Joint ventures

Joint ventures

A joint venture does not have a settled meaning under Australian law. The term is used with different meanings and can take a number of different legal forms. A common feature of a joint venture is the participation of two or more economically separate individuals or entities for one or more specific projects rather than for the purpose of undertaking a continuing business. A joint venture allows firms to combine key resources, expertise and experience to perform professional services on a specific project while allowing each firm to pursue other projects outside the joint venture.

Nature of the joint venture relationship

A joint venture is not the same as 'architects in association'. Commonly, architects in association have discrete tasks and one may be, in effect, a subcontractor of the other. For example, one firm designs and the other documents and administers.

Generally, there are two types of joint ventures; unincorporated joint ventures and incorporated joint ventures. It is also possible to create hybrid arrangements.

An unincorporated joint venture, or a contractual joint venture, is a joint venture based on a contract of co-operation or a joint venture agreement.

In an incorporated joint venture, a special purpose company is formed by the participants to carry out a project or projects. The joint venturers become shareholders of the joint venture company, and are usually bound by a shareholders agreement and the joint venture company's constitution.

It is prudent, if any doubt exists, to treat the relationship between two architects as an unincorporated joint venture. One reason is that professional indemnity insurance will not always cover undisclosed joint ventures, even if the parties only realise that they have a joint venture when a claim is received. The arrangements in relation to a joint venture should be recorded in a written agreement.

Reasons for joint venturing

There are many reasons for joint venturing, most commonly to meet the strategic or technical requirements of a project. For example, a firm from outside of a client's geographical area may enter a joint venture with a local firm, or large-scale projects often require design, documentation and administration resources beyond the capacity or experience of a particular architectural practice. A joint venture between practices, and with allied secondary consultants, is therefore one way for individual firms to acquire the necessary additional resources and expertise to provide the full range of services required. Such arrangements are typically made for a particular project, or where the firms wish to jointly seek commissions of a particular type on a regular basis. Joint ventures have the advantage of avoiding the need to temporarily expand an existing practice or to invest in new technology.

Success factors

The success of joint venture arrangements will be significantly influenced by the compatibility between the practices in terms of their skills and resources, by their architectural philosophies, the degree of trust between the parties, by the personalities of the principals, by the adequacy of appraisal of the joint venture by the prospective partners, and the ability to manage the joint team.

Success may also depend on a robust and workable written agreement which sets down the financial and other obligations of each joint venturer to the other, including a process for resolving disputes. Such an agreement is recommended in every case.

Legal advice

Legal advice should be sought in relation to the most suitable legal framework in which the joint venture may operate for the benefit of all participants, and also to confirm that the joint venture agreement is properly formulated and legally binding.

There is no one law regulating joint ventures in Australia. They are subject to the general law (common law) and legislation, including in relation to corporate law, contract and agency law, trade law, tax law and competition law. Accordingly, the obligations of the joint venturers will be as set out in the documentation forming the joint venture and the common law.

Summary

There are many examples of successful joint ventures, both long term and for the purpose of particular projects. The development of a workable written agreement is always recommended both for establishing the terms of the relationship before the event, and for the resulting document which is there to assist in speedily resolving any disagreements or disputes.

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Unincorporated joint venture agreements

There are no formal requirements to comply with in order to constitute an unincorporated joint venture. Unincorporated joint venture agreements may be in the form of an exchange of letters with a completed pro-forma sheet or appendix itemising the details of the agreement, or a more robust and detailed agreement. Like other agreements, the nature and length of the document will depend partly upon the size of the practices and the projects, and upon the elements that the joint-venture partners consider important.

A joint venture agreement will usually include provisions that address the following:

• that each participant has a separate interest in the project
• that the assets of the venture are owned by each participant
• that no participant has authority to contract on behalf of the other participant(s)
• that each participant is able to pursue other projects, either by itself, or with other parties, without any requirement to account to the other joint venturers for any benefits arising from those other projects
• an acknowledgement that the arrangement is not intended to constitute a partnership.

The following are some other matters that should be considered by the intending joint venturers before drawing up a formal agreement:

Parties

The agreement must state the names and addresses of the parties entering into the agreement, the nature of their current businesses, eg partnership or limited-liability company, together with a brief description of the purpose of the joint venture. Agreement will be required regarding the order in which the practices' names will appear on stationery and promotional material etc, or whether an entirely new name for the joint venture operation is to be adopted.

Nature of relationship

The nature of the joint venture association should be stated in any agreement. The name, if registered, should be registered in the joint names of the parties under the provisions of the relevant state or territory law. The expected duration of the joint venture should be stated.

Definitions

The agreement would typically require the definition of key names, stages or events associated with the joint venture, eg client, project, stages of architectural service.

Scope of joint venture

The extent and role of each partner's contribution to the joint venture must be clearly defined in the agreement, as must the roles of the parties, for example, who is responsible for design, documentation, etc, and who is responsible for keeping the client informed.

This is particularly important when one of the partners is assuming a greater level of involvement and responsibility than the other. In the case of activities of the joint venture being carried out equally by each of the parties, this should be clearly stated together with a full description of what those activities are, for example, at each of the following stages: pre-design, site analysis, schematic design, detailed design, documentation, tendering and negotiating, construction review and post-construction activities.

Each partner's liabilities, obligations and entitlements should also be stated together with when they will be considered to be in default.

