joint venture agreements

In this article, Bhaskar Kumar discusses Joint Venture Agreements in India.

INTRODUCTION

The emergence of joint ventures in business associations has caused endless perplexity in legal arena. The changing panorama of industrial world has impacted law and legal system in a surprising manner. The law of contract which has the basic purpose of serving and ensuring the rights and duties of a commercial relationship and to ensure that no one should get benefitted by unscrupulous act of other.

Principle of equity and Principle of unjust enrichment are the basic principles around which the whole contractual legislation revolves. In the present paper, the researcher has navigated through the concept of joint venture agreements. Joint venture agreements are a recent and celebrated phenomenon in the contractual world. A massive number of joint venture agreements are being entered into by the parties in the day to day business transactions.

In the present context, when the whole globe is looking at India as an attractive destination for investment, for India poses itself as an investment-friendly place filled with lucrative commercial incentives and strategic advantages. The Indian economy is preparing itself for a new avenue in terms of growth and soon it is going to be a leading player in the international economics.

So, in the case of foreign investment, when a company is not able to employ all the requisite resources and also lacks information about the nature of Indian economy and other considerations, it is left with the only choice to enter into a joint venture agreement to carry out the commercial purpose it intends to achieve. The case with India is that even though it provides opportunities in terms of expansion of market but it lacks expertise in technical know-how and other nuances. In that case a joint venture is plausible option for both the parties, wherein, one party is trying to tap into the potential offered by the Indian market and other party is trying to expose India with latest technological developments.

In the present paper, the researcher has attempted to explore the legislations and laws regarding the supervision of joint venture agreements. While researching the aspect of joint venture agreements in India, the researcher has completely focused at the contractual aspect of joint ventures. As the ambit of joint venture agreements is very wide and it is not possible to look at every legal aspect such as corporate law, competition law, intellectual property rights, etc., hence, the researcher has to restrict himself to the contractual aspect of joint ventures.

What is Joint Venture Agreements?

Joint venture agreements are termed as an agreement entered into by parties for a particular period or for a particular purpose. It can also be said that joint venture agreements are said to be concluded when two parties enter into an agreement to share their resources to achieve a certain commercial purpose. In case of a contractual joint venture, the contract is entered into to carry out a particular purpose and this kind of joint venture does not assume the status of separate entity. These agreements are entered into to tackle certain market by deploying the resources of both the parties. Contract is an essential prerequisite for the existence of a joint venture which is fulfilling every condition which concludes a contract and must not be contrary to basic provisions of the law of contract. The most common examples are franchisee arrangements, licensing agreements, and purchasing and distribution agreements.

“Black’s Law Dictionary 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 concept of joint venture is a frequent phenomenon of the United States of America’s Courts and it finds its jurisprudential origin in United States of America’s courts. It means a legal entity or enterprise in nature of partnership engaged in a joint undertaking entered into for the purpose of mutual profit. It also connotes an association of persons or companies jointly taking any commercial entity where each party contributes assets and risks. “It requires a community of interest in 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, (Black’s Law Dictionary, 6th Edn., page 839).” According to Words and Phrases Permanent Edn., “a joint venture is entered into by two parties to carry out a single business enterprise for the purpose of profit”. (p. 117. Vol. 23). “A joint venture can take the form of a corporation wherein two or more persons or companies may join together. A joint venture corporation has been defined as a corporation which has joined with other individuals or corporations within the corporate framework in some specific undertaking commonly found in oil, chemicals, electronic, atomic fields.” (Black’s Law Dictionary, 6th Edn., P. 342).”

The joint venture is an association of two or more persons based on contract who combine their money, property, knowledge, skills, experience, time or other resources in the furtherance of a particular project or undertaking, usually agreeing to share the profits and the losses and each having some degree of control over the venture.

Some examples of joint ventures are Mahindra and Mahindra, Kawasaki and Bajaj, Hero Honda etc.

