How are specific joint venture liabilities and disputes dealt with in your jurisdiction?

Lawyer’s from around the globe, including our very own Alex Canham, answer question 2 on international joint ventures, which is published in IR Global’s Collaborations Across Borders Virtual Series.

England – AC On the liabilities front,  the central JV company is a great tool for apportionment of risk and liability because all the risk of the JV is taken through the vehicle. Each party provides resources or staff to that company and it is taking the risk.

If the JV fails or incurs a liability, in the absence of parent or cross-guarantees, the liability is with the JV vehicle. Everyone likes it, because they are not directly liable for something they are not fully in control of. If the JV has a direct liability to a third party, then it is apportioned between the various JV partners, according to clauses within the articles of association.

If you have three partners with a share in the JV, you can contractually say that each will be responsible for a certain amount of risk. On the informal side of things, in a contractual relationship, there is a direct liability to the main trading business.

JVs are about exploitation of a piece of knowledge or equipment, or something novel and untested. There is risk associated with that, so having a central company is really useful.

Germany – MS Regarding  liability,  it’s a bit simpler if you have a JV company established for the JV project. It is important to clarify which liabilities this vehicle will take on, so it’s then only a question of financing for the shareholders or partners. If you don’t have your own entity to execute the JV project, then it can be very complicated to define the exact liabilities assigned to the project and those assigned to the JV partners.

England – AC  That follows for establishing profit and loss, rather than money flowing directly into the existing company and causing problems around extrapolation of that data.

Slovakia – AV  If you have a corporate JV, you follow the law. If there is a liability towards a third party, the shareholders/ partners of the limited liability company are liable only within the unpaid contribu- tions which are registered in a commercial registry. The shareholders of joint stock company do not bear any liability for the obligations of the company. The limited liability company and the joint stock company are both liable with their entire property for any breach of their obligations. On the other hand, there is liability among the parties, which is why we have contractual freedom in joint stock contracts or corporate documents.

England – AC  Does a particular party take a lead on the liability?

Slovakia – AV  The laws of Slovak republic provide contractual freedom on this. There is a liability regulated by the commercial code, but among the partners there is a lot of contractual freedom applicable, since, there is no specific legislation regulating joint ventures in Slovakia. The legal terminology from corporate law does not define such terms explicitly.

England – AC That’s helpful from a JV perspective, because no two are the same. International or domestic JVs are all designed on different terms. It depends on what exactly the project  is, the attitude to risk, who’s providing the funding, and who’s providing the services or the balance of that between the two, three, four, five or six parties that are involved.

We have got a very flexible legal framework that is recognised in the same way as the Companies Act in the UK. A JV is a limited company that happens to have multiple shareholders doing a project together, so there are no restrictions around obligations or liabilities.

Slovakia – AV In a partnership agreement you can agree a ratio of distribution for project liability. It doesn’t matter if the other partner has less shares.

England – AC That goes further  than  we go in the UK, since the profits from a limited company would typically flow by reference to shares unless you have a different class of shares.

Germany – MS It’s always difficult  for JV partners, if one is interested in the knowledge of the other, then it’s clear that the partner providing knowledge will not have to provide such a significant financial investment. In Germany there are often provisions in the JV agreement allocating profits and finance, based on different commitments.

Spain – BDG  Liabilities will depend on the activities of the joint venture or the new company. In Spain, we have a strong and restrictive legislation around labour accidents with regard to the liability of members of the board.

If the company is involved in a risky activity where a labour accident might happen (e.g. construction), they need to be aware that the liability may skip from the company to the members of the board.

One of the things I recommend in a JV is an insurance policy to cover the liability of members of the boards, since, in some cases, the liability could be criminal.

As far as other liabilities are concerned, the JV has a limited liability, except when it is a temporary union (UTE) or an AIE. In that instance, all the partners are liable for all the debts of the company. The general rule is limited liability for a company with the partners and board members only liable when they neglect labour accidents or some other specific cases.

Arbitration is the most common form of dispute resolution between members of the JV, particularly when some of the members are foreign. The arbitration will normally take place in a neutral country, being Paris or London the most common arbitration courts.

Washington, D.C. – WS  From the US perspective, I think we first have to consider what the purpose of the entity is. If we are dealing in a high liability area, such as offshore oil drilling that’s one issue that may have a lot of labour liability or exposure. Once we know that, the first order of business is in structuring the allocation of responsibilities and liability, to include defence, indemnification and hold harmless provisions between the parties. If one makes a mistake, the other is defended from the consequences of that mistake. Once we structure something well from a legal standpoint to insulate the liability, then insurance comes in as an important ingredient.

We also look to see if the JV should  be onshore or offshore. As Mark indicated, the new tax legislation has made it attractive to bring the JV onshore, but if we have concerns around issues like anti-trust or consumer liability, we may want to keep the JV offshore to insulate it through distributorship and other means, to avoid liability. We can then keep lawsuits out of the US and force claimants to go abroad.

