Joint Venture Disputes
Forming a new joint venture or JV relationship with another company can be an exciting step for a business to take. It is highly recommended that JV partnerships are structured according to a formal contract to ensure that they do not result in misunderstandings.
JV contracts should be drafted and reviewed carefully, preferably by an experienced business law attorney. An experienced attorney can draft specific clauses into the agreement that protect the parties from ambiguity. Ambiguity leads to misinterpretation that can lead to disputes down the road.
Below is a list of the four of the most common disputes among joint venture partners with information on how a well-drafted joint venture agreement can avoid them.
- Misunderstandings Over Resources
Joint venture partners often share from the same pool of business resources. This may include capital, equipment and labor. A dispute may occur if one of the joint venture partners begins to divert some of these resources away from the JV and towards his or her standalone business. If there is no contract in place that explicitly forbids this from happening, this may offend the sensibilities of the other partners in the joint venture.
The best way to avoid this is to outline explicitly in a written and signed JV agreement how resources should be shared, to what extent each party can access them and the specific permissions and prohibitions for use of joint assets and personnel.
2. Misunderstandings Over Clients
Since Joint Ventures are usually made between partners with existing business interests, it is important to spell out in writing the extent to which members of the JV “own” the customer relationships that develop over the course of business. This is often not very clear cut as client relationships may form asymmetrically with one or several JV partners. Would those partners be within their rights to form a separate business relationship with the clients? If so, what if the services offered outside of the JV compete with those offered within it? What happens if a member of the JV introduces a client from another business into the JV? Does that JV partner “own” the business relationship with that client?
These are important scenarios that should be spelled out in a JV agreement drafted by an experienced business attorney.
3. Misunderstandings Over Expansion
If the JV business meets or exceeds expectations, all parties to the joint venture may agree to expand. However, there may be disputes over business expansion strategy. One JV partner may envision expansion by acquisition of another business, others may find creating new product lines or growing geographically to be the best strategy. Usually, these discussions can be resolved amicably if there is a written and predetermined way to handle questions of business strategy and direction. This should be drafted into the JV agreement so that parties all agree with the method of resolution before the need to discuss strategy arises.
“it is important to spell out in writing the extent to which members of the JV “own” the customer relationships that develop over the course of business.”
4. Misunderstandings Over Dilution and Change of Ownership
Dilution occurs when one party to the joint venture transfers a controlling stake in their own business and thus introduces another decision maker to the JV. This could occur after a sale of some or all of the shares of a company that is a party to the JV, or can also happen if a family member takes over a portion of the business and suddenly becomes a party to the JV. In such cases, there could be a clause in the JV agreement that binds all entities for a period of time to the terms and conditions of the agreement regardless if they were parties to the original JV agreement. This should be carefully drafted into the agreement by an experienced business attorney that can anticipate conflicts and ensure that all likely scenarios are covered.
Joint venture disputes are largely avoidable if anticipated ahead of time and resolved in the terms and conditions of a carefully drafted JV agreement. Are you considering a joint venture enterprise with another business or group of businesses? Then call South Florida Law today to discuss drafting or reviewing your joint venture agreement on (954) 900-8885.