When forming a joint venture to undertake a construction project, it is vital to have a written joint venture agreement (“JVA”) in place between the parties teaming up to bid on a construction project.
In general, the JVA will spell out, amongst others, the parties’ respective obligations, objectives and scope of the joint venture, allocation of risks, how the profits are distributed, and other aspect of the projects. Just like any other legal documents, if the JVA is drafted with great care, the joint venture partners involved may minimise the chances of future disputes between them arising out of the JVA.
Before drafting the JVA, the parties teaming up in the project should identify/evaluate the potential issues so that they can discuss and iron these issues/details out in the JVA.
The Key Provisions to include in a Joint-Venture Agreement for a Construction Project
It is important to note that different joint venture structures will be suitable for different scenarios or circumstances as each JVA is unique depending on the parties’ arrangement and also, the requirement of a particular project.
However, below are some of key provisions that one should consider when drafting the JVA for a construction project:-
- 1) The Structure of the Joint Venture
- Firstly, it is important for the joint venture partners to specify the following: – the name of the parties involved in the joint venture, business name of the joint venture, the leader of the joint venture, duration of the project(s), a description of the project the joint venture is purposed for. Normally, a joint venture is formed to undertake a single project. However, if the parties are going to undertake multiple projects, these projects should be identified and specified clearly in the JVA as well.
- 2) Arrangement of the Works
- Secondly, it is crucial for the joint venture partners to identify their respective rights, scope of works, duties and responsibilities for the project(s). This would include the specific portion of works they are responsible for, the estimated value of those works identified and also, the targeted completion date for the project.
- 3) Capital Contribution/Profit Sharing/Risk Allocation
- Thirdly, the joint venture partners should also discuss and spell out clearly the following items in the JVA: – the capital contribution of each joint-venture partner, how profit is going to be distributed and risk allocation of each joint-venture partner. This may include the estimated percentage of the works that each joint-venture partner will be responsible for the works for the project.
- 4) Insurance
- Apart from the abovementioned, the joint-venture partners should also discuss and agree on what insurance to be obtained by the joint venture for the project they are going to undertake. It is important for the parties to discuss and decide who will be responsible to pay for the insurance coverage.
- 5) Non-Compete Provision
- It is also crucial to include this provision in the JVA. A non-compete provision is essentially a clause that restricts a party from engaging in activities that are competitive with the other party. It is important to have this provision in the JVA to prevent or limit competition (typically limited by scope, duration and geography) between one of the parties of the joint venture. This clause has to be drafted properly in terms of the restriction.
- 6) Governing Law
- It is important for the joint venture to set out the rules and laws of the jurisdiction which will govern the joint venture in the event of a dispute. Typically, a “governing law” provision is a provision used in an agreement that specifies which country’s law will apply in the event of a dispute. By inserting this clause in a JVA, the joint venture partners will know what law will be adopted to determine the questions about their rights and obligations under the JVA.
- 7) Dispute Resolution
- In addition to the “Governing Law” provision, it is pertinent for the joint venture partners to consider how they want the dispute to be decided i.e., in court or alternative dispute resolution (“ADR”) such as, arbitration. When drafting a dispute resolution provision, it is important to decide which forum to choose, should there be any dispute that arise under the JVA. The party may choose to elect one forum or a combination of different forum. As a starting point, usually the parties in the JVA will decide whether arbitration or court litigation is a more appropriate forum for the disputes to be determined. Essentially, the joint venture partners would need to understand what are the advantages and disadvantages of these forums.
- 8) Termination Provision
- Lastly, drafting a correctly worded termination provision is significantly important as it defines the manner in which the joint venture would come to an end. In this regard, it is important for the joint venture partners to consider when and how should a party be able to terminate the JVA and what would constitute a “trigger event” (i.e., a particular event that allows a party to terminate the JVA). In relation to this, the “trigger event” has to be drafted comprehensively and carefully to include amongst others, the following: – the insolvency of a party, material breach and how items such as the works, defects, will be handled after the termination.
Kindly note that this is not an exhaustive list of the provisions in a JVA. We highly recommend you to consult one of our lawyers in our Construction Unit to ensure that the JVA is drafted properly in accordance to your needs.
This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.
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Harold & Lam Partnership