If necessary, it should also be stated which partner is to act as the agent for the joint venture or that no partner may act as an agent for the other partner.

Management

The joint venturers may decide that the day-to-day conduct, management and operation of the venture will be carried out by the management committee or by other persons nominated by a management committee. Consideration should be given to the appointment of a financial controller and proper provision made in the agreement for such an appointment.

The preferred minimum composition of a management committee is a representative nominated by each party. The agreement should include the facility to revoke nominations and to appoint replacement committee members. Each party should be entitled to appoint alternative principals to act in place of the permanent representative of that firm.

The agreement should also state the number and type of staff that each firm is required to assign to the joint venture, including the commencement date and period of assignment. In some cases, it will be desirable to state the names of staff to be assigned to the project and the cost of their time chargeable to the joint venture. The staff cost will depend upon the nature of the fee sharing arrangement. Minutes of all committee meetings should be recorded and issued promptly to all parties concerned.

The management committee may appoint a project manager or operations manager from within the joint venturers' organisations to be responsible to it and to direct the operations of the joint venture on a day-to-day basis. The scope of that appointment should be defined in the agreement.

Resolution of disputes

The agreement will need to stipulate the procedures by which management committee meetings are to be conducted and whether decisions of the committee are to be majority or unanimous decisions. The agreement must therefore provide for the means of resolving a failure to achieve a unanimous or majority decision.

A common method for resolving disputes is by the appointment of a commercial arbitrator rather than by referral to litigation and the courts. However, as an initial means of resolving a dispute without resorting to arbitration, the parties should consider agreeing to undertake a mediation before an independent mediator or agreeing to refer the dispute to another architect as an expert to consider the matter and come to a decision binding or non-binding on the parties.

Guidelines for the application of alternative dispute resolution procedures and arbitration may be obtained from the Resolution Institute (previously known as the Institute of Arbitrators and Mediators Australia).

Accounting for the venture

A program for the regular billing of fees and their apportionment to the parties must be agreed at the outset and written into the joint-venture agreement. An agreed split of fee income will simplify the accounting methods of the joint venture, with each party, although committed to the allocation of certain resources to the venture, responsible for recording their own costs.

Where no agreement on the apportionment of fees exists or where fee income is irregular or impossible to assess at the outset, the management committee will need to agree the method of costing and recording principal and staff time and disbursements.

A final financial statement at the completion of the joint venture, or annual accounts explaining the transactions and financial position of the joint venture, should be prepared to provide a true and fair profit-and-loss account and balance sheet.

Financial statements of the venture should be issued on a regular basis. The method of apportioning any surplus or loss either during or at the completion of the venture should be agreed at the outset and written into the joint venture agreement.

Provision should also be made for the distribution of monies to other creditors, such as rent, outgoings and supplies required by the joint venture. Similarly, contributions or property provided by the parties or property acquired jointly should be recorded by the management committee and methods of disposing of that property at the termination of the joint venture agreed.

Insurances and liability

Apart from professional indemnity insurance, the insurance needs of a joint venture are much the same as for practices generally. The levels of insurances need to be decided for risks such as, theft of property, fire, etc. However, the most important and probably most expensive insurance matter concerning the joint venture will be professional indemnity insurance.

Advice from insurance brokers should be sought to ensure that adequate and appropriate cover is in place for the joint venture before entering into an agreement. Unincorporated joint ventures, although easy to form and administer, may present problems for the joint venture participants. In certain circumstances, there is a risk that the nature of the arrangement between the parties may in fact constitute a partnership. In a partnership, all partners are jointly and severally liable for the full extent of any debts incurred, so a joint venture partner with a 10% share may be held liable for 100% of the debt.

Moral rights and copyright ownership of documents

Agreement must be reached on the form of attribution of authorship that will apply to all the work produced by individuals engaged by the joint venture. These are often referred to as moral rights. This agreement will need to be expressed in terms of consents by each relevant individual to the form of attribution.

If each person within each practice has given consents, then each party can make arrangements on the basis of those consents. However, each joint venture party should be satisfied that the other has all such consents in place before relying on their existence.

Once this is resolved the agreement should record the agreed attribution of authorship to be applied to the project and its publicity, articles, photos and other promotional materials and activities. Agreement will need to be reached on publicity and marketing policies, strategies and formats.

The vesting of copyright and ownership of documents and photographs should be taken into account and provision made for copyright and ownership and the use of joint venture documents if a party leaves, or in the event of the joint venture being wound up.

For further information, see Acumen notes Moral rights and Architects and copyright.

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Anti-competitive conduct and bid rigging

There are risks for joint bidders or joint venturers that, if not done properly, their conduct may fall foul of the competition provisions under the Competition and Consumer Act 2010.

You should get legal advice to ensure that your joint venture or joint bid will stand up to legal scrutiny particularly given the serious monetary and criminal penalties for illegal anti-competitive conduct.

Bid rigging

Generally, bid rigging is a form of collusion in which parties agree that only one of the parties will make a bid and then, if the rigged bid is successful, both parties to the bid rigging share the benefit of the commercial contract awarded to the successful tenderer/bid rigger.

Under Australian law, bid rigging is considered anti-competitive conduct and is illegal. National legislation, the Competition and Consumer Act 2010, imposes severe monetary and even criminal penalties on parties who engage in bid rigging.

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