Are you interested in working with another person, business, or organisation on a project or business idea that you’ve been dreaming of for years? Or perhaps you only have some of the skills or resources for the project, but want to split costs, liability, leverage others’ resources and protect your intellectual property?
In most cases, the solution to these considerations could be a joint venture with one or more parties, as documented in a joint venture agreement. In this blog, we will discuss what should be included in a joint venture agreement. If you’re already scoping out qualified and experienced business solicitors, reach out to the expert corporate solicitors at Solomon Hollett Lawyers. You can reach out to our team here for a free 15-minute consultation.
What is a joint venture agreement?
A joint venture agreement is a written agreement signed between parties wishing to work together, or contribute specified resources and capital to achieve a specific goal.
A joint venture allows legal entities to engage with one another under a binding agreement that assists all parties to achieve their common, desired goal. Joint venture agreements may be set up for a specific purpose and dissolved once the goal is completed, while others can be more long-term and have no immediate expiry, particularly where their object is to establish a business as a going concern.
What should be included in a joint venture agreement
Now that you have an idea about what a joint venture is, let’s take a closer look at what should be included in a joint venture agreement. Remember that when you draw up a joint venture agreement, it’s always a good idea to have a commercial lawyer to advise on and review the agreement. This will help to avoid potential disagreements down the track and protect your interests.
Both parties’ business information
A joint venture agreement is an agreement between two entities, and because it relates to separate entities, listing their business details is essential. Be sure to include all relevant information – like your Australian Business Number (ABN), what each business does and their registered legal names, if different to their trading name(s).
Names and addresses
Behind each joint venture agreement are participating members (from both legal entities) who contribute assets, capital and/or other resources to the project. Their names and contact information should be listed clearly.
Type of joint venture
Joint ventures exist for many different purposes It’s important to make clear in your agreement what type of joint venture is being entered into. Here are some examples of going venture agreements:
- Project-based. These are temporary partnerships that usually last for a given amount of time – or until the goals of the project are achieved.
- Vertical joint venture. An agreement between buyers and suppliers in a given industry and supply chain.
- Horizontal joint venture. An agreement between two companies who sell the same product and want to collectively grow market share and expand to new markets.
- Functional joint venture. An agreement between two entities that wish to take advantage of each other’s skills, resources and industry knowledge for their mutual benefit.
Purpose of the joint venture agreement
For the agreement to be legally binding, a clear purpose must be included. For example, two businesses might want to create a separate legal entity or business to perform a given function (often referred to as an “incorporated joint venture vehicle”), or they may wish to function as a consortium or group of businesses that are working to achieve a certain agreed goal. The purpose should specify the reason why the entities are agreeing (for example to share resources and capital to improve business processes).
Rights and obligations
Legal documents create various rights and obligations for those who enter into them. Rights and obligations are essential duties and expectations or responsibilities that ensure that members remain within the agreed legal boundaries established by the agreement. Rights and obligations within joint venture agreements also push certain members to achieve the goals of the joint venture. A well-drafted joint venture agreement will specify what resources members are required to contribute, both tangible and intangible.
Decision-making is a fundamental component of a joint venture agreement and is a key consideration in any form of business partnership – allowing it to evolve and adapt over time to changing markets or expectations. Decision-making is facilitated by voting rights, where members are afforded a certain weight and obligation when making decisions. Voting rights help joint ventures observe a clear hierarchy whereby decisions are made and upheld by other members.
Establishing ownership rights is another key part of any joint venture agreement. Agreements, where a particular entity is conducting a majority of the work, may wish to see a greater proportion of ownership of the project’s profits. Stipulating exactly who owns what is essential, particularly when it comes to our next points.
Profit loss distribution
Allocating profits and losses is another essential element of any functioning joint venture agreement. When parties enter into an agreement where profits are generated, distributing them fairly and effectively is essential.
Joint venture agreements are often made to (eventually) end. Ensuring they finish smoothly without disagreements about ownership or profits are exactly what dissolution terms are intended to achieve. For example, dissolution terms can invoke special clauses in cases where no agreement is reached and specify dispute resolution mechanisms to resolve any dispute as to the terms on which the joint venture will be dissolved.
Confidentiality and non-compete clauses
Safeguarding your business interests and intellectual property in the short and long term may require strict confidentiality about the nature of the joint venture, or the knowledge shared or created. A special confidentiality clause can help both parties protect their interests.
Likewise, competition among joint venture parties may also be avoided by adding a non-compete clause. For example, this could prevent an individual company from selling separately to would-be customers of the new entity established by the joint venture agreement, which is particularly prevalent where one of the joint venture members ceases to be a part of the joint venture and where the joint venture otherwise continues to operate.
To ensure a joint venture agreement is legally binding, it should be properly executed by the relevant entities and parties. This includes all members who are parties to the joint venture with their first and last legal names and company or other titles they hold.
Always remember to add the date to specify when the agreement comes into force.
Advantages of joint venture agreements
Joint venture agreements have several advantages. Here are some of the most important:
1. Joint venture agreements help businesses reach shared goals and share profits fairly.
2. Businesses or other entities involved in joint venture agreements can put forward their best talent and resources instead of outsourcing – making the result more profitable and unique.
3. Risks, assets, and other resources are pooled to make better use of them.
4. Joint ventures can be focused and time-bound to specific projects, rather than being bogged down in potentially unfruitful business partnerships.
Risks of joint venture agreements
While joint ventures can certainly make doing business easier, if they are not properly executed, they can cause trouble. Here are a few common risks of entering into joint venture agreements without first seeking professional advice from an experienced commercial solicitor:
- Poor planning can result in disagreements about which joint venture partner is contributing what.
- Expectations on the time needed to complete certain work can differ between entities and cause tension.
- Disagreements may arise over intellectual property rights and ownership of the end product.
- Dispute resolution doesn’t always fix disagreements – and potentially lengthy legal disputes may arise if different members cannot resolve their dispute.
Avoid the risks with our corporate solicitors at Solomon Hollet Lawyers
Now that you know what should be included in a joint venture agreement, you might be wondering how do I avoid the potential risks that come with entering into one? Any legally binding agreement should be carefully drafted by legal professionals to ensure your interests are secured.