Entering into a joint venture (JV) can be a strategic way to grow your business, explore new markets, or pool complementary resources with partners. However, before drafting or signing an agreement, it’s important to check that all legal aspects have been considered. A well-drafted joint venture document doesn’t just record your intentions on day one; it protects your interests, reduces risk, and helps avoid disputes if things don’t quite turn out as planned.
In this introductory commercial law for joint ventures blog, we’ll walk through a comprehensive joint venture agreement checklist to help you make informed decisions. Should you need more formal advice, you can contact our team, who have a wealth of experience to share.
What Is a Joint Venture Agreement?
A joint venture (JV) agreement is typically signed by two or more parties collaborating on a specific project or business activity. Unlike a merger, partnership, or full business acquisition, a joint venture (JV) allows each party to maintain its independence while working towards a shared goal. This is often limited to a single initiative, product or service. It may also operate over a specific timeframe. The structure can vary, too. An agreement may be between two or more organisations, or the JV can form a new entity in its own right. The right JV arrangement will depend on the desired outcome of the project in question.
What To Check Before Signing a JV
Before signing a joint venture agreement, you should review several key considerations. It is always worth taking the time to check that each of the following legal elements is clearly defined and mutually agreed upon by all parties before proceeding. A professional legal opinion often proves to be worth the investment at this stage. Starting with confidence that all is well on day one normally pays dividends as joint ventures progress.
Purpose and Objectives of the JV
The foundation of any joint venture agreement is a clear, shared understanding of what the parties hope to achieve by their shared enterprise. This section should set out the purpose of the venture, its scope, and key milestones or deliverables. Ambiguity here can lead to misalignment, delay, frustration and costly disputes down the line.
Contributions of Each JV Party
Each participant’s contribution to the joint venture should be specified in detail in any fair agreement. It’s relatively easy to account for financial investment, but provision of intellectual property, labour, equipment, and expertise ought to be included too. Being transparent helps prevent disagreements over who brings what to the table, and, importantly, its value.
Governance Structure
One of the most valuable legal tips for joint ventures is that establishing a sound governance structure early in any project is a key contributor to overall success. There are significant benefits to agreements that outline decision-making methodologies, establish who holds voting rights, and detail how joint ventures will be managed on a day-to-day basis. Good questions to ask include whether there will be a board, a management committee, or an alternative structure. If so, who sits on it, and how does it operate?
Cost, Revenue & Profit Sharing Terms
JV typically involve investment. Even if no monetary contribution is made, time, effort, skill and intellectual property need to be compensated fairly and transparently. Mechanisms for recording costs, investments, and sharing rewards, typically profits, must be clearly outlined when drafting joint venture contracts. Will rewards be distributed equally, or based on contribution or performance? What about reinvestment strategies? Long-term growth? Suitable clauses should be included that cover these points and fairly reflect the risks and rewards associated with the joint venture.
Exit Strategy or Termination Clauses
Even the best-planned ventures can come to an end. Outlining an exit strategy in any joint venture (JV) agreement helps protect all parties involved. Assuming all goes well, the terms for parting once the project has been completed should certainly be included. It is also always worth planning for circumstances where a JV party might want to exit early. Will one party have the right to buy out the other, for example? Can either party walk away freely? What if the agreement ends in dispute? What if the terms of the agreement itself are broken?
Dispute Resolution Methods
Linked to the above paragraph, disputes can and do happen during joint ventures. Differences of opinion are all too common, so it is always helpful to include a clear resolution process in any joint venture (JV) agreement. It can prescribe next steps should relationships sour, including mediation, representation or arbitration. Agreeing on which legal jurisdictions apply if things really go wrong can help, too. The focus should be on resolving conflicts quickly and efficiently while preserving healthy business relationships.
Regulatory & Compliance Obligations
Regulatory compliance is a critical area that’s often underestimated. Depending on the industry sector or market targeted by the Joint Venture (JV), you may need to navigate a complex maze of regulations, such as product licensing, safety procedures, financial controls, and customer protections. You may also be party to anti-competition laws, merger and acquisition rules, and market controls.
A strong JV agreement ought to clearly outline each party’s legal and commercial responsibilities and ensure unhelpful compliance issues don’t arise down the line.
With this in mind, a formal due diligence process should be conducted early in the formation of any joint venture. This should assess the legal standing, governance, compliance, financial health, and reputation of all the JV parties, and help you identify risks and, most importantly, prevent surprises after the agreement is signed. If the JV operates across borders, it may also need to address international compliance obligations.
Confidentiality and IP Protection
When entering into a joint venture, sensitive information is inevitably shared. Confidentiality clauses are essential to prevent misuse or unauthorised disclosure of ideas, market-sensitive information, protected customer data, and more.
Intellectual property (IP) legal issues can be particularly complex for joint ventures, so they need to be included in appropriate agreement clauses. This is particularly true if new intellectual property (IP) is to be developed as part of the venture. Who will own it? How will it be shared? How will the creators be compensated? What happens once the JV ends? What if the JV ends prematurely?
Clear terms around intellectual property ownership and usage rights are necessary to avoid future legal worries. Our dedicated IP Services team can help avoid problems in this area.
Common Pitfalls in Joint Venture Agreements
Joint venture agreements that fail because of poor legal planning are particularly frustrating. If a relationship irrevocably breaks down, strong commercial performance means nothing and promised growth and profitability can slip away. To make this less likely, we’ve highlighted some red flags to look out for when you next sign or draft a JV agreement document.
- Vague or generic terms: Leaving key details undefined leads to confusion and potential disagreement. Specificity and clarity are always preferable to general catch-all statements.
- Unfairness: Problems can occur when one party has disproportionate control over the joint venture, or risks and rewards are not shared equitably. Agreements should always be viewed as reasonable, fair, and entered into in good faith.
- No dispute resolution plan: Without an agreed-upon, predefined process for resolving issues, disputes can quickly escalate into combative and ultimately costly situations.
- Unclear roles: When duties aren’t clearly allocated, decision-making is often delayed, tasks can be duplicated, or work may be overlooked. A JV agreement should outline a detailed governance structure that ensures everyone knows who is responsible for what, when, and how.
- Neglected exit terms: All JVs come to an end at some point, and a lack of a clear exit strategy can trap parties in unworkable situations, make leaving a joint venture acrimonious, and lead to financial loss.
By avoiding these pitfalls and more, you significantly improve your chances of building a sustainable and successful joint venture. If you are still unsure about what to do next, our commercial legal services team can assist you with any joint venture-related questions or tasks.
Why Work with Specialist Joint Venture Solicitors
Every joint venture is unique, and so is every agreement. Working with legal specialists who specialise in joint ventures ensures that your interests are protected, the agreement is legally sound, and any risks are identified early.
At Jamieson Law, we understand the commercial and legal nuances that make or break a joint venture. We can help you structure a deal that works for everyone.
Thinking about entering into a joint venture?
Before you sign anything, speak to a solicitor who can help you structure the agreement properly and avoid risk. Contact Jamieson Law for expert advice.
