This article is written by Shruti Chaurasia, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from lawsikho.com.

Introduction

When two or more individuals come together and enter into a contract to form an association to carry on a business as co-owners for the profit of the co-owners it is called Partnership. It is governed by the “Indian Partnership Act, 1932”. Whereas, when two or more business entities or individuals working separately come together for specific business purposes for a limited period it is called Joint Venture (JV). They pull their resources together to achieve mutual goals. It is highly flexible which could involve either an expansion to an existing business or an entirely new business. Joint Ventures has initially been used for trading and commercial purposes by the merchants and businessmen.

This article provides a brief analysis of the similarity and difference between a Partnership agreement and a Joint Venture agreement. 

What is a partnership agreement

When two or more individuals want to enter into a partnership, they are required to enter into a partnership agreement. The agreement states details about the business, the relationship between the partners, percentage of ownership, profit and loss percentage, etc. The agreement between the partners can be oral or written at the will of the partners. But it is always advisable to have a written agreement to avoid future disputes. Section 5 of the Partnership act states that for a partnership, the existence of an agreement is essential. It is very important to have a good agreement in place to avoid unnecessary litigation proceedings. A good partnership agreement will have solutions to all major issues that can take place in the future.

What is a joint venture agreement

Joint ventures have characteristics of a partnership. It can be formed between partnerships, corporations, LLP, etc. It can be formed by a larger and a smaller entity to work together on projects. It is a collaboration between two companies lacking in some aspect to use the resources of other companies without any disbursement. A joint venture agreement like the partnership agreement is formed to avoid all legal issues and to describe the roles and responsibilities of the entities coming together for business purposes.

Purpose of partnership agreement

The main objective of a partnership is to form a new business that will aid profit to its partners. The following are the main purposes for which it is recommended to have a written partnership agreement:

• Control over ownership

A Partnership agreement includes a clause relating to allotment of shares and imposes a reasonable restriction on transfer of ownership by way of transfer of shares in a company. Through a written agreement parties have a clear idea on the pattern of transfer of ownership in the event of the death of a partner. It safeguards the company to be sold to a competitor by imposing reasonable restrictions on the transfer of shares. It avoids the event of uncertainty. In many cases, it protects the shareholding percentage of an existing partner in the event of a change in the share capital of the company.

• Avoid legal issue

In the event when properly written provisions are not made, it can invite unnecessary legal suits on the point of disagreement between partners. These agreements are made by foreseeing possible events of disagreement and by inserting clauses to avoid the same. This can protect partners from costly legal issues. For instance, after the business starts making profit there are mainly two questions raised. First, when can the partners take money out of business and second, how much will each partner get. In case when there is no written agreement providing answers to these questions, it can amount to legal issues between the partners.

• Describe roles and responsibilities

Partnership agreements provide the roles of each partner towards the business of the Partnership. It lays responsibilities on partners to provide true accounts of the business. It states the provision of compensation to partners due to loss incurred by the fraudulent act of the other partner or partners.

• Avoid tax issues

A partnership firm is not termed as a separate legal entity. Therefore, there is a tax liability imposed on individual partners. It means every partner is liable to pay tax on his share of income from the business. A written agreement about the distribution of profits and losses spells the tax status of the partnership, which helps avoid any tax issues.

• Avoid the state’s default rules

If there is no written partnership agreement in place then the business and the partners will be governed as per the default rules of the state. The written agreement helps partners to set their own rules and regulations as per their interest and the interest of the business.

• Protect business and investments

Events like bankruptcy, partner’s death, or disability can hurt the business of the firm. When there is no written agreement giving remedy during such situations, the company may go into dissolution risking the investments made by the partners. In an event when one of the partners dies, his amount of share into the Partnership can be paid to his legal representatives and other partners can continue with the business. Also, provisions are inserted that prevent the company’s confidential information from being shared by partners which protects the interests of other partners and the business.

In CIT vs. Seth Govindram Sugar Mills, the firm consisted of two partners who represented their joint families. In their partnership agreement, there was a provision providing the heir or nominee to take over the place of the deceased partner. One partner out of the two died leaving his widow and minor sons. The issue raised was whether the firm which consisted of two partners was dissolved after the death of one of the partners. The Supreme Court held as under: “Section 42(c) of the Partnership Act can appropriately be applied to a partnership where there are more than two partners. If one of them dies, the firm is dissolved; but if there is a contract to the contrary, the surviving partners will continue the firm. On the other hand, if one of the two partners of a firm dies, the firm automatically comes to an end and, thereafter, there is no partnership for a third party to be introduced therein and, therefore, there is no scope for applying cl. (c) of s. 42 to such a situation.”

