Overview - Context

		Joint ventures are a common feature in international construction projects in Asia.
		There are different reasons to form joint ventures.
		Joint ventures can take different forms.
		The primary feature that distinguishes a joint venture from a partnership is that the joint venture usually is formed to undertake a single project whereas a partnership creates an ongoing business.
		Proper management of joint ventures, using an appropriate joint venture agreement, is critical in managing the risks inherent in joint ventures.

Reasons to Form Joint Ventures

		Taking on a project that is larger than the contractor normally would undertake, with a view toward spreading the risk.
		Combining two contractors to generate bonding capacity that each contractor would not have individually.
		Teaming up two contractors with special expertise (a civil and mechanical contractor teaming up to construct a power plant).
		Teaming up a contractor that has an established organization in a country with a contractor with little or no experience in the country but with specialized engineering knowledge or skill.
		Teaming up a foreign contractor with a local contractor that may have political or other valuable relationships in the country where the project is.

Types of Joint Ventures

		Integrated Joint Venture:
			Primary characteristic is that it can represent a true partnership, in that the parties share profits and losses.
			The interests may be 50% - 50% or some other division, and there may be two or more members.
			The members share the profits and losses in proportion to their interest in the joint venture.
			The parties combine resources and personnel in an agreed upon manner.
		Typically used:
			Strong, lengthy relationship between parties.
			Non-linear, complex projects.
			To spread risk on large projects.
		Non-Integrated Joint Ventures:
			Primary characteristic is that it is not a partnership in that there is no sharing of profits and losses.
			Each member takes on a specified scope of work and is responsible for the profits or losses associated with that scope of work.
			Each member is solely responsible for the resources necessary to perform its specified scope of work.
		Typically used:
			Limited relationship between parties is desired.
			Linear projects with distinct work scopes.
		Combination Joint Ventures:
			They present a combination of an Integrated and Non-Integrated Joint Venture.
			Each member takes on a specified scope of work and is responsible for the profits or losses associated with that scope of work.
			But the members also agree to act as partners with respect to a portion of the necessary work, which may include sharing the preliminaries and general conditions necessary for each member's separate scope of work, as well as the actual performance of a portion of the work of the project.
		Typically used:
			Becoming popular; more closely reflects the likely spread of specialist as well as general work required on the larger, more complex projects.

Joint Venture Agreements

		The joint venture agreement on a sophisticated international construction project is a complex document that usually is the product of extensive negotiations between the parties.
		A typical joint venture agreement will include more than 30 numbered paragraphs and many sub-paragraphs.

Management of Joint Ventures

		A unique feature of the joint venture is that it needs to be managed with due attention to the sometimes divergent interests of the members.
		While the joint venture is not a partnership (usually the JV agreement will expressly stipulate that it is not), its structure and form closely resemble a partnership.
		Frequently the joint venture will, like many partnerships, include only two members. This can lead to tie votes and impasses.
		In managing the two-member joint venture, a mechanism is needed to break the ties that develop.
		There must be a manager of the joint venture, and the joint venture must have a decision-making structure.

Management Board

		In order to avoid one party dominating the joint venture, it is a good practice to establish an appropriate system of management.
		Management normally will be in two tiers: project-level and "board" level.
		The top layer is often referred to as the Management Board.
			Its members usually include senior management personnel from the head offices of the respective members and not project staff.
			The Management Board usually is empowered to take such actions as appointing the project manager and taking action on any matters that cannot be resolved at or delegated to the project level.
		There are several different ways to manage the decision-making process at the Management Board level.
			Require unanimous consent on any vote, with the matter being submitted to a dispute process in the event that agreement cannot be reached.
				This is not a particularly good approach, as there may be critical matters on which decisions need to be made and for which delays can prove to be damaging.
			Require unanimous consent, but in the event unanimity cannot be reached, include a tie-breaking mechanism.
			The JV agreement should provide that the person who is to make the final decision shall act in a way that benefits the interests of the joint venture as a whole as opposed to any one of its individual members.

