Joint venture contracts are agreements between two or more parties that are entered into to accomplish a specific business operation together. The parties to a joint venture agree to split the profits and losses of the business enterprise. As part of a joint venture, the two companies act as one entity rather than acting as separate entities. An example of a joint venture is when two product manufacturers join forces to sell their products together.
Joint ventures must be entered into voluntarily, so contracts are necessary. All parties must agree on the joint venture terms and express their intent to enter into the specific business relationship.
What Is Usually Contained in a Joint Venture Contract?
The parties must address the following requirements when they enter into a joint venture in order for it to be valid. A joint venture contract contains many elements, but the following are the most important:
- All parties share a common interest
- All members have the right to govern and direct policies
- The right to control and manage the property that will be used during the venture
- Fiduciary duties between the parties, which usually include the sharing of profits and losses by all parties
- The purpose of the joint agreement.
- The contribution provided by each company, whether in cash or in assets, with the value of each contribution.
- Each party’s individual roles in the project, like technical contributions or commercial commitments.
- How the parties will stay updated on the project’s progress.
- The length of time the partnership will last.
- How to terminate the agreement if it no longer works.
- Details are laid out regarding who will manage the project on a day-to-day basis.
- If profits will be determined by the contribution levels of each party or by a specific formula.
- A section that details the specific details of a project, such as confidentiality agreements.
The items listed above will typically be addressed in detail in a joint venture contract. In addition, the joint venture contract should include the names and contact information of all parties involved so that it is clear who is a part of the venture.
It may also be necessary to add additional clauses and contract provisions based on the parties’ needs. Parties may wish to include a clause stating how legal disputes should be handled (e.g., whether mediation or litigation should occur). Legal liability for misconduct during the venture may also be addressed.
The Reasons for Forming a Joint Venture
A company may want to establish a joint venture for a variety of reasons. In this situation, you should definitely hire a lawyer to review your contract. The most common reasons for forming one are:
- Your business may require or benefit from resources that another company can provide.
- Creating an alliance can help you gain better access to a wider market.
- The other company helps you develop new products, services, or technologies.
- Creating a larger network will help you expand your business.
- To gain access to other customers or increase sales, you need to be able to leverage other companies’ brand reputations or business images.
- A partnership may reduce the costs of research and development of a project.
- You may be able to benefit both companies by sharing your expertise.
A Joint Venture Contract Can Be Terminated for Various Reasons
There are a number of reasons that the two companies may decide to dissolve the joint venture agreement, but some of the most common reasons are:
- There is a possibility that one company may be interested in buying the other.
- Perhaps the market has changed, making the partnership no longer necessary.
- There may be new goals for one or both of the companies.
- The contract’s purpose wasn’t achieved.
- It is possible that the joint venture’s goals are no longer relevant.
- The contract’s time period has expired.
Joint Ventures vs. Partnerships
Even though joint ventures are similar to partnerships in many ways, a joint venture is a collaboration on a specific goal or project, and a partnership is a business structure that determines how it needs to operate in terms of state law and taxes.
A joint venture is a temporary partnership created by a contract, whereas an established partnership is permanent. Moreover, a joint venture will be limited to a specific project or venture, whereas a partnership will be broad in scope.
As far as taxes and debts are concerned, joint ventures and partnerships can also be different. A joint venture requires each party to file an independent tax return, while a partnership will be taxed as a pass-through entity. Each partner is liable in a joint venture, while each partner is liable in a partnership. Furthermore, they differ in terms of ownership, with partnerships being 50/50 and joint ventures having ownership percentages assigned.
Joint Venture Contract Sections
Each joint venture contract should include multiple sections. In addition to including all of the members and their contact information, you will also want to include:
- Venture formation
- The venture’s name
- Joint venture’s purpose
- Contributions from all parties
- Distribution of profits
- The management structure
- Responsibilities of the parties
- Exclusion clause
- Contractual terms
- Information regarding termination
- Requirements for confidentiality
- Clauses for further action
- Assignments and transfers of rights
- Laws and regulations
- Severability terms
- How notices are handled
Do Joint Venture Contracts Need to Be in Writing?
Joint ventures must be formed by contract, but not all jurisdictions require that the contract be in writing. In some jurisdictions, joint ventures may be found even with implied contracts, such as those implied from oral agreements or by the actions of the parties.
Because even small business ventures can be complex, it is highly advisable that parties use a written contract when they enter into a joint venture. A written agreement definitely has its advantages because it provides the parties involved with a written record of the contract terms, which helps everyone understand the agreement more clearly. The written contract can also be used as evidence during a lawsuit.
Lastly, like any other contract, joint venture contracts are subject to requirements of the statute of frauds (i.e., certain contracts need to be in writing, such as when the contract deals with the sale of land).
Examples of Joint Ventures
Joint ventures are conducted by well-known companies as well as by small businesses. Together, both entities can achieve synergies that they would not be able to accomplish without each other.
Here are some examples of joint ventures:
Automotive
In today’s automotive market, joint ventures are emerging through technology. Joint ventures in the automotive industry include:
- Manufacturer collaborations
- Rideshare company ventures
- Government and school contracts
- Industry consortiums and engagements
- Supplier relationships
Technology
Joint ventures are ideal for technology companies because they allow for maximum flexibility. Technology companies can enter into joint ventures with:
- Affiliate partnerships
- Financing agreements
- Vertical joint ventures
- Project-based joint ventures
- Application programming interfaces (API) JVs
- Retargeting/republishing joint ventures
- Functional joint ventures
Should I Hire a Lawyer for Assistance with Joint Venture Contracts?
As required by law, joint venture contracts are an essential part of any joint venture. If you plan on entering a joint venture, you may wish to hire a contract lawyer to help you draft and review the joint venture contract. Similarly, if a legal dispute arises over the joint venture contract terms, your lawyer can assist you in filing a lawsuit in a court of law.
