An international business transaction requires a precise and detailed underlying contract. However, it can be expensive and time-consuming to draft such a contract oneself. The ICC Model Joint Venture Contract (Construction) responds to the market’s need for a reliable and equitable template, providing a set of clear and concise standard provisions regarding joint venture participation and governance in construction projects that will save parties time and money in the negotiation process.
In complex transactions, international as well as national co-operation between companies of all sizes require fair and balanced terms and conditions. The model allows for a solid decision-making process, a clear allocation of participation and provision of resources, the need for swift and effective dispute resolution, and the need for complete and informed allocation of risks.
The model is intended for parties that wish to cooperate in the execution of major construction projects as joint operators (in a non-incorporated form, thus not as a legal entity) rather than on a sub-contract basis, which implies a different risk-sharing allocation. Users should note that this model is geared towards the needs of the construction industry and that other sectors may have specialized approaches, for instance in the Joint Operating Agreements used in the oil and gas industry.
In the model’s joint venture arrangement, the risk of non-payment by the employer is shared amongst the joint operators and unlike in subcontracts, payment on an “if and when” basis is the rule and not the exception. Similarly, joint-venture operators, unlike subcontractors, typically assume counterparty risk of each other for the benefit of the employer (joint and several liability).
The model satisfies the increasing desire of employers undertaking major projects who do not want to use a multi-contracting structure with several contracts directly entered into with several contractors. Instead, it provides a form of contracting where there is a single point of contact on the contractor’s side while maintaining an employer’s potential recourse against the major suppliers to the project.
Users deciding between this Joint Venture model and the ICC Model Consortium Contract should be aware that the main difference between the two is the extent to which the partners share performance risks, i.e. the risks innate to the nature of their resources, technologies and processes.
In a joint venture, on the one hand, the members share all risks, liabilities, rights, benefits and profits in proportion to their participation in the joint venture, usually determined based on the resources that each member will supply to the joint venture for the execution of the total scope of work under the contract with their employer, to whom they are jointly and severally liable for all the contractual obligations. Joint venture members are generally kindred spirits in their field of business and understand each other’s business and risks.
In a consortium, on the other hand, the co-operating parties are jointly and severally liable for all the contractual obligations towards the employer but are liable towards the other consortium members only for the proper execution of their individual parts of the total scope of work. This form of co-operation may be preferable where the consortium members are not familiar with the intricacies of the other members’ business and risks and therefore have no control over the probability of the risk occurring or the resulting impact.
The ICC consortium model is an ‘open consortium’ in which the employer contract is entered into between the employer and all of the members of the consortium; all of the members of the consortium are jointly and severally liable for the performance of the contract. Generally, one consortium member is appointed by the other consortium members as the consortium leader for managing the contract with the employer; usually it has the authority to conduct negotiations for the members, but cannot enter into any binding agreements on their behalf.