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Published by Enhelion, 2020-07-14 10:28:28

Module 10

Module 10


10.1. Introduction:

As we have studied in the previous lessons, a Joint Venture is a commercial alliance of two or
more individuals or entities (Company or partnerships) whereby the parties to the Joint Venture
collaborate to pool their resources, capital, assets, skills, etc. to initiate a commercial project,
which facilitates better efficiency and management, as compared to a project initiated by
individual entity. Parties to a JV may possess varied skills, competence and experience to
contribute, all of which can lead to synergistic benefits to the JV. Such an alliance provides a
competitive edge to the JV partners over its competitors in the market. A JV form of business
structure facilitates joint management and sharing of the risks and liabilities. JV alliances enable
the parties to expand their business into other geographic and product markets consumer.

In the previous lesson, we also learnt about the incorporated Joint Ventures wherein, parties to
the JV establish a separate corporate vehicle in the form of a company or LLP to carry out the
business. In this module we shall be learning about unincorporated Joint Ventures.

Unincorporated Joint Venture is a structure wherein, the parties to the JV do not establish a
separate corporate entity, unlike incorporated Joint Ventures, but concludes a purely contractual
arrangement like a strategic alliance or a cooperation agreement for the purpose of commercial
association. The parties agree to collaborate as separate individuals or entities rather than acting
as shareholders of a company or partners in a legal partnership. The contractual JV is generally
entered into where the incorporation of a separate legal entity is not necessary, or it is not
feasible to establish such a separate legal entity. For projects involving short term commitments
or limited tasks and activities, this form of JV is most suitable. In such JVs, the commercial
relationship between the parties is in advancement of a common objective for a profitable deal,
the profits/income of which are to be shared in an agreed proportion. In such type of agreements,
the parties do not intend to go through the formalities and complexities of a corporate vehicle.
The rights, duties and obligations of the parties to the JV, as between themselves and third

parties and the duration of their legal relationship is to be mutually agreed by the parties under
the contract and such a contract is purely under the umbrella of “Contract Act” unlike a
shareholder agreement wherein aspects of companies act are also involved. The agreement is
binding on all the parties and its breach shall entitle the other party to seek legal remedies against
the defaulting party. This form of JV has certain drawbacks. Unlimited liability and no separate
corporate identity are common drawbacks.

10.2. Terms and conditions of JV agreement:

A joint venture agreement for the purpose of “Un-Incorporated Joint Venture” is a purely
commercial arrangement between the two corporate entities and there cannot be any standard
way or method of drafting such agreement. However, from a broad point of view, following can
be the key elements of such joint venture agreement.

1. Detailed explanation of business: The JV agreement should contain a detailed
explanation of the business to be conducted.
Eg: Joint Venture for construction of a particular project like roads, buildings, railways,
parks, supply of water, electricity, etc or for specific business objective such as
“exploring certain markets”, “jointly making certain sales of supplementary products”
etc. This detailed explanation of business is quite important because unlike in case of a
“incorporated joint venture entity” wherein all the decisions will take by the board of
directors from time to time in consultation with each other, there is no such common
entity here. Thus, certain key elements of “business purpose and objective” should be
specified in unambiguous manner such as “territory of business”, “business products”,
“appointment of sub-agents” etc.

2. Role and duties of each partner: The roles and duties of each of the partners to the JV
business should be described in detail as this becomes the most important element in case
of an “un-incorporated joint venture”. The parties may agree to make financial
contribution in cash for the business expense, provide technical knowledge, skill and
shall in all respect bear its share as regards planning and execution of the work and

responsibilities including provision of information, advice and other assistance required
in the Joint Venture and participation shall be in agreed ratio. Further, there might be
certain restrictions also on each of the joint venture partner as to what kind of decisions
and activities such partner can take for the purpose of joint venture business.

3. Recording of expenses: Certain joint ventures involve the utilization of the assets and
other resources of the partners rather than the establishment of a separate entity in which
case, each party utilizes its own assets to carry on the Joint Venture. It also incurs its own
expenses and liabilities and raises its own finance.

4. Confidential information: There may be a clause whereby the parties to the JV may
agree that none of them shall, either during the term of the agreement or even after the
termination, disclose any technical or other know-how of either of the parties without
their prior consent.

5. Intellectual Property: Any Intellectual Property developed with respect to any work
undertaken pursuant to the agreement shall be owned jointly or individually by either or
all of the parties, as agreed in this regard, and any assignment of IP shall be permitted
only with the prior consent of the parties..

6. Term of the agreement: The parties may terminate the agreement on any date which
they mutually agree or on the achievement of the purpose of the JV. Further the clause
shall also provide the conditions and procedure for renewal of the term.

7. Termination: the agreement of Joint Venture may be terminated on various instances
• The purpose of the contract is not fulfilled.
• The shared goals of the joint venture may no longer be applicable.
• The time period set in the contract has lapsed.

8. Indemnity: Even though no separate corporate entity is concerned, the JV partners may
be exposed to third party claims and liabilities due to the conduct of other partners. A
provision regarding indemnity should be incorporated in the JV agreement under which
one party shall indemnify the other party for any loss caused due to the actions of the
other partners.

9. Non compete - clause for partners with respect to JV Businesses: Indian Contract
laws prohibit making of contracts which enumerates non-compete agreements wherein an
individual is restrained from freely practicing any trade or profession. However, there are
certain exceptions to such a restriction, especially in cases where there is a sale of
goodwill. In other words, it restricts one party from engaging in a similar trade or
business similar the other party’s trade or business for a given time and/or within a given
geographical area. A non-compete clause is valid if it is commercially related to the
purpose of establishment of Joint Venture.

10. Events of default:
Not all Joint Ventures last forever. In fact, there are many Joint Ventures which have a
specific objective, and post achievement, the partners may choose to exit from the
venture. Joint Venture Agreements often contain certain ‘events of default’ upon the
occurrence of which non-defaulting parties shall have the right to terminate the Joint
Venture Agreement.

11. Arbitration and jurisdiction:
At times there may be disagreements between the Joint Venture partners. There are
various mechanisms for resolving such disputes. Arbitration is a popular mode of dispute
resolution, with a number of arbitral institutions being established in India. In any Joint
Venture agreements, it is necessary to identify the governing law to determine the
substantive law that is applicable to any legal proceedings which may arise from the
agreement. Some jurisdictions may have better or faster mechanisms of delivering justice
than others, thus, choice must be made after studying the options. Indian courts are

generally overburdened and therefore lead to various procedural delays to get in the way
of a normal hearing process. While it is usually faster than approaching the courts,
various factors need to be considered in choosing arbitration. In India, arbitration is
governed by the Arbitration and Conciliation Act, 1996. One of the significant
advantages of arbitration is a reduction in or elimination of procedural delays. Arbitration
generally tends to be more expensive than litigation.

12. Notices: Any communication, approvals and notices to be served upon either party shall
be in written format, to be delivered by postal delivery or through electronic mail
message or facsimile. The notice period shall be as agreed by the parties.

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