Key points while entering into a joint venture

James Bremen.

James Bremen advises what to keep in mind while entering into a joint venture or consortium agreement.

The use of joint ventures or consortiums are attractive because they allow contractors, consultants and financiers to team up and offer owners a single interface for all needs of a project.

Owners are increasingly requiring that consortiums be formed to provide a single point responsibility and to ensure bidders have the ability to perform the scope of work.

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In light of this development, this article seeks to highlight some of the key legal and practical issues, which should be considered when entering into a joint venture or consortium agreement.

The term “consortium” is used throughout the article to refer to both “consortium” and “joint venture.”

Form of the bidding entity
The form of the commercial entity bidding for the project can be dictated by the owner and/or local law.

In the UAE, the Commercial Companies Law (Federal Law No. (8) of 1984) recognises seven forms of commercial entity, including “joint participation” and “limited liability company.”

As an incorporated entity, the consortium will, subject to the corporation’s law of the country concerned, enjoy limited liability.

But the protection afforded by limited liability may be of little benefit in a major project as the owner is likely to require guarantees from the parent companies of the consortium members to ensure performance of the contract.

Therefore, before entering into a consortium agreement, a party should consider the form of commercial entity, as this may effect its legal relationship with other members and the owner.

Local partners
Where the consortium includes foreign entities or shareholders, local laws may limit the involvement of those foreign participants or shareholders and/or require at least one of the participants to be a local entity. Where the main members of a consortium are foreign entities, the selection of a local partner can be critical to the success of the bid and project.

• Where the potential influence of the local entity over the consortium, is disproportionate to its contribution to the project, it can create tension between it and its foreign partners;
• A quality local partner can ensure that many of the pre-conditions to the submission of a bid or award of a contract are met including permits;
• Local expertise and experience can also assist when dealing with labour or the supply chain.