint venture?
Joint ventures (or ‘JVs’) can be a productive way to do business but can be prone to disputes between the parties. The vehicle for a JV can take a number of forms including:
- a limited company in which each party holds shares
- joint membership of a Limited Liability Partnership (LLP)
- a traditional unincorporated partnership under the Partnership Act 1890
Why you need a Joint Venture Agreement
A Joint Venture Agreement (‘JVA’) can prevent joint venture disputes, by anticipating problems and setting out how they should be dealt with. You may need different agreements depending on the legal form the business has taken. It’s advisable to draw up a written JVA either in the form of
- a Shareholder Agreement if the JV is through a company
- an LLP Agreement if dealing with an LLP or
- a Partnership Agreement for a traditional partnership.
The written agreement should set out, amongst other things, each party’s share, roles and responsibilities, the decision-making process, the reward structure and exit arrangements. The absence of a JVA can lead to bitter disputes about each party’s rights and obligations. The cost of resolving such a dispute is likely to be many times higher than the initial cost of putting together a written JVA. Failure to do so can prove a serious false economy: it is always better to be protected in the first place than have to resolve a complicated dispute after it arises.
Common causes of joint venture disputes
Common areas of joint venture disputes can be:
- Disagreements over each party’s share of the business and level of reward in terms of income and capital growth.
- The level of commitment/input each party is expected to contribute to the business.
- The diversion of business by one party away from the JV into a separate business.
- Disputes over the future direction of the business, such as whether to acquire a new business or expand into another sector.
- The terms on which a new party can enter the business either from the outside or from one of the existing party’s family.
- Whether, and at what price, the business should be sold.
What actually happens? The legal processes in common joint venture dispute claims
The Court process to determine such joint venture disputes also takes a number of forms. These are dependent on the type of business and obviously the type of dispute claim. Let’s look at how an issue arises, what the legal grounds and relevant legislation are, and the possible outcome.
- In a traditional partnership dispute, partners may be liable for breach of the various duties they owe to each other under the Partnership Act.
- Claims for breaches of the Shareholder Agreement are not uncommon. Where a minority shareholder or member of an LLP feels he is being unfairly treated, he may have grounds for an Unfair Prejudice Petition under section 994 of the Companies Act 2006. If successful, this often leads to the majority being ordered to buy out the disgruntled minority.
- When the loss complained of is a loss to the company rather than to the individual, a shareholder may seek the permission of the Court to bring a Derivative Action. This is a claim brought in the name of the company by the shareholder concerned.
- Finally, a Director may be pursued by the company via its other Directors for breach of his fiduciary duties to the company where the Director in question has benefitted personally or causes loss to the company.
Disputes relating to JVs tend to be particularly destructive, and can seriously damage the prospects for the JV itself. A lot of time and expense can be saved by anticipating at the outset the contentious areas which may arise and setting out in the JVA how these should be dealt with.
Why alternative dispute resolution is always the best option
If, despite the parties’ best efforts, a dispute arises then the parties should seriously consider submitting the dispute to mediation in order to try and arrive at a settlement whereby one party buys the other out or the business is split between them. A mediated settlement provides the flexibility to arrive at a commercial settlement and avoids the significant cost of litigation and potential damage to the business.