Relationship between joint adventurers

The relationship of joint adventurers is fiduciary in character and imposes upon all of the participants utmost good faith, fairness and honesty in dealing with each other with respect to the functioning of the enterprise. It forbids one joint adventurer from acquiring solely for himself any profit or secret advantage in connection with the common enterprise. This is particularly true in the case of the one to whom the conduct of the enterprise is entrusted.

Now the question arises as to what legislations and provision do these joint venture agreements are subject to? Why the joint venture agreement is not a partnership agreement or merely a simple agreement? There are questions such as how the joint venture agreements are different from partnership? The researcher has attempted to answer the question that whether the joint venture agreements are governed by separate legislations.

In the later parts of the paper the researcher has endeavored to give the paper a practical and relevant aspect by including the analysis of clauses vis-à-vis the joint venture agreements. The researcher has tried to find answers to the question that in case of joint venture agreements how the clauses such as Force majeure, Non-competition, Confidentiality, etc., would work. The researcher has attempted to find the specific provisions regarding the clauses in joint venture agreements with the help of a number of case laws as well.

In the last part of the paper, the researcher has enclosed a sample agreement which is joint venture agreement to analyze how a joint venture agreement is drafted in India. The researcher has analyzed the agreement keeping in view the practicality and touched upon the aspect of clause analysis, as, in recent times a lot of cases in joint venture agreements are based on terms and conditions of the clauses of the corresponding agreement.

LEGAL REGULATION OF JOINT VENTURES

When it comes to rules for joint Ventures, then, there are no separate provisions for joint ventures in India. However, the rules regarding FDI and FEMA and other general contractual principles are applied in India along with the choice of law and dispute resolution mechanism agreed upon by the parties of the agreement.

In India in general the joint venture agreements are basically governed by the principles of Indian Contract Act, 1872, but in special cases they attract other statutory provisions of corporate laws too.

How is a joint venture different from a partnership?

The rights and duties of joint venture agreement is decided by terms and conditions of the agreement whereas there is statutory provisions for the partnerships because of the absence of any legislation.

The essential difference between the joint venture and partnership is that a partnership can be entered into only by natural persons whereas there is no such restriction in joint ventures.

Clauses in Joint Venture Agreements

• Force Majeure

According to section 56 of the Indian Contract Act, 1872, if an agreement becomes impossible to perform in later phase of time and such impossibility could not have been foreseen, then, such agreements become void. In case of joint venture agreements, the clause of force majeure means any event or circumstance which is beyond the control of the party which is claiming the force majeure and that particular event must have rendered the parts of it impossible. The party claiming the force majeure will be excused from the performance of the agreement to the extent it is affected by the force majeure event and will not be liable for any loss, damage or compensation to that extent.

• Restrictive covenants

1. Non-Competition

By this clause the duty of good faith is restored. The non-compete clause stipulates a restriction on conducting business which is of the similar kind of one party by the other party for a given time and within a prescribed geographical limit. So, by default this clause attracts section 27 of the Indian Contract Act, 1872, and also article 19 of Constitution of India.

“A negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not, therefore, a restraint on trade unless the contract as aforesaid is unconscionable or expressly harsh or unreasonable or one sided as in the case of W.H. Milsted and Son Ltd. 1927 WN 233.

In M/s Gujarat bottling Company Ltd. v. Coca Cola Company 1995 SCC (5) 545, the supreme court held that restrictive covenants which operate during the period of the continuance of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint on trade, and therefore, do not attract Section 27 of the Indian Contract Act, 1872.

In Percept D’Markr (India) Pvt. Ltd vs. Zaheer Khan & Anr CASE NO.:
Appeal (civil) 5573-5574 of 2004, the supreme court noting the settled law in above-mentioned case held that under Section 27 of the Indian Contract Act, 1872, (a) a restrictive covenant which extends beyond the term of the contract is void and not enforceable. (b) The doctrine of restraint on trade does not apply during the continuance of the contract for employment and it is applied only when the contract comes to an end. (c) As held by this Court in Gujarat Bottling vs. Coca Cola, this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts. This clause is not allowed in case on foreign investment in pharmaceutical sector. However, the sale of goodwill is an exception to this law under Indian Contract Act, 1872.

