A contractual joint venture is an agreement between two parties for a specific business project, where they work together in partnership and share profits or losses. The joint venture agreement outlines contributions, functions, dispute resolution, and regulatory and tax implications.
A contractual joint venture is an agreement in which two parties meet for a particular business project and sign a contract outlining the terms under which they will work together. The parties do not establish a separate legal entity for the project, but work together in partnership, sharing the profits or losses of the enterprise under the conditions set out in the joint venture agreement. Contractual joint venture is a legal arrangement other than an incorporated or equity joint venture, in which two or more parties have established a separate legal entity to serve as a vehicle for carrying out the project.
The participants in a contractual joint venture normally set out the goals of the joint venture in the agreement. They would also agree on the contributions in cash or in kind made by each party to the contract, with details of how the contributions would be assessed. The parties’ functions within the project, including their technical contributions and commercial commitments, would be defined in the contract. Arrangements will be made for the parties to meet to discuss project progress and appoint a management committee.
The joint venture agreement would also cover arrangements for situations where new parties enter the contract or a participant withdraws from the agreement, and for the payment or reimbursement of contributions when these events occur. There should also be a provision to penalize participants who violate the terms of the agreement. Participants may want to protect the intellectual property they are using in the project and would include measures in the contract to defend their rights. There should also be a dispute resolution mechanism to deal with disputes arising from the contract and provisions for termination of the contract after the project ends.
Choosing to do business in the form of a contractual joint venture will have regulatory and tax implications, depending on the jurisdiction where the project is being implemented. Some countries may require foreign investors to work with a local partner in an equity or contract joint venture, while others may insist on setting up a separate legal entity to carry out the work on the project. In many jurisdictions the contractual joint venture will be treated as a partnership for tax purposes, which often means that it is not taxed as a separate entity but that each participant is taxed on his share of the profits or losses.
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