Joint Venture Risks – A Marriage of a Different Kind (Part II)
Vice President, Regional Practice Leader – Risk Management (Ontario)
This installment follows a blog post published on May 28th about joint ventures arrangements. Today, I will cover more specifically joint ventures agreements as well as some tips for mitigating risk for this type of project.
All joint ventures do not require a written agreement to be in place, but it is highly recommended. There are a number of standard templates for Joint Venture agreements out there. If your company is entering into these arrangements regularly, it might be wise to have your legal counsel create a standard template to start with. If not, it is likely that one of the partners will have a template to start with. Here are some of the critical components of an agreement:
- The business objective for the joint venture needs to be defined. This will drive much of the rest of the agreement.
- It should be customized to specifically address the unique project issues.
- It should be customized to accommodate the scope of work to be done by the different partners.
- It should define how the joint venture will be managed, and how the partners will participate in decision-making. One party will need to act as the managing partner, which is typically the party with the majority ownership interest.
- It should specifically address the allocation of risk between the partners.
- It should define how much capital will be contributed by each partner, and how the ownership of any property will be handled.
- It should address the management philosophy that will be used to deal with disputes and problems.
- If the partners are from different geographical jurisdictions, the venue for the agreement needs to be decided and agreed upon.
- It should address how changes to the agreement will be handled.
- Ownership and protection of the intellectual property should be clearly defined.
- It should state how profits will be distributed and how losses will be shared.
- It should define how the joint venture will be terminated and dissolved, including the buy-out provisions of other partners. Your liability period for warranties and construction defects might drive this.
- Confidentiality clauses need to be included to protect all the partners.
- Indemnification needs to be clearly laid out as to how it will be handled, what types of damages, how they will be shared, and to what limits.
- Outline duties and liabilities with respect to the fiduciary liability each partner has to each other, how conflicts of interests will be handled, disclosures, and how each of the partners will be bound to each other will be laid down.
- It should determine who will be responsible for securing the required insurance, how much coverage needs to be carried by each partner, and if this will be acceptable to the owner.
Please have any such agreement reviewed by your legal counsel before you sign it.
When it comes to the issue of insurance coverage this can be handled in different ways. If it is a True or Line Item Joint Venture the entity will likely need to secure separate coverage. If this is the case, the managing partner will most likely designate the lead broker who will prepare the appropriate specifications and secure the quotations. This should be started as early in the process as possible so any underwriting and capacity issues can be identified and mitigated early on.
If it is a Silent Joint Venture, then generally each of the joint venture partners will be responsible for securing various aspects of the required insurance coverage. Again, it is important that you are diligent and discuss the needs early with your insurance broker. Not all policies automatically extend coverage to your involvement in joint ventures. In many cases, the joint venture will need to be endorsed onto your policy and there may be a premium charge for doing so. In addition, the insurance underwriter may have a number of questions about the project before they agree to add it to the policy. It is never fun to deal with these issues when you need to provide a Certificate of Insurance and are being held up by underwriting requests for information or a refusal from your insurance company to extend coverage to that project.
Finally, there are some basic risk management items that can be implemented that go a long way to mitigating risks in a joint venture project. Here are a few:
- Hiring and Orientation Plan – If you are hiring people specifically for this project, have clear and agreed-upon criteria for hiring guidelines and employment agreements. In all cases create an orientation program so that everyone working on the project is clear on the project objectives, scope, timelines, project risks, responsibilities, reporting structure, policies and procedures.
- Project Specific Safety Plan – All projects are unique so ensure that your Safety Plan has been reviewed and appropriately modified to accommodate the unique safety hazards of the project.
- Project Specific Environmental Plan – Environmental issues are expensive and need special care. Identify all the environmental hazards and exposures for the project in advance, and create specific plans on how these will be managed, mitigated and transferred. Assign someone who will be responsible for monitoring this plan and ensure they have a clear reporting structure that will empower them to take the necessary actions if an environmental risk has been identified.
- Project Specific Quality Plan – This plan describes how quality in all aspects of the project will be monitored, and how quality issues will be addressed proactively. Early identification and resolution of quality issues are far less expensive to deal with.
In summary, joint ventures are a great business structure if they are done properly. All projects have problems that will need to be dealt with, and these will often test the joint venture partners. If you have set it up with the proper amount of thought you are likely to be successful.