­Joint Ventures – When Divorce Is Not An Option


Joint Ventures – when divorce is not an option

When setting up a joint venture, the parties are trying to establish an “enduring” relationship, underpinned by agreements that are robust, yet sufficiently flexible to cope with events during the life cycle of the venture.

Sometimes, for example, in a property development, there are few unknowns, so the likely course of the venture can be mapped with a high degree of certainty. At the other end of the spectrum, resources projects can involve considerable uncertainty, not only in relation to how the project will be developed (or not), but also when it will be developed, as the partners may have different funding capabilities and other competing projects.

Issues are more likely to escalate when there is unequal bargaining power between JV partners. If the partners are both significant corporations, then the likelihood is that they will have multiple relationships across different projects, and this will have a self-regulating effect on behaviour. But for a small entrepreneurial company, the day it attracts investment from a major partner is both the happiest day and the saddest day of its life. On the one hand its previous existential issues in trying to survive on meagre cash reserves may have disappeared, but on the other it has lost control of its “baby”. 

What is interesting is that parties who wish to enter into a project alliance for delivery of a major project usually workshop objectives and desired behaviours in an effort to create the right culture for success. Yet partners in a traditional joint venture rarely, if ever, do this. Usually the JV negotiation consists of due diligence of the underlying asset, then the lawyers discuss a few words in industry templates; the smaller company is so keen to close the deal it does not enquire too closely on what some of the high-level provisions, particularly relating to reporting, mean in practice.

So the end result often sees a dominant partner proceeding at its own speed and in accordance with its own head office dictates, while the junior partner is relegated to the sideline, where it sits consumed by suspicion, using a telescope to try to work out what is going on and lobbing in empty threats of legal action. No doubt the larger partner finds it intensely irritating to have its professionalism impugned by a needy junior partner, but the flip side is that the principals of the junior partner are likely to have a lot more skin in the game, unlike employees of a major corporate who will transfer to another project in the company if this one does not proceed.

Would it not make sense to workshop the party’s respective capabilities and requirements at the beginning of the relationship, and craft the JV agreement accordingly? Usually a large operator will assume that it will steer the boat and the junior partner will trail along in its wake as a hostage to fortune; the assumption is that the junior has very little to offer commercially or technically. If this assumption is properly tested the operator may be pleasantly surprised to find a useful sounding board; on the other hand the junior may receive a much-needed reality check if it really does not have much to offer. It may also be the case that going forward the information the senior partner provides is informed by its own corporate reporting protocols – if so, why wouldn’t the parties attempt to reach agreement on reporting formats to minimise surprises and disappointment?

What are the options if, despite the initial goodwill, tensions arise which result in a breakdown of civil communication? Maybe the worst option is to litigate or arbitrate. Apart from the expense, courts and arbitrators are not in the business of policing behaviour on a continuing basis, so it is not practical to keep running back in respect of an ongoing problem that is not capable of final resolution. If a problem is not specifically covered by the agreement, courts are starting to recognise that long-term relational contracts are a separate category of contract, to the point where they will try to second guess what the parties would have written if they had considered the unforeseen circumstances which arose later. Is it really appropriate or desirable to risk having a Judge or arbitrator, who has had no exposure to the commercial realities of the deal, rewriting it?

If turning to a court or arbitration is not attractive, what other options are there? The first thing to consider is whether the aggrieved party still believes in the venture. If the party has doubts, or other options for redeployment of capital, a simple solution is to withdraw, or sell out, or sell down. If divorce is not an option, there are often other mechanisms that can be built into the JV. In an incorporated JV one of the simplest ways to resolve deadlocks is to agree to appoint someone all parties respect as an independent director. In respect of an unincorporated JV, resource ventures often contain sole risk/non-consent clauses intended as a safety valve if one party wants to pursue an operation and the other doesn’t. In practice sole risk clauses are rarely invoked – a sole risk project indicates that there are serious cracks in the relationship which threaten to open much wider.

So far I have only focused on significant disputes, but small niggling disputes which fester over time can be just as poisonous to relationships. Often there is a difference of opinion on a vague clause, particularly in relation to reporting. Sometimes differences are simply cultural between nationalities; sometimes they arise because small participants with a small number of projects and limited cash have a different perspective to large corporate partners bound by budgets and formats imposed by head office. Occasionally if there are personality conflicts disputes may be minimised by replacing personnel.

 In my experience the best way to resolve minor, yet irritating, disputes which will not go away is by reference to an independent expert who can determine what “best practice” would dictate in the circumstances. In practice, to refer a dispute to such an expert will require that the parties either have an expert determination clause in the JV agreement, or agree separately that this is what they will do to overcome the difficulty. This type of reference can be done in a constructive way which actually may strengthen the relationship.

 Law Strategies specialises in the creation and administration of enduring contractual relationships.

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