November 2018

Joint business ventures are common between parties who combine resources to carry out a specific activity.  It is important, however, for the parties in a joint venture to be clear as to what they wish to derive from it and for the rights and responsibilities of the participants to be expressed as clearly as possible. Disputes may arise in situations in which, for example:

  1. there are no financial/accounting provisions in the joint venture agreement or they are not sufficiently clear or specific; or
  2. one of the parties is solely or largely responsible for carrying out the operations, especially if that party is also undertaking other operations; or
  3. one or more of the parties suspects fraud or negligence in relation to the setting up of the venture, including the purchase of assets, or the way in which the venture has been operated.

Clarifying Financial Issues

Expert accountancy input can assist parties in joint ventures to resolve disputes by:

  1. identifying areas for closer examination;
  2. clarifying the areas of dispute, thus helping to narrow differences between the parties;
  3. commenting on the way in which expenditure has been attributed to the parties, if necessary by reference to a detailed examination of accounting records;
  4. considering whether income may have been diverted from the venture;
  5. commenting on the business model of the joint venture; and
  6. if the venture is to be taken over by one or more of the parties, valuing the entity through which the joint venture has been carried out.

Case Studies

A joint venture between a number of parties was set up to convert an office building into a mixed commercial and residential development. One of the participators, a property company, carried out the project on behalf of all parties. We identified various issues to be addressed in negotiations between the parties, including:

  1. the reasonableness of the method by which the property company recharged overheads to the project, i.e. according to the proportion of its total sales represented by the project;
  2. the reasonableness of the inclusion in the total of general overheads of specific expenditure items, such as fees for company incorporations and tax advice, which appeared to relate to other projects or other aspects of the property company’s activities; and
  3. the validity of the apportionment of revenues and costs between the property company and a subsidiary which traded with it.

Many of the characteristics of disputes arising from joint ventures apply to other business situations. We were involved, for example, in a dispute between two shareholders of a property development company. In this case, one of the parties also controlled a number of other entities and projects and carried out the administration of the company, recharging it for this work and for direct costs incurred by him or his other entities on the company’s behalf. This dispute was eventually resolved by mediation.

Conclusions

Joint ventures are established in many different fields and there may be a similarly wide spectrum of disputes, ranging from the need to resolve detailed operational issues to large-scale litigation following a breakdown of trust between the parties.  Disputes between parties to joint ventures are likely to have a financial element which may need to be examined in detail.

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