Features of Joint Venture Contract

October 2017 Tuna Çolgar
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Introduction

In cases where the means of an individual establishment is not sufficient due to the volume or technical features of the commercial operation that is planned, need for cooperation arises in order to carry such a commercial operation. Partnerships that are formed as joint ventures are frequently encountered in infrastructure projects, as well as in the transportation, energy and construction sectors. Particularly, companies are willing to participate in wide-ranging investments by combining forces under the structure of joint ventures and joint projects which makes for stronger investments by using each other’s specialties and the strength realized through financing together.

In doctrine, a joint venture is defined as an “Aggregation of more than one natural or legal entity which are independent from one another legally and financially, under a contract, in order to conduct a work or a continuous operation by establishing a commercial cooperation or without the existence of such cooperation, and to gain profit, by undertaking joint and several liability for the risks of that operation.[1]

As is clear from the definition, above, two kinds of joint ventures are utilized in practice: “Contractual Joint Ventures” and “Capital Contribution Joint Ventures.” In the model of Contractual Joint Ventures, a relationship only consists in a contract of law of obligation stipulated between the parties; there is no need for the presence of a commercial company with a legal entity, and the participation share deeds of the partners are sufficient. On the other hand, in the model of Capital Contribution Joint Ventures, parties of the relationship first form a partnership relationship that possesses the characteristic of a joint venture by conducting a joint venture contract. Then they establish a commercial company that has a legal personality, and commence participate in an already existing partnership.

Contractual Joint Venture

In relation to the categorization of joint ventures according to subject, a contractual joint venture serves the purpose of performing a single work or a continuous activity; whereas, a capital contribution joint venture is formed with the purpose of running long-term commercial operations together[2]. The formation of a joint venture, regardless of its nature, is based on a contract stipulated by the participants of the relationship[3]. Below contractual joint ventures will be examined.

A contractual joint venture is also defined as the relationship that is formed by the aggregation of multiple natural or legal entities that are financially and legally independent from one another, in order to take the responsibility of conduct of the work towards the owner, where each partner is liable for the whole of the work.

In a contractual joint venture, the life span of a joint venture is usually limited to the projected work. In this sense, transience cannot be measured as a contractual joint venture, and terminates when the project that is subject to the contract comes to an end; in other words, when the purpose of the contract is fulfilled[4].

In parallel with these explanations, also in practice, a contractual joint venture is formed under the contract stipulated by multiple companies that are financially and legally independent from one another, with the purpose of conducting the whole of the work together, without separating the sections related to their own specialty areas, and jointly and severally sharing risk. As a contractual joint venture qualifies as a risk partnership, enterprises are obliged to state financial purposes of the establishment of such partnership[5].

The characteristic quality and distinctive aspect of a joint venture that separates it from a consortium is the partners’ liability to the owner for the whole of the work, instead of fragments of it. Even if the work as a whole does fall under the obligation area of a partner, and the work is apportioned in the internal relationship, partners are jointly and severally liable to the owner. In a joint venture contract, it can be openly decided that each partner will be jointly and severally liable for fulfillment of the responsibilities of the partnership.

A contractual joint venture qualifies as a contractual unity, and is not obligated to stipulate a condition-dependent contract. As a general rule, a joint venture does not possess a legal personality as it consists of a contract. While each partner is entitled to represent another for a related joint purpose, it is possible to include special provisions regarding representation of the joint venture in the contract[6].

Another feature of a joint venture is that generally a special capital contribution is not assigned to the partnership. Reaching the joint purpose is possible by means of participation shares brought by the partners[7]. One of the advantages of a contractual joint venture is that assets brought by the partners as per their shares are not assigned to the common ownership of each other[8]. As this type of joint venture qualifies as a single business partnership, assignment or liquidation of collective or joint ownership is not necessary, and this presents the opportunity of saving time and money, both in the events of aggregation or separation.

One of the most vital features of a contractual joint venture is the partners’ participation in the profit and loss of the joint venture. As a rule, partners’ portions of participation to profit and loss are determined in the joint venture contract. If there is no provision relating to allocation of profit and loss in the contract, the principle of equality shall prevail[9].

Partners can regulate the terms of allocation regarding the management of partnership including, but not limited to, the allocation of profit and loss under the joint venture contract. Determination of the terms regarding the management and decision-making of a partnership that is composed of two independent entities is significantly vital for the operation of a joint venture, and in reaching the joint purpose in the most profitable manner. In order to prevent blockages arising in the management of the joint venture, as well as joint liability to the owner arising therefrom, it is advisable to add a deadlock clause to the contract. Deadlock clauses that are formulated in detail have great importance in maintaining operations and reaching the joint purpose without delay in spite of the blockages arising in the process of management of the partnership.

The choice of law that the partnership relation is subject to should be made carefully according to the qualification of the joint purpose, in order to determine the obligations of the partners of a contractual joint venture to each other, and to resolve disputes arising from these obligations.

Parties come together to realize specific objectives, and all of the deeds that are undertaken by contract are oriented to reach the joint purpose and to profit. In this respect, it is evident that a contractual joint venture constitutes an ordinary partnership with no legal personality.

Conclusion

As a result of a wide range of investments, especially in the areas of infrastructure, construction, energy and mining, corporations are willing to participate in projects to combine their forces and to use each of their specialties and means of financing together, thereby creating a stronger union. This tendency among corporations results in the propagation of the notion of ‘joint venture.’

Contractual joint ventures are unions in which at least two entities come together, adopting the purpose of conducting single or temporary work, generally under joint management, to make a profit pursuant to a contract, without assigning any assets to the joint assets of the partners, and are most likely to remain the most preferred partnership instrument in commercial operations that demand sizable investments[10].

[1] Prof Dr. Nami Barlas, Contractual Relations Based on Ordinary Partnership, 4th Edition, İstanbul, 2016, p. 284.

[2] Dr. Sıtkı Anlam Altay, Capital Contribution Joint Ventures in Law of Joint Stock Companies, İstanbul, 2009, p. 38.

[3] Barlas p. 285.

[4] Altay p. 39.

[5] Altay p. 48.

[6] Dr. Kemal Dayındarlı, Joint Venture Contract, 2nd Edition, Ankara, 1999, p. 54.

[7] Barlas p. 291.

[8] Altay p. 49.

[9] Dayındarlı p. 54.

[10] Altay p.49.

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