Project Level Management

		The project-level management often is left to a project manager, with or without the support of a project board.
			Any project board usually will include key project personnel.
			The chairman of the board usually is the project manager.
			The project manager usually is selected by the management board, but frequently the terms of the joint venture agreement will prescribe who may be nominated as the "leader" of the JV and as such may be empowered to select the project manager and/or his deputy.
			Generally, unanimity is not required of the Project Committee, and frequently the project manager will be given the right to break tie votes.
		The project manager and project board essentially will conduct the day-to-day business of the JV:
			Open and manage the bank account.
			Submit the monthly payment applications and interact with the engineer and the employer.
			Submit and negotiate change orders.
			Approve and manage subcontracts and purchase orders.
			Manage work progress.

Project Leader

		The concept of the "leader" takes into account the fact that one of the joint venture parties will have to be in a position of negotiating with the employer and/or other third parties.
		This will be the case even when there is an non-integrated joint venture in which each party is undertaking its own separate scope of work.
		Therefore, it is critical that all joint venture agreements contain provisions that either:
			Specify the party that is the "leader" of the JV; or
			Identify who is the project manager or provide a mechanism to appoint the project manager.
		In any event, the role and powers (authority) of the "leader" or the "project manager" need to be defined.

Working Capital

		Regardless of whether the joint venture is an integrated or non-integrated joint venture, provisions must be included that address the responsibility of the parties for working capital contributions.
		Working capital obviously will be required at the commencement of the project and, perhaps, at times during performance of the work.
		Failure to contribute necessary working capital can have disastrous results to the joint venture.
		Likewise, given the importance of working capital contributions, the joint venture agreement must specify the consequences of failure to make required working capital contributions.
		Generally, the failure to make working capital contributions is not considered an event of default justifying termination of the interest of the party that has failed to make the additional working capital contribution although it can be treated as such.
		The more common way to treat the failure to make working capital contributions is to allow one member to contribute the amount that the other member failed to contribute and to adjust the interests of the members in the profits (but not the losses) accordingly.

Default

		As in any main contract or subcontract, the joint venture agreement must address default by one of its members.
		Default must be defined, and remedies for default must be included.
		Often cross-indemnity clauses and parent company guarantees are used to establish liability and in turn security.
		The most serious type of default is insolvency of one of the members.

Default - Insolvency

		The power of non-insolvent joint venture members to take action regarding the insolvent member's interest in the joint venture may be subject to the bankruptcy law of the jurisdiction in which the project is pending or in which the bankruptcy was declared.
		Local bankruptcy law may provide that the insolvent member's interest in the joint venture is an asset of the estate of the bankrupt member and that any provisions purporting to forfeit the member's interest in the joint venture as a result of the bankruptcy are invalid.
		For this reason, it is recommended that the joint venture agreement respond to the insolvency of a member by providing that the insolvency removes the insolvent member from any voting or decision-making power in the joint venture and that the insolvent member's interest in the joint venture shall be determined when the affairs of the joint venture are concluded.

Recent Experiences

		The highly competitive international construction market has put strains on joint venture relationships.
		There are even disputes within Japanese joint ventures.
		With international joint ventures, there are cultural issues/attitudes and risk of misunderstandings. Such issues can impact relations with advisors, employers and subcontractors/suppliers.
		Joint-and-several liability at the main contract level, in effect, has the venturers guaranteeing the performance of others.
		Control of the project process can be lost in favor of a project leader.

Successful Joint Ventures

		Use long-term partners, with the resulting familiarity and awareness of cultural/business issues.
		Perform due diligence to ensure that joint venture members are solid on both technical and business grounds.
		Try a small project to start.
		Use a comprehensive joint venture agreement.
		Recognize management control issues - in effect recognizing the need to release control but on appropriate terms.
		Avoid taking on main contract liability while becoming in effect a subcontractor.
		Seek security for member liability and responsibility.
		Insist on transparency in provisions dealing with project leadership and delegation of duties to project manager.

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For more information about the issues covered in this report, please contact Paul Berning in San Francisco at 415-369-7229 or at pwberning@thelen.com or Vincent Rowan in London at +44 20 7490 4000 or at vincent.rowan@pinsentmasons.com. For more information about Thelen's Construction and Government Contracts Department, click here.





©2005 Thelen Reid Brown Raysman & Steiner LLP