Purpose of joint venture agreement

The advantages of forming a joint venture are sharing of risk, access to larger markets, the larger capacity to produce goods and render services, etc. Therefore, to achieve these advantages successfully it is essential to have a well-structured, well-drafted, clear, and planned agreement in place. The main purposes of a written joint venture agreement are:

• To list out contributions

In joint ventures, the partners come together and contribute resources like funds, goods, technological resources, etc. The agreement states the list of contributions made by the ventures. The contribution can be made either equally or more by one venture than the other. 

• Termination

As a joint venture is prepared for a limited number of periods, the agreement provides a termination clause defining the period after which the Joint venture will be dissolved. The agreement defines the period or the condition after which the venture will come to an end. 

• Responsibilities

In a joint venture, the responsibilities and obligations of the partners are limited to their part as put forth in the agreement. The agreement defines the responsibility of partners to avoid any dispute or confusion on the same. 

• Tax consideration

The pattern in which the joint venture will be taxed depends on its structure. The agreement defines the structure of the joint venture whether an LLP or company, etc. 

Different types of partnership agreement

There are different types of partnerships formed based on Objectives, Tenure, Nature, and Liability. For example, in some partnerships the objective of the partners will be to continue the partnership for a specific period while in other cases the partnership is in existence till achievement of a particular objective. In some cases all the partners may have unlimited liabilities. Whereas, in others one of the partners may have limited liability while the rest won’t. Some of the types of such partnerships are:

• Partnership at will

Such a partnership can be brought to an end at the will of the Partners by way of notice of mentioning his intention to do so. Its tenure solely depends on the will of the partner. Even if one of the partners sends the notice of termination the entire partnership comes to an end.

• Particular partnership

This type of partnership is formed for undertaking a particular business. It comes to an end on the completion of the objective of the business. The limited period of this type of partnership depends on the condition precedent upon the happening of which the dissolution takes place.

• General partnership

In the absence of a partnership agreement, the partnership is governed as per the default provisions of the Indian Partnership Act 1932. In this type the liability of each partner is unlimited.

• Limited liability partnership

In this type of partnership agreement, some or all partners have limited liabilities. Partners enjoy limited personal liability only for their share of investment in the partnership. They cannot participate in the general management and daily operations of the firm.

Different types of joint venture agreement

There are different types of joint ventures. Some of the common types are:

• Contractual joint venture

Contractual joint ventures is a type of Joint Venture where two or more parties come together only for specific business purposes without creating a separate legal entity. Franchisee is an example Contractual JV.

• Equity joint venture

Equity means Ownership. In this type of JV a separate legal entity is created unlike Contractual JV. The partners share ownership, management, responsibilities, and profits and losses of the company. For instance, when a foreign company providing technology and other knowledge-based inputs wants to ensure managing power in the JV, this type of JV is entered into between the parties. The foreign company will have an option to invest in the JV at a future date.

• Partnership joint venture

A partnership or limited liability partnership venture can be set to merge the two businesses. An example of it is one party involved in the production of goods approaching another party to use their marketing and promotion skills for selling the products.

• Vertical joint venture

Vertical joint ventures are incredibly useful for dealing with importing products. This allows businesses to enter new markets while sharing risk. Both companies can work towards finding more effective ways to reach their goals by sharing industry knowledge, funding, etc.

The Joint Venture between Tata Sons and Singapore Airlines (SIA) Vistara is an excellent example of a JV Company of India with a foreign firm. Tata Sons holds a 51% stake, SIA controls the rest 49% in the carrier airlines. Vistara is the first airline to operate a domestic flight from Chhatrapati Shivaji International Airport’s Terminal-2 initiated in 2015. Headquartered in Bangalore, Air Asia has recently been ranked 4th largest Low-Cost Carrier (LCC) in India.

