Key points while entering into a joint venture
James Bremen advises what to keep in mind
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.
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.
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.
Depending on the jurisdiction, there are various other laws, which may have an impact on the formation or operation of the consortium.
The consortium should seek specific advice on local law matters, particularly on employment law and taxation.
There are legislative requirements governing the employment of nationals and expatriates. The tax position of the consortium and the project should be examined.
For example, some cities in the UAE impose income tax on certain entities and most of them levy municipal taxes.
Delineation of scope
The members of a consortium should ensure that the delineation of scope between the members is sufficiently and clearly set out in the consortium agreement, so that each party and the owner are clear as to the separate roles to be performed; the pricing of all costs associated with the bid can be apportioned appropriately between the parties; and in the event of any dispute or default, it is clear which party is liable for associated costs and losses.
A consortium leader and decision making protocols should also be established.
The consortium agreement should address the issue of cross-indemnification where the members may be jointly and severally liable towards the owner in respect of the scope of works.
The consortium agreement ought to provide that each member shall be wholly responsible for any losses and claims arising out of its scope of work; in the event a claim is made against a member for default where another member is liable, the liable member ought to have control of the dispute resolution procedure; and there ought to be an express indemnity in respect of the above matters, so that each member takes responsibility for any loss it causes.
The consortium agreement should address the issue of bidding costs, which can be a significant unrecoverable expense. In the event a bid bond is required, the parties ought to consider whether to apportion costs according to the relative scope of work for each consortium member.
Exclusivity of members
The consortium agreement should require all parties to submit their bid on an exclusive basis in order to discourage them joining a rival consortium and using the information to assist the rival consortium.
Further, if one of the parties withdraws from the consortium, it should be prohibited from entering another bid with a rival consortium on the same project. Finally, the exclusivity clause ought to extend to affiliate and subsidiary companies of the consortium members.
Termination and long-stop date
The consortium agreement should include termination clauses covering different circumstances.
These include where the bid is unsuccessful; where the owner cancels the tender; and where the consortium agreement only covers the tender and the bid is successful.
In this case, the termination of the consortium agreement will typically trigger the formation of a new consortium agreement covering the execution of the project.
In addition, all consortium agreements ought to have a long-stop termination date in the event that none of the events mentioned above occur.
A long-stop date provides security that the consortium will only last for a specific period of time (typically one or two years).
A poorly drafted consortium agreement could lead to internal disputes amongst the members, which could adversely affect the project. This, in turn, could lead to claims from the owner, which would further burden the consortium.
Who is James Bremen?
James Bremen is a partner in King & Spalding’s London office and a member of the Global Transactions Practice Group.
Bremen has practised exclusively in construction law for more than a decade. He has significant experience in project development and dispute resolution both in the UK and internationally.