Joint Venture and Partnership Agreement
About Joint Venture And Partnership Agreement
At certain points in the lifetime of a business, it is practical as well as beneficial for many to collaborate with another individual/firm/company for the purpose of conducting the aforementioned business. This may be done in the form of a Joint Venture Agreement or a Partnership Agreement, with the nature of the agreement differing on the basis of the nature of the collaboration.
For any business seeking to collaborate with another entity for the purpose of achieving one particular task or completing a specific project, a joint venture agreement would be the appropriate path to undertake. If the collaboration is for a certain period of time or the purpose is not as well defined as seen in the case of a Joint Venture Agreement, then a Partnership Agreement may be opted for.
The reasons for collaborating are vast. They can vary from trying to leverage resources and saving costs, to obtaining the combined expertise of two parties or seeking the other party’s aid in entering a foreign market. Collaborations in business are inevitable. Therefore, it is essential that an agreement between the parties exists to clearly define the rights and obligations that will result from the collaboration.
Frequently Asked Question
Most commonly in India, there are 2 types of Joint Ventures. There are joint venture agreements where two parties enter into an agreement and a separate legal entity is not formed. The other type is where the two business partners form a new separate legal entity for the purpose of the joint venture. The lifetime of the newly formed joint venture entity is for the duration of the project.
What are the general points to be considered when entering into a joint venture or partnership agreement?
The following terms are key points to be considered during the negotiations that precede the agreement stage when discussing a joint venture or partnership agreement –
- Financing and further funding if necessary
- Assets that will be contributed by both partners individually.
- Human Resources
- Sharing of Information and frequency of reporting
- Sharing of Profits
- Ownership of Intellectual Property Rights arising from the collaboration.
- Termination and Effect of the termination.
Registration of agreements entered into is always ideal, but not mandatory in case of a joint venture agreement. With respect to Partnership Agreements or if the Joint Venture constitutes the creation of a separate legal entity, then it would be necessary to comply with the requirements of the concerned Ministry, particularly the Ministry of Corporate Affairs in the event a Limited Liability Partnership is entered into by the two businesses.
Alternatives to a Joint Venture Agreement include but are not limited to Mergers and Partnerships. However due to the level of integration of the two businesses/entities in a merger or a partnership, and the lack of a particular goal in a particular timeline to be achieved, these two alternatives are not ideal if the collaboration is for a specific project only. Partnerships and Mergers are ideal if you seek to enter into a long-term business relationship with the other entity.
The Joint Venture Agreement may contain the specifics regarding the ratios in which the parties will distribute profits and losses. A separate agreement is not required. However, if the parties wish to opt for a separate agreement, it is necessary to ensure that the agreement is consistent with the Joint Venture Agreement.
The answer can be summarised in three words 1. Clarity 2. Accountability 3. Mediation. By entering into a formal agreement, the relationship between the parties is clearly defined. There is clarity regarding the roles and responsibilities of each party, what is expected to be performed by them, thereby saving resources and boosting efficiency. This also allows for accountability in the event of failure to perform by either party. Lastly, in a business relationship, the dynamics of the relationship can change at any point in time on the basis of external factors. Having an agreement that lists out the measures that can be undertaken and the methods to resolve the disputes helps in faster resolution of the business and preservation of the business’ interests.
What is the necessary due diligence required on the part of an entity entering into a Joint Venture or Partnership Agreement?
From a broad perspective, it is necessary to ensure that the other party is competent to enter into a contract, to check whether they have the right to transfer or provide the assets they will be bringing into the Venture/Partnership and lastly if there are any other legalities to be observed surrounding the partnership or venture. For example – if the venture consists of a collaboration between two entities who control more than 25% of the market share, or if a new legal entity is being formed, certain legalities must be met.