Joint Venture Agreement Format - India

Joint ventures can be categorized in a variety of ways. As a broad definition, it can be understood to mean a strategic agreement or partnership between two or more businesses, in which they pool their resources to work together on a particular project or on a continuous basis, in order to work on a specified task. In the world of business, joint ventures are one of the best ways to collaborate with other businesses, and it is also a good way to unite different areas of expertise for targeted or general business purposes.

It is important to note, however, that there is a business risk to both parties, as each party is dependent on the other to make sure that their reputation as partners is not damaged by putting their name to a joint venture. In order to achieve the joint venture’s objectives, it is important that the parties clearly define their respective roles and responsibilities at an early stage of the joint venture and how they will cooperate to make the venture successful. It is ideal if this is formally written down in a joint venture agreement, so the work will be recorded in it.

Types of agreements

A joint venture can be structured in a number of different ways. In order to determine whether the joint venture arrangement is for a short- or long-term arrangement, or whether a separate company should be set up for this purpose, whether the agreement is strictly for a loose collaboration or if there is a view to a merger or acquisition in the future, it is important to consider all of these factors before taking any further steps.

As a starting point, here are a few key things to keep in mind:

• Contractual Joint Ventures - A contractual joint venture can take the form of two or more parties coming together and collaborating on a specific project, sharing the costs of R&D, or sharing knowledge and expertise on an ongoing basis as part of an ongoing collaboration. There is no particular way in which the parties can negotiate the contract terms, so they can share profits and liabilities exactly as they see fit or in such proportions as they think are best for them. I think it's very important to have a well-drafted collaboration agreement so that the parties don't get into a partnership (and therefore have to share profits and liabilities equally) without realizing that they are doing so.

• The term partnership can also refer to a joint venture, where two or more parties voluntarily start working together and carry on a business in common with the aim of profiting from it, even if the parties are unaware of that fact. It is important to understand that partnerships are governed by the Partnership Act 1890, and are not formed as separate legal entities. Unless the parties have entered into a partnership agreement setting out the terms in which these partners agree to be held responsible for the liabilities and share profits equally, the partners (individuals or companies) are equally responsible for the profits.

• Limited Liability Company – In the event of a joint venture that involves a high-cost project, e.g. developing a new product or service, and both parties have committed to the venture with capital, a new company will be formed to carry out the project (this kind of company is referred to as a special purpose vehicle).

• Establishing a new company will keep the parties' existing companies separate from the joint venture, protecting their assets, as it will be a completely separate entity from the old. As part of the joint venture agreement, both parties will share in the dividends made by the joint venture company. Whenever you set up a limited company, you should be careful to draft the articles of association in a careful manner, and you should also make sure a shareholders agreement is drawn up between the members so that the rights and obligations of all the parties are clearly outlined from the very beginning.

JVs: advantages

There are several benefits to being a part of a joint venture. Shared resources can enable the companies to benefit in a number of ways, such as:

• The parties can benefit by having access to better resources such as specialized staff, technology, and finance as opposed to having to acquire these resources themselves for a greater cost than if they had to acquire such resources themselves.

• By jointly managing some financial responsibility, businesses are able to hedge some risk by sharing in some of the financial responsibilities produced by their joint business arrangements.

• It is important to understand that joint ventures are flexible structures (at least at the more relaxed end of the joint venture spectrum where a loose collaboration is done rather than an SPV). There is a possibility that a joint venture will have a limited lifespan and offer only a portion of what you do, limiting the partners' commitment and their exposure to the business.

Joint venture disadvantages

In terms of potential disadvantages, there are the following:

• Disputes - Joint ventures that fail due to disagreements can be the result of disagreements between the partners. This occurs largely due to the fact that the parties are not taking the time to discuss and agree the objectives for the joint venture before they enter into a joint venture. It is possible that if the parties of a joint venture do not have a jointly drafted joint venture agreement, that they may fail to consider what resources each party will provide and how the joint venture will be financed in the future. There is a possibility that this may result in major disagreements and ultimately the joint venture may not succeed as a result.

• Eventually, either party may lose commitment as their existing business interests or personal interests sometimes take precedence, resulting in a situation where one party ends up driving more than their share. The parties may eventually walk away if the remuneration or profit share isn't amended to reflect the changes in responsibilities.

• Joint ventures are at risk of reputational damage if they undertake a bad venture or report an inadequate PR story. Even when neither party causes the failure of the project, it can be difficult to avoid collateral damage from occurring. It is therefore imperative that one does due diligence on any potential business partners and that one picks those potential partners carefully and after careful consideration.