REUTERS | Mike Blake

Contracting with joint ventures

Working on a major infrastructure project recently, I was reminded of the issues that can arise when dealing with contractors undertaking projects on a joint venture (JV) basis. This is an increasingly common approach on large and complex projects (particularly in the roads, tunnelling and power sectors) as contractors look to pool their expertise or simply share risk.

Many of these points are simply a matter of common sense. However, in my experience they are frequently given little or no thought, even by experienced practitioners.

Form of the JV

A JV may take a number of legal forms. However, at its simplest, the choice lies between:

  • An integrated JV, under which the parties form a separate vehicle (usually a limited company) to carry out the project.
  • A non-integrated JV, under which the parties contract separately in their own right, generally on a joint and several basis.

Factors affecting the choice of JV vehicle include tax and accounting considerations, possible competition law implications, any regulatory requirements affecting the project, the preferred management structure, how profits are to be extracted and so on. These factors need not concern a party contracting with the JV, but they do need to understand the implications of the chosen structure on how the contract operates.

Integrated (corporate) JV

Matters to consider when dealing with an integrated JV include:

  • Guarantees should be obtained from the consortium members (or their parent companies) to cover the JV company’s liability, ideally on a joint and several basis.
  • Ensure that the JV company is sufficiently resourced to undertake the project in terms of working capital, seconded staff and the like.
  • Consider inserting change of control restrictions, so you can check that the covenant of the JV company (and any supporting guarantors) remains adequate following a change of ownership.
  • Ensure that any insurances taken out for the project will cover the JV company as well as the consortium members.
  • Think about what should happen if a consortium member becomes insolvent. For example, it may trigger termination of the shareholders’ agreement, in which case it should also be treated as an event of default under the primary contract.

Non-integrated JV

Where the contractor is a non-integrated JV, the following issues need to be considered:

  • Ensure that all the JV members are named as parties and execute the contract. Even this most basic point is often missed or forgotten.
  • Ideally all the consortium members should be jointly and severally liable for the obligations of the contractor.  In that event, there may be no need to obtain guarantees from the parent companies of the JV members. However, it may be wise to obtain them anyway as a precaution.
  • Be clear as to how the contractor’s insurance obligations are to be met – whether by the annual policies of the JV members or under a project-specific policy. If the consortium members offer their own policies, check that they cover the activities of the JV and that there are no obvious gaps between them.
  • Again, think about what should happen if a consortium member becomes insolvent. Whether or not this will be treated as an event of default may turn on the relative importance of the consortium member to the delivery of the project as a whole.
  • Likewise, consider what should happen if the JV is terminated for any reason.
  • Ensure that the contract is clear as to where instructions and notices should be served, to whom payments are made and the like. Ideally one person should be nominated to receive communications on behalf of the JV. However, it may be wise to send formal notices (such as claims or notices of termination) to each of the consortium members separately.

If the employer is a joint venture

Also increasingly common is the situation where the employer comprises two or more parties acting jointly. This may happen, for example, where a developer and a local authority agree to collaborate on a large-scale regeneration project. Issues to cover in that situation include:

  • Who is responsible for giving instructions, making payments and so on.
  • Ensuring that each employer party is able to enforce the employer’s rights under the contract separately, including matters such as copyright licences.
  • Providing for the other employer party (or one of them) to step in and assume the employer’s obligations under the contract if the paying party defaults.

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