A Brief Introduction About the Joint Venture Agreement
When two companies think of collaborating by investing capital, time, and other resources to develop a new firm whose profits they will share, they use a joint venture agreement to put down the terms of their joint investment in the new entity. The parties of the agreement are the joint venturers who want to acquire and hold a stake in the business interest. It includes the purpose, contributions, equity distribution, profit sharing, liabilities, and other important terms to govern the joint venture. The agreement provides legal validity to the transaction and makes sure that the parties have recourse available if anything goes awry. It is also called a joint venture contract.
Who Takes the Joint Venture Agreement: People Involved
You would need to enter into a joint venture agreement if:
- You are a company looking to acquire and hold a stake in business interest.
- You are a business interest looking to enter into a joint venture with another company.
Purpose of the Joint Venture Agreement: Why Do You Need It?
The purpose of a joint venture agreement is to:
- Lay down the terms and conditions of the agreement in a single comprehensive document.
- Establish the relationship between the contracting parties as joint venturers.
- Specify the terms related to the sharing of investment, capital, equity, ownership, resources, and other important factors.
- Protect the rights of the parties and making the legal resolution of a dispute possible.
Contents of the Joint Venture Agreement: Inclusions
- Effective Date: This mentions the date on which the agreement becomes effective.
- Term of Agent: This term gives information about when the obligations of the Agent will be completed, either by distributing profits of the business interest or by terminating the joint venture due to mutual consent.
- Contributions: This clause will specify the individual contributions to the joint venture, including details of how much money and resources are to be contributed by the joint venturers. Investments can be monetary or in the form of property and skill. Include a date on or before on which the contributions should have been received.
- Conduct of Venture: This term details the specifics of how the business of the joint venture will be conducted and what roles each venturer will play. It also decides how the policy established by the transaction will be handled and who will perform executive functions of the business on its behalf.
- Title to Property: This clause specifies who the title of the property acquired by the joint venture goes to.
- Division of Profits: This clause details how the profits are to be divided between the joint venturers.
- Apportionment of Losses: This clause specifies how losses are going to be sustained by the parties and how much loss is each party is liable to sustain.
- Death or Incapacity of Party: This term lays down how the joint venture will be managed in the case of death or incapacity of the parties. Usually, the JV is dissolved, and the net profits are divided between the surviving party and the representative of the deceased party.
- Termination: Termination clause specifies the circumstances under which the agreement may be terminated.
[Also Read: Collaboration Agreement]
How to Draft the Joint Venture Agreement?
The procedure to draft a joint venture agreement:
- Mention the effective date of the agreement.
- Identify the contracting parties with their names and addresses.
- Establish the relationship between the parties.
- Specify the name of the joint venture and its address, the scope of the agreement, and the contributions of each party.
- Include a Conduct of Venture clause.
- Include a Title to Property clause.
- Include a term that specifies the division of profits.
- Include a term for the apportionment of losses.
- Include a clause to allow a party to maintain the records of the venture.
- Include a Death or Incapacity of Party clause.
- Ensure that a termination clause that decides what circumstances would allow the termination of the agreement is included.
- The agreement must state the name of the jurisdiction that will govern the document and any disputes that arise from it.
- Have the parties to the contract sign it to signify acceptance of terms.
Make sure that the agreement complies with local, state, and federal laws.
By the method of negotiation, the terms of the contract must be mutually beneficial and agreeable to both parties. This will instil confidence and good faith in the parties, reducing the chances of disagreement or dissatisfaction, which often lead to disputes. The contract should not unfairly benefit one party at the expense of the other unless agreed upon. The parties must make sure that they negotiate according to the established procedures for all parties to get the maximum return on their investment equitably.
Benefits & Drawbacks of the Joint Venture Agreement
- Lays down the terms and conditions of the transaction in a single comprehensive document.
- Safeguards legal interests of both parties.
- Ensures that each party is aware of its rights and obligations and that they are acting to that effect.
- Makes the transaction less risky.
- Makes legal recourse an option, should a dispute arise.
- Gives the transaction legal validity.
- The legal costs of framing the agreement must be borne by one or both of the parties.
- Often, neither of the parties commit enough resources to the joint venture.
- Negotiations can take time.
What Happens In Case of Violation?
If the terms of the agreement are breached by either of the parties, the other may be able to go to court. However, the resolution of disputes using conventional dispute resolution methods is not preferred. Ideally, a dispute should be settled internally amicably.
Joint venture agreements are entered into by two or more companies when they want to pool resources and invest in single business interest, acquiring and holding a stake in it. Some of the most important clauses in such an agreement include the scope, contributions, records, apportionment of losses, and termination.
Sample Joint Venture Agreement
You can download a joint venture agreement template here.
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