A joint venture or consortium is a strategic business association between two or more parties. It can be used in any type of business transactions and in domestic or international business but is generally used for engineering project management contracts and complex ventures.
The intention of entering into a joint venture or consortium is to combine the individual strengths of the parties and thereby ensure that they may have a better chance at success with the venture than if they carried it on individually. Ideally, the parties identify partners on the basis that their mutual efforts will be complementary to each other.
A joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation.
Black’s Law Dictionary (10th Edition, page 417) defines `joint venture’ as a business undertaking by two or more persons engaged in a single defined project. The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member’s equal voice in controlling the project.
The Supreme Court of India, in the case of Faqir Chand Gulati vs. Uppal Agencies Pvt. Ltd. and Anr. had defined the term ‘joint venture’ and held that “the expression ‘joint venture’ connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks.”
It can be seen that a joint venture is a partnership between two or more persons to take up a common enterprise. The ‘joint venture’ involves the factors, like (1) contribution by the parties of money, effort, knowledge and other assets to common undertaking; (2) joint property interests in the subject matter of the venture; (3) right of mutual control of management of the enterprise; (4) expectation of profit; and (5) right to participate in the profits.
Consortium is a Latin word, meaning ‘partnership, association or society’ and derives from consors meaning “Partner”.
A consortium is an association of two or more individuals, companies, organisations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. Each participant retains its separate legal status and the consortium’s control over each participant is generally limited to activities involving the joint endeavour, particularly the division of profits. A consortium is formed by an agreement or MoU, which delineates the rights and obligations of each member. A consortium is defined as a group of companies participating for mutual benefit. Companies in a consortium co-operate with one another, often sharing resources as needed. A consortium allows the companies to conduct operations that they would not be able to do individually. It is important to note, however, that a consortium is not a merger and the companies remain independent.
A consortium can be termed a joining together of companies to (1) bid for the contract; (2) present a façade of a consortium to the Client for execution of the contract and accept joint and several liability towards Client for due performance of the contract and completion of the project; and (3) put in place a management structure for internal coordination and execution of the project. In all other respects, members of the consortium are independent of each other and are responsible for their own deliverables under the contract, without reference to each other.
Normally consortium is formed by members who are having an intrinsic knowledge and requisite technical experience in their respective fields and, therefore, had decided to jointly submit a bid in order to fulfil the criteria/conditions specified under the bid documents. The common object of such consortium will be to secure the contract and the consortium is formed only for this limited purpose and each party was required to perform its specified portion of the contract separately.
Distinction between Joint Venture and a Consortium
As can be seen from the above discussion, the distinction between a joint venture and consortium is very fine and many times they are interchangeably used. Few of the major differences are as under:
|1.||Joint Venture may be incorporated as a legal entity||Consortium is not incorporated as a legal entity|
|2.||Management control is exercised by JV itself||Management control rests with the Consortium members|
|3.||Can acquire, own and dispose of assets in its name(when incorporated)||Assets are generally held by Consortium members|
However, the distinction between Joint Venture and Consortium will be important in order to ascertain whether such a venture is assessable to Tax under the Income Tax Act, 1961, which needs to be examined by a Tax expert.
When the Joint Venture is not registered it may not have the legal backing to have management control of its affairs nor can it own assets in its name. Hence an unregistered joint venture and consortium will be having more or less the same characteristics.
It is also pertinent to mention the observation of the Apex Court in Faqir Chand’s case (supra) where the Court held that the title or caption or the nomenclature of the instrument/document is not the determining factor as regard the nature and character of the instrument/document and the true purpose of a document have to be ascertained with reference to the terms of the document, which express the intention of the parties.