Joint Ventures-Explained

joint-venture-1 What is a Joint Venture?

Joint Ventures are internationally recognised as a form of cooperation in the joint fulfilment of the construction contract obligations. Joint venture undertakings come about through agreements for a combination of legally independent entities for the joint rendering of works or services limited in both time and content. Typically, they are restricted to a single project in which case the members of the group act jointly from the initial stages to the completion of the project. Joint ventures, which are also called joint adventure or joint enterprise, are generally unincorporated associations.

According to Words and Phrases, Permanent Edn., a joint venture is an association of two or more persons to carry out a single business enterprise for profit. A joint venture can take the form of a corporation wherein two or more persons or companies may join together.

In Black’s Law Dictionary, 10th Edn., page  417, a ‘joint venture’ is defined as a business undertaking by two or more persons engaged in a single defined project and a ‘joint venture corporation’ has been defined as a corporation that has joined with other individuals or corporations to accomplish some specified project.

In New Horizons Limited v. Union of India, the Supreme Court of India explained the concept of a joint venture as under. “The expression ‘joint venture’ is more frequently used in the United States. It 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 requires a community of interest in the performance of the subject-matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses.”

Essentials of a Joint Venture

To constitute a ‘joint venture’ certain factors are essential:

  1. Each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money;
  2. Joint property interests in the subject matter of the venture;
  3. Expectation of profits to be shared among the parties;
  4. There must be a joint proprietary interest and right of mutual control over the subject matter of the enterprise;
  5. Usually, there is a single business transaction rather than, a general or continuous transaction.

According to Black’s Law Dictionary, the essential elements of a Joint Venture are:-

  1. An express or implied agreement;
  2. A common purpose that a group intends to carry out;
  3. Shared profits and losses; and
  4. Each member’s equal voice in controlling the project.

 What is the status of Joint Venture in law?

The legal systems, in general, have not kept pace with the growing economic means of joint venture groups and there is no special legal form for this type of cooperation which has come to stay in the commercial sector.

Harry G. Henn & John R. Alexander in Laws of Corporations (3rd Edition) has remarked that “There is some difficulty in determining when the legal relationship of Joint Venture exists, with authorities disagreeing as to the essential elements… The Joint Venture is not as much of an entity as is a partnership.”

 No law on the Statute book of India or the States defines a joint venture, though Section 8 of the Partnership Act, 1932 provides that ‘a person may become a partner with another person in particular adventures or undertakings’. In the case of such ‘particular partnership,’ it has its existence only till the purpose for which said partnership or adventure or undertaking came into being. It gets dissolved the moment the purpose for which the partners joined is accomplished and liabilities of persons joining in a particular partnership for the purpose of particular adventure would only last till such undertaking completes the purpose for which it is formed. Such particular partnerships are restricted to a single project in which the members of the group act jointly both at the initial stage and during the implementation of the project.

Being unincorporated associations, common law did not recognise the relationship of co-adventures, but with the passage of time, the judicial decisions recognised what is known as ‘joint venture’ of  two or more persons/ undertakings to combine their property or labour in conduct of particular line of trade or a general business for joint profits.

In Asia Foundations and Constructions Ltd. v. State, a Division Bench of Gujarat High Court considered the legal standing of a joint venture and rights and liabilities of joint partners. The Court discussed this aspect of the matter in the following manner: “The common law did not recognise the relationship of co-adventures, but with the passage of time, the judicial decisions recognised what is known as ‘joint adventure’ of two or more persons undertaking to combine their property or labour in conduct of particular line of trade or a general business for joint profits. The Courts do not treat a joint adventure as identical with a partnership though it is so similar in nature, and in the contractual relationship created by such adventurers that the rights as between them are governed practically by the same rules that govern the partnership. This relationship has been defined to be a special combination of persons undertaking jointly some specific adventure for profit without any actual partnership. It is also described as a commercial or a maritime enterprise undertaking by several persons jointly; a limited partnership not limited in the statutory sense as to the liabilities of partners but as to its scope and duration. Generally speaking, the distinction between a joint adventure and a partnership is that former relates to a single transaction though it may comprehend a business to be to be continued over several years, while the later relates to a joint business of a particular kind.”

It is generally understood that in order to constitute a joint venture, there must be a community of interest and right to joint control. It is recognised that each of the parties must have an equal voice in the matter of its performance and control over the agencies used therein, though one authority may entrust the performance to another. A joint venture may exist although the parties have unequal control of operations. The rights, duties and liabilities of joint ventures are similar or analogous to those which govern the corresponding rights, duties and liabilities of the partners. As in the case of partners, joint ventures may be jointly and severally liable to third parties for the debts of the venture.

Rights and liabilities of members in a Joint Venture

The services to be rendered by the group are to be allocated amongst the members of the same by an internal agreement, and consequently, the rights and duties of the members inter se are also regulated by this agreement. These internal agreements are not effective vis-a-vis third parties, and they operate amongst the members’ inter-se. Thus, all the members are jointly and severally liable for performance of the work jointly undertaken irrespective of internal division of the work. If one member of the joint venture group does not fulfil his commitments, the others are under joint and several obligations to carry out such obligations vis-a-vis the customer. Such a situation may arise when a member of a joint venture group drops out prematurely because of the liquidation or insolvency or any other legal reason. When a contract is concluded with a joint venture group all members are made jointly and severally liable even if only one is capable of rendering the service in question. The joint and several liabilities of the members of a joint venture group may cover the marginal areas of the contract performance such as late performance, faults, deficiency of goods and services etc.

Whether a party has a right to withdraw from Joint Venture and what is the effect of such withdrawal?

The right of a party to withdraw and the effect of such withdrawal upon the Joint venture depend upon the terms of the agreement and/or upon the circumstances. Generally, no co-venturer has a right to withdraw from or abandon it without the consent of other co-venturers, where the joint venture has not fulfilled its purpose. In the absence of a decree of a Court or on an agreement fixing the time of termination or voluntary abandonment of the enterprise by one of the co-venturers, the joint venture agreement remains in force until its purpose is accomplished or becomes impossible for fulfilment and while it is in force, ordinarily, one co- venturer has no right to withdraw himself from the arrangement. It is only where the joint venture agreement is silent about this duration or termination, that a co-venturer has right to withdraw since it is virtually a limited partnership at will. Even the abandonment of a joint venture by one of the participants and his active opposition to its operation by his co-venturers will not forfeit his interest in the enterprise or deprive him of his right to share in the profits.



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1 Response to Joint Ventures-Explained

  1. Pingback: Distinction between Joint Venture and Consortium | maheshspeak

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