Legal Briefing

Unincorporated joint ventures: remembering the basics

The In-House Lawyer Logo

Corporate & Commercial | 01 July 2010

Many foreign companies registered in the UAE form joint ventures to execute projects, especially in areas like defence, oil and gas, engineering, and construction. However, most of them are unaware that the legal provisions generally governing a foreign company in the UAE are not applicable to unincorporated joint ventures (JV).

Provisions of the Company Law

The Company Law contains few provisions on JVs. As per the law, it is not mandatory for the JV to have a memorandum of association. The rights, duties and obligations of the partners are regulated by a contract that is negotiated and executed between them (JV contract, which need not be registered before the authorities). Hence, the first step towards a successful JV is to identify and agree on the rights and obligations of the partners.

Due diligence on partners

It is imperative that due diligence is conducted on partners to assess its credibility. This exercise should encompass regulatory, financial and contractual aspects. The partner’s license should be reviewed to confirm that it is valid and that it permits the partner to engage in the proposed activities.

As per the Civil Code, only those who are specifically authorised to enter into binding commitments on behalf of a company through a special power of attorney can represent it. Otherwise, the representative should be authorised by the company’s constitutional documents. Therefore, the authority of the partner’s representative should be ensured.

It should be verified as to whether the partner is bound by any non-competition agreements restricting it from associating with the JV for the proposed activities, either in the entire UAE or in certain emirates.

Basic terms of understanding

It is essential that the partners have a clear idea about the JV’s duration. Most of the JVs in the UAE are project-oriented and terminates on its completion. It is comparatively easier to form and operate a JV for a particular project with a fixed duration. However, the arrangement is complex and more caution is required if the JV is open-ended.

Hindsight suggests that majority of the problems that adversely affect the JVs have a financial background. Often, they result in its termination, causing substantial financial and other losses. The partners’ financial rights and obligations – be it on capital contribution, additional funding, intellectual property, banking facilities or profit and loss allocation – should be explicitly agreed on beforehand.

Any in-kind contribution made by the partners must be valued by an independent auditor and a certificate in this regard be obtained. Depending on the nature of facilities availed and standing of the partners, the banks may require corporate or personal guarantees, or other collateral securities from the partners. Besides, the client may oblige the JV to procure performance and advance payment guarantees.

Similarly, the partners should agree on their rights to nominate representatives to liaise with the banks, manage accounts, and sign cheques. The JVs usually fix limits for their authorised signatories, so that the manager handles cash transactions up to a certain limit and a team – representing either partners – jointly deals with major transactions.

Generally, the management of the JV is entrusted with a board of directors comprising of both partners’ nominees. A partner’s right to nominate board members is linked to myriad of factors, including capital contribution. The leading partner nominates the majority of the board members and thereby control the JV. To avoid disputes, partners should agree on the board’s rights and obligations, nomination of its chairperson, quorum for meetings, majority for resolutions, and chairperson’s right to casting vote. The intention of the partners to reserve any issues for their own determination should also be agreed on.

Labour and immigration

The laws do not permit the JV to sponsor its employees. Hence, either or both of the partners may be obliged to sponsor the employees. This involves considerable financial burden, since the sponsor has to provide labour permits, residence visas, salaries and end of service benefits to the employees.

Non-competition

It is vital that the partner is prohibited from competing with the JV. Otherwise the partner may negotiate with third parties on arrangements alternative to the JV or with respect to projects in which the JV may participate. The ambit of non-competition should cover employees and clients too, restricting the partner from associating with them for a certain period.

Disputes

The board or the partners may differ on various issues leading to ‘deadlocks’. Provisions should be put in place to resolve these issues without affecting the JV’s operations, which could be through a casting vote by the chairperson, discussions on management level or reference to a third party expert. The partners may opt for formal dispute resolution mechanisms – litigation or arbitration – only if the informal methods fail. The resolution mechanism may be chosen judiciously, considering the nature of dispute, financial and technical implications, time factor, and knowledge of Arabic.