Insurance depends on the client’s budget and the risk factors, but it is one of the first things we look at, to see if there is coverage and what the price might be. We don’t have quite the same type of exposure for officers and director and individual liability as in Europe, but, as a public company, we have a duty to shareholders and the best insurance coverage is a first step to establishing a good JV.

Spain – BDG I have to say that these contractual clauses between JV partners are now more common in Spain, because of the influence of US and UK lawyers. It only covers liability internally though, not with a third party.

Brazil – ADC If  a  NewCo  is  created,  in principle the liabilities relating to the implementation of the project would be first attributed to the NewCo. Corporations and sociedades limitadas afford the limited liability protection to shareholders, but there are several exceptions provided by law, particularly environmental, anti- trust, anti-bribery and consumer laws and labour case law, in which shareholders may be personally liable. This should be analysed on a case-by-case basis, in light of several factors, such as the field of activity. To address such risks at the NewCo level, the parties usually resort to insurance, corporate governance measures and compliance policies.

A contractual joint venture allows the segregation of liabilities in a more straightforward manner, but this does not necessarily prevent the involvement of one party in liabilities or litigation originated by the other party.

Therefore, in both cases, it is crucial to have clear indemnification provisions and a good dispute resolution system. There is a tendency for parties to choose arbitration over judicial courts, as the court system in Brazil is subject to a lot of red tape, the conclusion of lawsuits may take years, and many judges may not have the specific expertise required for the technical resolution of certain disputes. However, the fact that arbitration tends to be much more expensive and does not allow the parties to appeal leads some companies to opt for the court system. This analysis should be made on a case-by-case basis, in light of the complexity of the joint venture and of the amounts involved.

More recently, mediation is becoming a new trend, to be exploited prior to the beginning of an arbitration or judicial lawsuit.

In any event, if the JV project is to be developed in Brazil, we usually recom- mend the parties to elect Brazilian law as the governing law and a city in Brazil to be the venue for arbitration or court resolution, as this is more efficient from an enforcement perspective.

New Zealand – MC Under an incorporated JV arrangement, shareholders in the JVCo do not owe fiduciary obligations to one another, although a shareholders’ agreement can impose fiduciary-like contractual obligations. Again, liability for the JVCo’s debts and obligations is generally limited to the JVCo, protecting offshore shareholders and directors (and their assets).

Although shareholders may be asked to guarantee the JVCo (for example to secure funding) which can reduce the limited liability protection provided by the JVCo, in our experience this rarely outweighs the benefits of using a JVCo.

In a Limited Partnership the GP’s liability is unlimited and joint and several with the limited partners – but usually residual after the LP’s assets have been exhausted. Given this exposure, a GP is usually a limited liability company with nominal share capital. Limited partners enjoy limited liability provided that they do not take part in the management of the LP (subject to certain exceptions allowing strategic control), which can be particularly attractive to offshore and/or passive investors.

In an unincorporated JV that is not a partnership (see above), the JV parties keep their respective businesses separate – although they may, for example, jointly use assets and facilities – and share costs up to the stage of production or output. For tax purposes, a UJV which is a partnership is broadly similar to that of LPs as discussed above, with UJV partnerships treated as transparent for liability and tax purposes. Unless agreed otherwise, each JV party collects profits for its own separate account and retains ownership of its property.

No matter which kind of JV structure  is used, where a JV is formed in New Zealand its actions will typically be subject to the laws of New Zealand where a dispute between the JV parties arises. However, JV parties are also generally free to agree a different dispute resolution place and process (e.g. arbitration in Singapore) if this is considered more appropriate, and this is becoming much more common in JV agreements with international reach.

Texas – DL A lot of the issues identified are issues we face in the US as well. Going back to the new regime of international structuring of businesses through the US, the ability to do business directly from the US, means that a lot of the work done abroad in JVs are via contracts. Before the changes, it was done through ownership and partnership abroad, in a foreign jurisdiction that was tax favourable.

When you have common ownership, there is certain unavoidable exposure to liability from the activities of the JV, that will extend up the chain to the ultimate parent in the US. The owners can allocate risk and liability between each other, but that doesn’t change the exposure of the entity itself.

By using contracts, you can insulate yourself a lot better, having forum selection clauses in the contract obligating the parties to litigate in certain courts and jurisdictions, indemnification clauses and representations and warranties. The fact it is at arm’s length, means you can regulate that risk much better.

Marcia mentioned arbitration and it would be interesting to get William’s take on this, because 15 years ago almost everybody began to use arbitration to resolve disputes.

Most firms that I know, other than the really large ones, have reverted to relying on jurisdictions in the US to go to court, rather than arbitration clauses, because it’s cheaper. Three panel arbitrations have become a business and are now a USD2 million expense, rather that USD200,000. We advise clients to go with jurisdictions in the US, because the courts are reliable and much less expensive. It may take time to get there, but it is a known process with rights to appeal.