In case of United States vs. Penn-olin Chemical Company 378 U.S. 158 [1964], two companies Penn Salt Chemical Corporation and Olin Mathieson Company signed a joint venture agreement each acquiring 50% of the newly formed Penn-olin Chemical Company which began producing sodium chlorate in southeastern united states. The government sought to dissolve the joint venture as being violative of some anti-trust laws to prevent anti-competitive practices. The parties agree that they have same line of commerce. The only thing to look here is whether the joint venture has substantially lessened the competition which might have existed in absence of this joint venture. For determining this, the court can take into account the factors such as the power of joint venturers, the competition existing between them, the reasons and necessities for its existence as a joint venture.

2. Confidentiality

The confidentiality clauses are put into a contract to make clear the terms and conditions regarding the confidential information and specifies certain information should not be shared by any party.

In Centaur Mining and Exploration Ltd. [Recs & Mgrs Apptd.] [Administrators Apptd.] vs. Anaconda Nickel Ltd (2002) 21 AMPLJ, the parties concerned had entered into a preliminary agreement to facilitate the negotiation of a joint venture agreement. As is often the case with preliminary agreements, the confidentiality clause was brief and wholly inadequate, merely stating that the subject matter of the preliminary agreement and the studies [in terms of the preliminary agreement] were to be kept confidential.

Recently, the common law courts as well as Indian courts have started treating the confidentiality clause in the line of non-compete clause. In Stellar Information Technology Private Ltd. v. Rakesh Kumar and Ors. 234 (2016) DLT 114, the court of law held that once it is obvious that under the name of clause of confidentiality, one of the parties is secretly trying to attempt to enforce a covenant in restraint of trade which shall eventually render it void.

• Indemnity

Section 124 of Indian Contract Act, 1872, defines the contract of indemnity as contract by which one party guarantees to save the other person from loss caused to him due to the guarantor itself or by the act of a third party. In India there is a clear law about both implied and express indemnity.

The Bombay High Court in Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942) 44 BOMLR 703 while interpreting the provisions of indemnity clearly held that the Contract Act is not exhaustive and doesn’t cover all the nuances of the indemnity clause and in such a case common law principles are to be relied upon. Hence, if there is no conflict with the Indian Contract Act,1872, and any other judicial decisions, then, the common law principles related to interpretation of contracts will continue to be applicable to the provisions of indemnity.

• Choice of law and jurisdiction

In case of choice of law and jurisdiction it is the discretion of parties to agree upon as to which law and jurisdiction to choose for their contract. However, some basic principles of contract law will still be applicable for the joint venture agreements. Other laws related to company law, FEMA and laws pertaining to taxation will be applicable to joint venture agreements in India.

In National Thermal Power Corporation v. Singer Company Leave Application No. 8199 of 1989, the court of law held that the court would try to find and identify the legal system with which the transaction has its most closest and real connection. In Rabindra N. Maitra v. Life Insurance Corporation of India AIR 1964 Cal 141, the Supreme Court further delves into the localization theory. The court opined that while looking into the question of choice of law, several factors are needed to be discussed such as the place where contract was made, the place of performance, place of domicile, place of residence of business partners, nationality of character of contract, subject matter of contract and other factors which help to localize the contract in question.

• Clause of Termination

In Turnaround Logistics (Pvt.) Ltd v. Jet Airways (India) Ltd application no. IA 3848 of 2006, the Delhi high court held that the term “determinable contract” means a contract which can be put to an end and, thus, all revocable deeds and voidable contracts would fall within this term.

In Crompton Greaves Limited v. Hyundai Electronics Industries 1 (1999) CLT 25, the court held that if in the aforesaid time the government approval could not be obtained then in such a case the agreement is of determinable nature. As the agreement provided the termination clause which shows the clear intention of parties to terminate the agreement if in the aforesaid time the government approval could not be obtained. But a notice is required to be sent to the party informing about the reasons for the termination.

