Conflicts in joint ventures - get the joint venture agreement right!
When a joint venture is formed for the purpose of delivering and operating a major infrastructure project then it is likely that some of the members of the joint venture will also be providing services to it, either directly or through an associated company (meaning a company from the same group). This can present difficulties if a dispute arises under the contract through which those services are being delivered. It is usual for all of the members of the joint venture to be represented on its governing body (the board in the case of an incorporated joint venture or the executive committee in the case of an unincorporated entity). Therefore the joint venture agreement should always make careful provision for the managing of conflicts of interest. This article looks at a couple of traps which should be avoided when drafting these provisions.
A properly drafted joint venture agreement should define any contract between the joint venture and one of its members (or a company associated with one of its members) as being a ‘related party’ or ‘conflict’ contract. It should then remove voting rights from the conflicted representatives on the board or executive committee whenever a resolution relates in any way to the contract over which they are conflicted. Ideally, it should go further than that and also deprive them of the right to be present at any meeting (or part of a meeting) where discussions are taking place in relation to that contract and deny them sight of any relevant board papers and legal advice.
The first trap arises when the agreement attempts to set out when provisions for managing conflicts should first bite. It is common to see joint venture agreements which stipulate that any special conflict provisions should only become effective upon a ‘dispute arising’ in relation to the relevant contract. However, in reality it can be difficult to identify when a dispute has actually arisen, especially where there is disagreement between the non-conflicted members of the joint venture. For instance, does the potentially conflicted representative get to vote on whether there is a dispute for the purposes of determining whether the conflict provisions bite? It is therefore safer to apply the conflict provisions to any discussion or vote whatsoever relating to relevant agreement, whether or not a dispute has arisen. The representatives of the conflicted member will always have that conflict of interest, whether there is a formal dispute or not so there should be no hesitation in excluding them completely at all times.
The second trap arises where the voting provisions within the wider joint venture agreement do not properly recognise and accommodate the specific rules for voting where a conflict has arisen. It is usual practice for joint venture agreements to set out certain ‘reserved’ matters that are considered so important that decisions taken in relation to them should always be unanimous. These tend to include the commencement of litigation and the entry into or termination of significant contracts. A contract with a joint venture member or an associate of a joint venture member is always likely to be a significant contract. Therefore care should be taken to relax the requirement for unanimity where the vote relates to a related party contract. Otherwise the consequence will be that it is impossible to achieve the required unanimity (because the conflicted member is unable to vote) and it will therefore be impossible to pass any vote of the board or executive committee which relates to the relevant contract.
These are just two examples of traps that await the draftsman. There are, of course, others and professional advice should always be sought when drafting joint venture agreements.
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