A joint venture is a commercial arrangement between two or more parties who intend to enter into a collaborative business arrangement. As such, each person or entity participating in the joint venture (and in the case of a corporate joint venture, the joint venture company itself) will be a party to the joint venture agreement, which aims to regulate the formation and operation of the joint venture.
It is not unusual for business owners to disregard the need for a joint venture agreement when entering into such arrangements with family and friends, often because they feel that their personal relationship with these parties is sufficient to regulate the operation of the joint venture business, and that because of this personal relationship, any and all potential problems can be discussed and easily resolved. Others view the time and effort required in negotiating and drafting such an agreement as wasted time which could have been better spent on other activities. However, joint venture agreements are essential for new businesses in a joint venture arrangement because it sets out the rights and obligations of each party to the joint venture at the outset. Without this agreement, the future of the joint venture will be unpredictable and exposed to avoidable complications.
Below are 3 key reasons why a new business collaboration needs a joint venture agreement.
#1: To agree on how to resolve any disagreements that may arise
Disagreements are a natural occurrence in any type of business relationship, regardless of whether the parties are family or friends, and this is especially so in relation to matters on control and management, financing and profit-sharing. By discussing and setting out the details in the joint venture agreement on how such disagreements will be resolved, the joint venture parties save time and energy in the event that they are unable to agree on a particular issue, as they had already previously agreed on how to proceed – for example, whether by reference to an arbitrator or through divorce measures should further negotiations fail during deadlock situations.
This ensures that the parties are not sidetracked by such issues, and the joint venture remains focused on its commercial objectives.
#2: To set out responsibilities and operational management of the joint venture
A joint venture agreement sets out the key responsibilities and contribution of each party, whether it is to provide certain facilities or services, and how such responsibilities will be fulfilled. It also stipulates the terms of how day-to-day operations will be managed, and the governance structure of the joint venture.
With the roles and responsibilities of each party to the joint venture clearly defined in the agreement, this ensures that all parties are on the same page, and are aware of their obligations to the joint venture.
#3: It facilities smooth termination of the joint venture
Joint ventures may be established for a fixed term or be indefinite in duration. In the event where parties have decided to collaborate for the sole purpose of a specific shared commercial objective, joint venture agreements may provide for the automatic termination of the joint venture in certain circumstances – for example, where regulatory approval has not been granted for the commercial objective to be carried out. In such situations, the joint venture agreement can provide for how the parties will deal with the pooled resources, including assets and liabilities.
It is clear from the above that parties intending to collaborate in a new business arrangement should strongly consider entering into a joint venture agreement. Such business arrangements may get off on a good start, but may not proceed smoothly as the collaboration progresses. By investing time and effort in discussing and agreeing on the salient terms of the joint venture at the very beginning, parties can minimise misunderstandings and also save time and money should any disputes arise.