In Indian Oil Corporation Ltd v. Amritsar Gas Service and Ors (1991) SCC (1) 533. The Supreme Court held that an agreement which contained a clause that gave power to either party to terminate the agreement with 30 days prior notice, and without specifying any reason, was “determinable” in nature and, hence, the enforcement is specifically not possible. The relief for the losses of earnings would be the compensation for that loss during the notice period. There is no possibility of party getting specific performance when the nature of contract is determinable.

Remedies for breach of terms of joint venture agreements

In Gammon India Limited v. Commissioner of Customs, Mumbai CIVIL APPEAL NO. 5166 OF 2003, the court held that if some transaction is not done for the purpose of joint venture, then, the venture would not be liable for the transaction and whoever has transacted would be liable in personal capacity.

In the present scenario, the contracts having termination clause for specified events don’t have any recourse in law. Even if there is no such clause which authorizes and enables either party to terminate the contract in the occasion of happening of event specified therein, the agreement can be terminated by giving reasonable notice and it would be determined by very nature of agreement. In case if it is ultimately found that termination was bad in law or contrary to the terms of the agreement or of any understanding between the parties or for any other reason, the remedy of the appellants would be to seek compensation for the wrongful termination but not a claim for specific performance of the agreements. The doctrine of good faith is adopted by the US courts in these scenarios.

In Asia Foundations and Constructions Limited vs. State of Gujarat AIR 1986 Guj 185, the court of law held that there must be a clause which makes the joint venture jointly and severally liable for all transactions as the third party thinks that he is transacting with a single entity.

CASE LAWS

In Bunga Daniel Babu vs. Sri Vasudeva Constructions and Ors CIVIL APPEAL NO. 944  OF 2016, the court reaffirmed that the agreement entered to build a house on plot is not a joint venture agreement as there is no control exercised by the plot owner on construction of the building.

In Asia Foundations and Constructions Limited vs. State of Gujarat AIR 1986 Guj 185, the court held that limited liability partnership are limited by liability whereas joint ventures are limited by scope and time.

In Dulichand Laxminarayan v. CIT [1956] 29 ITR 535, the court held that the essential difference between the joint venture and partnership is that a partnership can be entered into only by natural persons whereas there is no such restriction in joint ventures.

In GVPREL-MEE (J.V.) vs. Government of Andhra Pradesh and Anr AIR 2006 AP 169, the supreme court held that agreements entered between the owner of land and a builder to construct a building on his plot is not a joint venture agreement.

Judicial decisions have delineated certain principles as a sine qua non for the creation of joint venture agreement, joint interest, sharing of profits and losses, control, fiduciary relationship and right to an accounting unless the account is stated or simple. The supreme court of India holds the view that joint ventures are a legal entity in nature of partnership. It is a Quasi Partnership.

The Supreme Court laid down that certain essential ingredient of joint venture agreements which are:

  1. joint control and ownership of property;
  2. sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings;
  3. community of control over, and active participation in, management and direction of business enterprise;
  4. intention of parties, express or implied; and
  5. fixing of salaries by joint agreement.

Analysis of a Sample Joint venture agreement

This agreement was entered into by Project Company and Forest Development Corporation Limited of Maharashtra on behalf of Government of Maharashtra. And this agreement was of character of joint venture agreement as it was entered for a specific purpose.

While analyzing this agreement the researcher has not gone into the broader aspects of a contractual analysis but restricted himself to a limited aspect of analysis of clause contained in the contract. The clauses in the contract are very practical in aspect of that contract and most of the times they are disputed in a court of law. So to give the project work a practical and relevant color, the researcher has included a substantial portion to analyze various clauses and in this sample agreement the same methodology will be followed.

So, at the outset, I would like to start with the clause of Force Majeure. In the present agreement, this clause states that if either party is prevented from performing its obligations in case of causes which is beyond its reasonable control then the parties affected by such force majeure event will be exempted from performance till the continuance of such events and if such event continues more than 12 months then the other party shall have right to terminate the agreement. While discussing the clause of force Majeure, we come up with a conclusion that the clause of Force Majeure is inserted in an agreement to exempt a party from performance in a situation where the performance is not possible in and such situations are not a normal course of happening. There are sometimes events and incidents which no one can anticipate so to provide a just and fair treatment in such case the clause of force majeure has come into existence in contractual relations. Section 56 of Indian Contract Act, 1872, provides for the validity of this clause.

