Documenting Joint Ventures
Clarifying your proposed arrangements is vital to the success of any large scale construction project, says Bill Carr, Partner in the Corporate Team at CMS in London.
M
ost large-scale construction projects will involve the setting up of some form of
joint-venture – usually between an international construction company, perhaps with a local partner, a facilities management company, and potentially a financing party. It is critical that the proposed arrangements between the parties are properly documented, to avoid misunderstandings arising during the course of the project, and we explore some of the key issues to be considered in this article.
Type of joint-venture. Depending upon the nature of the venture, and
the jurisdictions involved, there may be a requirement to set up a separate legal entity to conduct the project. Equally, many construction joint ventures are carried out by way of an unincorporated joint-venture. Tax and liability considerations will be key, and the form of co-operation may change over the life of a project.
The extent of the project. The definition of the “business” is a key element of the contractual arrangements, as this will circumscribe what can, and cannot, be carried out in the context of the project.
Roles of the parties, and work-
share. The joint-venture should set out in some detail the roles that each party is to undertake to deliver the project, and how risks and rewards are to be shared between the parties. Where a
project is developed in phases, the agreement should set out work- share arrangements for each phase (and the extent to which work is exclusively allocated to parties, or would need to be awarded on a competitive tendering basis at each stage).
Management arrangements. The joint-venture agreement will need
to set out how the project is to be managed – with typically three tiers of management. Key issues will need to be reserved to the project sponsors (this is typically achieved through a detailed list of reserved matters for which a specific decision process would apply). There will then be a second management level, with representatives of each sponsor having day-to-day management authority over the projects. This project will also have a general manager/Project manager, with delegated authority to run the project.
Rights to information. The agreement should regulate the basis on which
the parties may access project related information, and how that information is to be prepared and presented. The management team would normally be required to prepare some form of project budget, with reporting against budget objectives and accounts drawn up to show the actual position.
Funding of the project. The basis on which the sponsors to fund
the project will need to be set 54 GLOBAL OPPORTUNITY 2014 | ISSUE 01
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out in detail. This will, in part, be determined by the payment profile under the underlying contract (to reflect relevant payment milestones). However, there may be an element of pre-funding of costs, and the basis on which development costs are to be funded, and recovered, is a key aspect of any joint-venture agreement. There may be a need to put in place loan agreements between the parties to fund the initial phase of a project, with a clear basis for those loans to be repaid out of the cash flow from the project.
Liability and support for the project. The agreement should set out the
basis on which sponsors may be liable for the project (for example, what types of losses might be recoverable and whether they might be caps on liability). It should also set out the basis on which the parties might be required to provide some form of credit support for the
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