Necessary terms/clauses 

To avoid potential situations of disagreement and legal proceedings a partnership as well as a joint venture agreement (“Agreement”) should include the following important clauses:

1. The most important clause of any Agreement is a clause defining the type of business the partners are entering into. Many of the important clauses depend on this clause.
2. According to the type of business partners enter into, each partner will have a liability of some kind towards the business of the firm. A clause mentioning each partner’s liability should be mentioned in an agreement.
3. A capital contributions clause that should clearly state what contributions each partner will make towards the business. It must also state each partner’s percentage of ownership in the business of the firm in case of a partnership agreement. Some partners may contribute through cash and some through the property, securities, assets, or certain skills which should also be listed in the agreement.
4. The agreement should mention the partner’s duties and responsibilities, it clears the risk of unclear authorities. This includes specifying each partner’s decision-making power, management duties, and other responsibilities.
5. It is very important in an agreement to mention a clause dealing with the Sharing of profits and losses. It should also specify whether partners will be able to take a regular withdrawal from his or her allocated profits each year, or otherwise. 
6. In any business, there are always chances of having occasions of disagreement between partners. Therefore, a clause mentioning steps to be taken in situations of deadlock or disputes is also important. This clause mentions the procedure by which the disputes between the partners shall be resolved. 

Apart from this, clauses like the commencement of the business, Name and style, registered office, duration of business, bank and book accounts, non-compete, governing law, etc. are also mentioned in these agreements. A clause defining representation and warranties includes a joint venture agreement. The co-ventures indemnify each other for such representations and warranties.

Factors considered while drafting both of these agreements

While drafting these agreements it is important to consider all important points so that there are no ambiguities. A clear intention to agree is necessary to be mentioned. It is important to formulate compact clauses considering all possible situations. Although leaving flexibility in case the partner or the terms need to be modified for the betterment of the business and the partners. It is required to consider the situation as to what will happen to the business in case of the death of any of its partners. If both partner’s points of negotiations are considered while drafting the agreements it is less likely that the partners will have usual disagreements upon the commencement of the business. Before drafting the representations and warranties clause due diligence should be made to avoid situations of loss in case the partner fails to have the capacity to comply with it. The agreements shall also cover the possibility of modifying the type of joint venture. It should be structured so that changes in law or technology do not make the business redundant. In case when two already existing business entities are agreeing to form a joint venture, the due diligence of the business entity should be made to understand its market values and capacity to comply with the agreement. Also in the case when the joint venture involves a foreign country it is important to decide the governing law by way of which the disputes will be solved.

Points of similarity

From the definitions and factors of partnership and joint venture agreements, it may be understood that there are some significant similarities. The similarities between both are:

1. There is a collaboration between two or more parties for business purposes;
2. Both can be created by oral or written agreement;
3. Both involve contribution by the partners by way of cash, asset, skills, etc.;
4. Created for the purpose of earning profits.
5. The relationship to third parties is identical for both the agreements.

Points of difference

Sr. No.	Partnership	Joint Venture
1	In a partnership, two or more individuals join together for a combined business.	Whereas a joint venture can involve two or more persons or entities joining together in a particular project.
2	In partnership, there is no separate entity that is formed.	In the case of a joint venture, a separate legal entity is created.
3	In a Partnership, profits are annually distributed.	Whereas in the joint venture profits are distributed at the end of a specific venture or on an interim basis.
4	Typically, in a partnership, persons involved are co-owners of a business.	Joint ventures do not involve co-ownership.
5	A partnership is formed for an indefinite number of years unless otherwise decided by the parties.	But a joint venture is created only for a limited period that is until the mutual goal is achieved.
6	A partnership is governed under the “The Indian Partnership Act, 1932”.	There is no specific act that governs the joint venture agreements.

Law and jurisprudence

Partnership in India is governed under the Indian Partnership Act, 1932. Whereas, LLPs are governed under the Limited Liability Partnership Act, 2008. There is no specific law to govern Joint Ventures in India. However, joint venture partnerships are governed under the Indian Partnership Act, 1932. Proceedings of arbitration in case of a dispute between both agreements are governed as per the rules and regulations of the Arbitration and Conciliation Act, 1996. In the case where one of the foreign parties is involved, governing laws are decided as per the mutual decision of the parties as agreed in the agreement.

Conclusion

Joint Venture and Partnership come into the pictures when an individual or business needs an additional fund or technical expertise. They are the forms of business, but they are the two different entities. They have a set of similarities as well. Companies form a joint venture to complete a precise goal and eventually end the joint venture after the goal is accomplished. Whereas, the partnership is created when the partners want to enter into a long term business. They both are created with the aim of gaining profits. An individual or business entity enters into either of these according to the goals they wish to achieve. Before entering into either of these agreements it is important to consider the liabilities they bring along.

References

• http://www.helplinelaw.com/business-law/JVLI/joint-venture-law-in-india.html
• https://www.educba.com/joint-venture-vs-partnership/
• https://www.economicsdiscussion.net/partnership-firm/types-of-partnership/31961
• https://www.lawyered.in/legal-disrupt/articles/indian-company-partnering-foreign-company-how-you-do-it/

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