Joint ventures can be a great way to pool resources, talent, and knowledge into a business – not to mention the fact that such collaborations come with the added bonus of spreading certain risks out. As a result, joint ventures have become an increasingly popular medium through which companies undertake significant business activities and projects. But, as with any partnership, if you are involved in a joint venture, you may find that conflict between individual parties arises at some point during the course of the working relationship. In this article, we take a look at what kinds of joint venture disputes are likely to arise, and how to resolve them.
- What is a joint venture?
- Why are joint ventures formed?
- Why do you need a Joint Venture Agreement (JVA)?
- What should the JVA contain?
- What are the dangers of not having a JVA in place?
- What are the common causes of joint venture disputes?
- What’s the legal process in a joint venture dispute?
- What about alternative dispute resolution?
What is a joint venture?
As touched upon above, a joint venture involves parties joining forces in order to work together for any number of reasons. Some examples of the forms a joint venture can take include the following:
- 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
For more information on types of joint venture, read our guide: How To Structure A Joint Venture That’s Geared Up For Success.
Why are joint ventures formed?
Joint ventures can make good business sense for a number of reasons. We’ve already mentioned that they are a good way to pool resources, talent and knowledge: this is because individuals often bring different strengths and skillsets to a company and it might be the case that one party brings most of the financial assets to the business, another might have previous experience of setting up a start-up and another may create the concept and bring the requisite business knowledge.
There’s also the added commercial benefit that in the context of a joint venture that the risks involved in starting up and running a company are spread out between the parties – a factor which often appeals to many.
Why do you need a Joint Venture Agreement (JVA)?
A Joint Venture Agreement (JVA) can prevent joint venture disputes by anticipating problems and setting out how they should be dealt with if they do crop up. You may need different agreements depending on the legal form the business has taken, and it’s encouraged that legal support should be sought in helping you to determine if multiple agreements are necessary.
In terms of getting a JVA in place, it’s advisable to draw up a written agreement either in the form of:
- A Shareholder Agreement if the joint venture is through a company
- An LLP Agreement if dealing with an LLP
- A Partnership Agreement for a traditional partnership model
It’s worth highlighting here that, in the experience of our specialist business disputes lawyers, the absence of a JVA in place at the outset of setting up of the company often leads to a more problematic and time-consuming path to finding a resolution when conflicts arise; a good reason in itself to consider getting the right formalities in place straightaway.
What should the JVA contain?
The agreement document should set out (amongst other things) each party’s share, roles and responsibilities, the decision-making process, the company’s reward structure and also the exit arrangements in place. It could also potentially (and usefully) contain a dispute resolution clause so that if a dispute occurs, the parties can refer the matter to an independent third party to help settle the dispute if it cannot be resolved internally.
For a more in depth look at JVAs and to get your questions answered, read our joint venture agreement FAQs.
What are the dangers of not having a JVA in place?
The absence of a JVA can lead to disruptive business disputes about each party’s rights and obligations, and the cost of resolving such disputes is likely to be significantly higher than the initial cost of putting together a written agreement in the first instance. Failure to draw up a JVA can prove a serious false economy: it is always better to protect your position right from the outset than have to resolve a complicated dispute after it arises.
Do you need to resolve a business dispute?
What are the common causes of joint venture disputes?
Some common situations that give rise to joint venture disputes can be identified by the following examples:
- Financing: tensions can quickly become inflamed if there is not absolute clarity around this particular area. This can encompass what funding is required and in what form (cash or assets), from where (loans or equity), from whom, for how long and whether there will be any external debt to consider.
- 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 being unclear.
- The diversion of business by one party away from the joint venture 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, not being transparent from the outset.
- A lack of definition about whether, and at what price, the business should be sold.
What’s the legal process in a joint venture dispute?
The court process to resolve such joint venture disputes can take several forms. These forms are dependent on the type of business you have and the nature of your claim. Below, we look at how some issues might arise, what the legal grounds and relevant legislation are, and some possible outcomes.
- In a traditional partnership dispute, partners may be liable for breach of the various duties they owe to each other under the Partnership Act 1890.
- Claims for breaches of the Shareholder Agreement are not uncommon. Where a minority shareholder or member of an LLP feels they are being unfairly treated, they may have grounds for an Unfair Prejudice Petition under section 994 of the Companies Act 2006. If successful, this often leads to the majority shareholder being ordered to buy out the disgruntled minority shareholder.
- When the loss complained of is a loss to the company rather than to an individual, a shareholder may seek the permission of the court to bring a derivative action, which 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 their fiduciary duties to the company, where the director in question has benefitted personally or causes loss to the company.
What about alternative dispute resolution?
If you find yourself in a situation where a joint venture dispute has arisen, despite the conflicting parties’ best efforts, you should give serious consideration to engaging with alternative dispute resolution or ADR; specifically, the mediation process, in order to try and arrive at a settlement whereby one party buys the other out, or the business is split between you.
A mediated settlement provides the flexibility to arrive at a commercially focused solution and avoids the significant costs of litigation and potential damage to the business in both the longer and shorter run.
It’s clear that a joint venture gone wrong can cause havoc for your business, so the need for a properly structured and transparent joint venture agreement at the start of the working relationship is crucial. At Harper James, our team of experienced solicitors can assist you with drawing up the right JVA and also with providing tailored legal advice if a dispute does arise.