Joint venture agreement for construction

Joint venture agreement for construction is very useful when two or more companies or organizations want to join forces to bid for and carry out engineering or construction projects together. This Joint Venture Agreement for construction would set out the basis on which the joint venture parties would cooperate in future, and it covers the general duties, the management structure, the principles for joint bidding the tenders, sharing work under contracts that are rewarded to the joint venture, also the financial arrangements and liability issues.

It is important to mention that the joint venture agreement for construction is a unincorporated venture, so each partner in the joint venture receives and becomes liable for tax on its share of profits. In this short article we will try to show you what is the subject of the contract, obligations of the parties and what are possible benefits. n Croatia, joint venture agreement is regulated by the Corporations Act.

Subject of the contract

A joint venture agreement for construction sets out the basis on which the joint venture parties will cooperate. It covers the general duties, the management structure, the principles for joint bidding the tenders, sharing work under contracts that are rewarded to the joint venture as well financial arrangements and liability issues.

A joint venture agreement is concluded by several owners of individual properties in order to build one or more facilities. Most often, these are old properties built on smaller plots of land, but by merging them you get a new plot on which a new facility can be built. In that case, the land is parceled in order to create conditions for the construction of a larger facility. There are cases when such contracts are concluded by the owners of apartments or business premises of the old building who are building a new facility on the same plot, which means that in this case there is no need for parceling of the land.

A joint venture is similar to a partnership, but differs from it in that it refers to a predetermined business operation whose realization is related to a certain time (at least for several years), while the partnership is a joint business in all segments of their business, and is usually a lasting business relationship.

Benefits of joint venture agreement for construction

It is important to define the exact remit and purpose of the joint venture, establishing exactly what the partners are cooperating in relation to and what standard of cooperation and good faith is required of each partner. One of the reasons for forming a joint venture is also to avoid competition and pricing pressure.

Landing larger contracts are the only way to stay competitive in a growing industry such as construction. Given the level of competition, contractors must get creative when seeking out new contracts and because of that joint ventures are a great way to do this. They offer numerous advantages to small and medium-sized construction companies, of which the most important advantage is the spreading of risk. By teaming up with more contractors, the risk of each individual contractor is reduced. Even though your partnership is only for a specific goal, this move will enable you to create long-lasting business relationships.

Essential components of the joint venture agreement for construction

The basic principle in concluding a contract as a bilateral legal transaction is the principle of autonomy of the will of the parties. According to this principle, the parties are free to decide whether to conclude a contract, i.e. with whom they will conclude it, what will be the content of the contract and in what form will they conclude it. However, this freedom is not unlimited because, in accordance with the Civil Obligations Act (OG 35/05), the parties cannot regulate obligatory relations contrary to the Constitution of the Republic of Croatia, coercive regulations and the morals of society.The essential components of each contract are prescribed in the Civil Obligations Act, which provides lawyers with a basis for reviewing each contract. So the essential components of the joint venture agreement for construction are the number of parties involved, the scope in which the joint venture will operate, what and how much each party will contribute to the joint venture, the structure of the joint venture itself, initial contributions and ownership split of each party, the kind of arrangements to be made once the deal is complete, how the joint venture is controlled and managed and how the joint venture will be staffed.

Obligations of contracting parties

The largest portion of the agreement will focus on the responsibilities of both joint venture parties. The parties need to agree on both overall joint venture management and actual project management itself. The duties of each party should be clearly defined in the main agreement. This is especially important for the requisition process and cash flow as well. You also need to define who will handle all the payments. Be sure to define in contract how all the profits and losses will be allocated.

Generally, a joint venturer is not liable to his/her associates for damages resulting from mistakes in business judgment.  However, a joint venturer can be held liable for negligence if the task necessitated exercise of a particular or extraordinary degree of diligence and skill. Generally, profits are distributed equally among the co-venturers irrespective of the capital advanced.  However, the sharing equally of profits can be changed by contracts created between co-venturers. Generally, regarding the sharing of losses, an agreement to share the losses in the same proportion as sharing in the profits can be implied.  However, if there is a provision in the contract as to the proportion in which they are to be shared, the provision is to be complied with.

Success of joint venture

The assessment of the success of the venturers investment in the joint venture depends on the risks of the venture, the control that the ventures exercises in the venture, and the parameters that are used for ex-post performance appraisal. In doing so, it is important to differentiate performance venture from the success of the venturers investment in the joint venture. In practice the success of the venture usually includes the success of the venturers investment in venture, but it doesn’t have to be the rule, especially not when evaluating performance of every venture in a joint venture.

A joint venture agreements for construction play an important role in the success of joint venture project management. These contracts are necessary not only for forming the joint venture organization, but also for stipulating general conditions of joint venture operation. The agreements that are meticulously prepared can maximize the benefits of all parties involved as well as minimize potential risk in joint venture project management. Once you have entered into a joint venture, trust and open communication will be crucial to keep the business relationship a successful and profitable one.

If you need a lawyer for drafting a joint venture agreement for construction project in Croatia, contact my law firm with confidence.