The next in this sequence is clause of Confidentiality. Under the head of restrictive covenants which is covered under Section 27 of Indian Contract Act, 1872, clause of confidentiality provides for the secrecy of certain terms and conditions which are used in this agreement lest other person or third party may not use the information for the profit of their own. In this present sample agreement, the clause of confidentiality stipulates that every party will keep confidential any such information which any such persons specified in this agreement shall acquire in relation to the transactions contemplated by this agreement or in relation to the employees, clients’ business or affairs of any other party and shall not use or disclose such information except with the consent of the other party. The only thing to look at while analyzing the confidentiality clause in an agreement is whether the clause is in restraint of trade or not, if it is not then there is no issue. If it is found that in the guise of the clause of confidentiality, a party tries to restrain the freedom of trade of another party, then, it is against the provision of Section 27 of Indian Contract Act, 1872. In the present clause, there is a restriction in sharing of confidential information, hence, it cannot be said in violation of Section 27 of Indian Contract Act, 1872.

Now the clause to be discussed is Dispute resolution and Choice of law and jurisdiction which would be employed in case of dispute related to performance of this agreement. The dispute resolution mechanism agreed upon by parties is Arbitration and have decided to settle their disputes by the method of arbitration. The law related to this agreement is Indian Arbitration and Conciliation Act, 1996, and the jurisdiction is conferred to Nagpur. Regarding law and jurisdiction I have discussed that the basic principles of law of contract will be applicable to any contract which at that time is related to India in any context. Despite basic contractual principles, the parties decide other rules and legislations under which they agree to be governed. Other laws regarding the taxation will still be applicable wherever necessary according to the other laws in force in India.

The next clause in sequence is clause of Indemnity. In the given sample agreement, the clause stipulates that “If, for any reason or resulting from any cause whatsoever, any statement, representation or warranty set forth herein is found to have been materially incorrect, untrue when made, in breach or fails to prove to be true, and if any debt, liability or other obligation of any kind is found to exist, the party making such representation or warranty shall be fully liable to the other Party for any and all liability, damage, costs and expenses, including attorney fees, arising from such misrepresentation, breach or incorrect statement”. The clause is clearly stipulating the case in which one party will indemnify other against losses or damages incurred. In case of indemnity the promise to compensate for any kind of losses incurred by the party in relation to specified sectors of the project is well stipulated in this contract.

At last the clause to be discussed is clause of Termination. The clause of termination in agreements is provided in order to delineate the conditions and circumstances under which a contract can be put to an end. The reason for insertion of such a clause is to provide a clear picture regarding the continuance of the contract. In the present sample agreement, the parties have agreed upon the five conditions, as mentioned above, when they can put an end to their contacts and also specified procedure for the termination. These conditions are to be satisfied by giving to the other party a written notice of 60 days prior to the real termination date and the termination can be done in case other party becomes insolvent, bankrupt, in case of government expropriation, nationalization or condemnation of all asset of the party, in case of some government policy which prevents the implementation of agreement directly or indirectly.

So, after the analysis of the sample joint venture agreement it can be said that the clauses are soul of any agreement and joint venture is not an exception to it.

Conclusion

By attempting to go into the topic of legal analysis of joint venture, the researcher has come across a conclusion that joint venture agreements are a recent phenomenon in Indian context and will take some time to get crystalized in Indian legal and judicial arena. Till date there is no separate legislation to regulate the joint venture agreements. The joint venture agreements are governed by the basic contractual principles and the provisions of law as agreed upon by the parties in agreement itself. The jurisdiction is also chosen by parties and in case of any dispute the case is filed into that particular jurisdiction and the most preferred way of dispute settlement is arbitration.

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