Joint Ventures: Finding a way forward in deadlock situations and disputes

One of the fundamental issues in any joint venture (JV) is control. There are a variety of financial, reputational and other factors which will often lead the parties to agree at the outset that certain material decisions may only be made with the consent of all, or a majority of, the JV parties.

So what happens when the parties don’t agree or there is a dispute?

There are a range of contractual mechanisms which can be built into the JV documentation to enable the parties to navigate difficult situations. These mechanisms vary in terms of formality, cost (financial and time), confidentiality and, fundamentally, their implications for the future of the JV. We set out below a summary of some of the dispute resolution mechanisms and anti-deadlock provisions that are common in JVs. 

Internal escalation

Having a clear internal escalation mechanism can provide an effective way to resolve a dispute or deadlock situation informally, saving cost (in terms of both finances and speed).  It also allows the parties to work together to resolve the issue which can prevent the irreparable damage to relations between the parties caused by any perceived 'win' and 'lose' outcomes which could arise out of a third party dispute resolution procedure. Some key things to consider include:

  • Who will be involved? Ideally this will be a member of each organisation who holds a senior position and does not have a day-to-day role in the JV but who has sufficient expertise to understand the issues.
  • Timing and process. Striking a balance between giving sufficient time to resolve the matter and the need to find a resolution quickly to minimise any ongoing impact on the JV caused by the dispute.
  • Will escalation be mandatory in all situations? Some dispute/deadlock matters will be more important than others so there may be situations where escalation is not appropriate - there will be always be exceptions.

Arbitration or expert determination

Another mechanism to resolve a dispute or deadlock situation is by referring the matter to an independent third party. This mechanism may be used after the parties have failed to reach agreement through the internal escalation process described above or on its own if the internal escalation process is not appropriate for the matter in question. 

The JV documentation will set out the process for the appointment of the independent third party who will act as an external expert or arbitrator. The parties will usually get an opportunity to make representations and the decision of the appointed third party will often be binding on the parties.

The choice of an expert or arbitrator for dispute resolution will largely depend on the matter in dispute and the formality that the parties wish to follow (expert determination being dependant on what is agreed in the JV contract and arbitration following specific rules of procedure). The appointment of an arbitrator is generally considered to provide a more cost effective alternative to litigation but to be more expensive than an expert determination (although this is not always the case). Some key things to consider include:

  • Scope. When and to what range of issues should arbitration apply? Will it be mandatory?
  • Confidentiality. A benefit of expert determination or arbitration is the ability, generally, to keep the matter confidential, which will help to protect the reputation of the parties and the JV.
  • Identity and appointment of the expert or arbitrator. Whilst it is possible to specify criteria in relation to the appointment of the expert or arbitrator (for example, qualifications, level of experience and sector expertise) at the outset, it is often preferable for the parties to seek to agree the identity of the expert or arbitrator once the circumstances have arisen (with a default appointment mechanism which will apply in the event the parties cannot agree).
  • Rules that will apply to the expert determination or arbitration. The procedure for expert determination will be dependent on what is agreed to by the JV parties. Arbitration will follow the specific rules and procedures of the arbitration proceedings chosen.
  • Remedies. Ensuring that the JV documentation clearly details a comprehensive set of remedies available will provide greater certainty as to the possible outcomes of expert determination or arbitration.

Exit or termination of the JV

Where the nature of the dispute or deadlock is such that the parties are unable to resolve the matter, the exit by one of the JV parties or termination of the JV may be the only viable option.

Below is a summary of some of the common provisions available where there is a dispute or deadlock situation. The same provisions could also apply where there has been a default by a JV party.

Sale. Where there is or has been a dispute, a party to the JV may wish to sell its interest in the joint venture. For more detail on transfer provisions in a JV read our transfer considerations guidance here.

Termination. This is the situation when the JV arrangement is terminated, any assets of the joint venture are disposed of, distributions are made, and the joint venture parties walk away. This may not be a satisfactory outcome for either party and consideration needs to be given as to how termination will be achieved, including transfer of ownership of assets (for example, intellectual property), how to decide the price and any other terms of a sale of the assets, conflicts and any ongoing obligations (for example confidentiality).  

Put and call options. An option will be granted to one or more of the joint venture parties, enabling the holder of the option to require the other parties to sell or buy its or their interest, at a price to be determined, usually by reference to market value.

Typically, the option will only be exercisable in certain situations (for example. default) or at a specified time and it is unlikely to be triggered by a deadlock situation. In a deadlock situation, the following mechanisms can be used, but need to be carefully considered to ensure that a party cannot engineer a deadlock situation to gain an advantage by taking overall control of the JV.

Russian roulette

If a deadlock arises, either party (the "offeror") may serve notice on the other (the "offeree"), offering to purchase its interest at a specified price. The offeree may, on receipt of the offer, either decide to accept it or alternatively require the offeror to sell its interest to the offeree at the same price (effectively reversing the original offer).

By allowing the offeree to reverse the offer, the mechanism is designed to ensure that the offeror provides a fair offer, but this assumes that the offeree will be in a financial position to enable it to reverse it.

Key things to consider:

• The financial position of the parties and their ability to use the mechanism in the manner intended – if the 'threat' of the offer being reversed isn’t realistic, the parties may wish to consider using an alternative method (such as reference to a third party) to determine the price.

• Would both parties have the ability to continue the joint venture without the other or does the joint venture rely on an assets or skill of a particular party?

• The overall bargaining power of the parties.

Texas shoot out

This is a variation of the Russian roulette mechanism and upon receipt of an offer, the offeree can either accept the offer or make an offer to acquire the offeror's interest at a higher price.

If the offeree takes the second option, it will trigger either a live or silent auction, and ultimately the party who makes the highest offer will win.

The key things to consider are the same as in a Russian Roulette mechanism save that a significant disparity in financial resources could be the reason why this mechanism may not produce a fair outcome.

Want to know more?

If you have any questions or would like support with deadlock situations and disputes, please get in touch.