In arbitrations you can end up with a split result, while the legal and arbitration fees can end up being three or four times as much as they would be in court. On the other hand, most clients dealing in international contracts do typically go with arbitration rather than select a jurisdiction and judicial process outside the US.

This is always a major issue in a JV.

Belgium – SB If the JV is structured by way of a corporate separate legal entity with limited liability, the liability of the JV towards third parties is limited to the assets of the JV. Creditors of the JV are not creditors of the shareholders. Therefore, they cannot reach the personal assets of the shareholders.

A JV agreement may not provide that a shareholder can participate without incurring any risk or loss. Such a clause in a contract is deemed null and void. The basic feature of companies is that the members participate in the profits and the losses.

If the JV is structured by way of contract, the partners have direct liability, but it can be limited vis-à-vis third parties by specific agreement with them.

Subscribing an insurance policy could partly resolve the liability issue, but there is a cost, and often a portion of the risk is not covered. Liability implying criminal offences are not covered.

Washington, D.C. – WS I  agree  with Don, the real problem we see with arbitration is the expense. We had an arbitration in London for a JV, and within one month, the legal fees were USD250,000 for just getting the case underway. Many American companies are worried about the expense of arbitration.

We often provide for arbitration under the rules of an entity like the American Arbi- tration Association (AAA), but not under its auspices. The parties follow the rules and select an arbitration, but don’t pay the substantial administration costs. For those entities that do want to select a US jurisdiction, we favour Delaware because it has Chancery Courts devoted to business disputes and usually you have pretty knowledgeable judges who understand business and focus on business.

The trend is to go to litigation and, as a matter of fact, many of the courts in the US have very substantial court-annexed arbitration and mediation service that gives the benefit of arbitration without the costs.

Texas – DL The courts will often mandate arbitration and mediation, but operated through the court system it is far less expensive.

I would add that the really large law firms have created somewhat of a monopoly on the international arbitration process by being the participants in the organisations that select the panel of arbitrators. They are picked on a system of points, so if the country of Spain is selecting counsel or arbitrators, they go through this points process, which always goes back to people from very large law firms being picked. They have a business model for this, with prices designed to gather USD2 million in legal fees by the time it is over.

Iceland –  ST  There is no special way  of handling disputes and ascertaining liability for JV in the Icelandic legislation, and disputes not resolved by contract usually end up in the court system. Arbitration is, in general, not frequently used in Iceland as a means for dispute resolution, but when a JV partner with a major stake comes from a jurisdiction where it´s a common practice, it´s likely there would be an arbitration clause in the part- ners’ memorandum of understanding. One risk factor previously mentioned is the aspect of competition law, merger control and obligation to report a major JV to the competition authority.

Cyprus – SF For any dispute that may arise involving any structure established in Cyprus, the District Courts of Cyprus are the competent authority to act, unless another jurisdiction is explicitly stated in the agreement made between the participants or the venture and any third party for a specific transaction. However, the parties involved are free to choose the use of arbitration as an alternative dispute resolution path, avoiding the long, time consuming and expensive judicial proceedings.

It should though be noted that for the case of the Corporation Joint Ventures, where constitutional documents must be submitted, if the parties desire to follow the path of arbitral proceedings for any potential dispute resolution, then this must be specifically stated in such constitutional documents.

Generally, liability for each of the four different structures that may be established in Cyprus may arise in different circumstances.

The participants of a corporate joint venture only bear limited liability and the corporate joint venture will be held liable separately from its participants for any breach. The corporate joint venture will be responsible for any taxes due or any creditors of the venture or for the obligations and duties arising under any potential contract in which the venture has entered. The venture can sue and be sued in its own name.

The liability in partnerships depends upon whether this is a general partnership or a limited partnership. In both cases though there must be a general partner who bears unlimited liability with the other partners for all the debts and liabilities of the venture.

The liabilities of contractual ventures depend on the wording of the contract forming the basis of the venture. As no legal personality is created, the participants will bear any liability may arise according to what is specified in the contract. Therefore, it is vital to have explicit and clearly written contracts setting out in detail the duties, obligations and liabilities of the participants.

Under an EEIG structure, the participants will bear unlimited joint liability for any debt or liability. This is the biggest disadvantage of these types of ventures as the participants are at greater risk. However, such risks might be mitigated if specific agreements excluding particular liability are reached.

Belgium – SB Dispute resolution by arbitration is of course possible under Belgian Law but we tend to recommend jurisdictional recourse, as use of the judicial system is much cheaper than arbitration. Furthermore, in contrast to arbitration, appeal of judicial decisions is possible without delaying the matter, as decisions in first instance are imme- diately enforceable notwithstanding appeal.

However, for international disputes, arbitration offers the added advantage that the parties can choose the language of the proceedings, as opposed to judicial procedures in which the language of the proceedings is determined by the location of the court.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

Alex Canham
Partner, Corporate
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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