A joint venture doesn’t have a strict legal definition, but cases heard in the courts provide an indication of what a joint venture looks like. It’s when two or more people or groups join forces for a specific business project, aiming to benefit each other, with everyone involved contributing to the effort.
Advantages of joint ventures?
The advantages of a joint venture can vary from business to business but essentially a joint venture allows the parties to pool resources, share the risks and any resulting profits. Disadvantages of a joint venture is the requirement to give up a proportion of the control and flexibility the venturers might otherwise have in pursuing a business objective independently and, of course, sharing those profits!
A key element of setting up a joint venture, to avoid difficulties further down the line, is to ensure that each party understands their role and responsibilities within the venture. Furthermore, it is essential to ensure all parties understand what to do in the event of a dispute between them and this is where the structure of your joint venture becomes important as different structures can allow for different procedures/remedies.
Joint venture structure
The first point to establish is what structure your joint venture will take. There are four basic legal forms of joint venture:
- A limited liability company
- A limited liability partnership (LLP)
- A partnership
- A simple contractual agreement
A limited company ensures that the joint venture has its own legal identity and limits the liability of the parties involved. However, it introduces an administrative burden on the parties as there are certain statutory requirements and formalities that must be upheld. It is standard practice for the parties to nominate their own directors to drive the company forward.
However, if a dispute arises, it must be remembered that the directors will owe fiduciary duties to the company itself rather than to the venturer who has appointed them. This can cause a conflict of interest and may paralyse the day-to-day function of the company if there is no mechanism within the articles of association or through a shareholders agreement to deal with dispute resolution.
An LLP is similar to a limited liability company as, once again, the LLP is its own legal entity and the partners will have limited liability. Like a limited company, the LLP is required to comply with certain formalities such as filing accounts and company information on a regular basis. In contrast to the director’s duties above, the duties of a fiduciary nature owed (if any) by the members to an LLP are owed on a bespoke basis, in other words it will depend on the contents of the LLP agreement. This allows the venturers to agree the scope of the fiduciary/contractual duties owed by the members to each other and the LLP itself.
A partnership does not form a separate legal entity and there is no limited liability available to the partners. The Partnership Act 1890 will apply to the partnership subject to any written partnership agreement. In these cases, it is imperative that the parties discuss and agree the terms of the joint venture and their relationship with each other to avoid disputes arising.
A contractual agreement between the parties can be beneficial in that the agreement can be drawn up fairly quickly (depending on the parties’ requirements) and there are generally no ongoing formalities to observe or ongoing administrative burden in relation to the contract. However, if the contract is not in writing, any resulting dispute is likely to be messy and complex and this will drive up each parties’ legal costs in resolving that dispute.
In many cases, parties will form a joint venture with little thought to the structure it should take and, in those cases, the joint venture is likely to take the form of either a partnership or a simple contractual agreement. The issue with unincorporated bodies, i.e. a partnership or contractual arrangement, is that often neither party has taken the time to establish and record each party’s role or what will happen in the event of a dispute between the parties.
Where a dispute arises in such a case, the parties will have to rely on established partnership/contract law principles, and this may not reflect the intentions of the parties at the outset of the joint venture.
Summary
In summary, a joint venture can be an excellent way to pursue a business goal, especially where you require skills or resources that you, alone, do not have. It is important to remember to spend time at the outset in establishing what each party’s role is and what procedure should be followed in the event of a dispute, as this will save all parties a significant amount of stress, time and cost in dealing with a dispute, should it arise.
If a dispute does arise, we have specialist dispute resolution lawyers who can assist you in navigating that dispute.
This article was written jointly by Helen Prince, associate and Catherine Mathews, partner in our Commercial Disputes team.