What Is a Contractual Joint Venture?

A contractual joint venture is an arrangement in which two parties come together for a particular business project and sign a contract outlining the terms under which they will work together. The parties do not set up a separate legal entity for the project but work together in partnership, sharing the profits or losses of the venture on the terms set out in the joint venture contract. The contractual joint venture is a different legal arrangement from the incorporated or equity joint venture, in which two or more parties set up a separate legal entity to act as the vehicle for carrying out the project.

Participants in a contractual joint venture normally would set out the objectives of the joint venture in the agreement. They also would agree on the contributions in cash or in kind made by each of the parties to the contract, with details about the valuation of the contributions. The functions of the parties within the project, including their technical contributions and commercial commitments, would be defined in the contract. Arrangements would be made for the parties to meet to discuss progress on the project and to appoint a management committee.

The joint venture agreement also would cover arrangements for situations in which new parties join the contract or a participant withdraws from the arrangement, and for payment or repayment of contributions when these events occur. There also would need to be a provision for penalizing participants who breach the terms of the agreement. The participants may wish to protect the intellectual property they are using in the project and would include measures in the contract to defend their rights. There also would need to be a dispute-resolution mechanism to deal with disagreements arising from the contract and arrangements for terminating the contract when the project has been completed.

The choice of doing business in the form of a contractual joint venture will have regulatory and tax implications, depending on the jurisdiction in which the project is carried out. Some countries may require foreign investors to work with a local partner in either an equity or contractual joint venture, while other countries may insist that a separate legal entity be set up to perform the work on the project. In many jurisdictions the contractual joint venture will be treated as a partnership for tax purposes, which often will mean that it is not taxed as a separate entity but that each participant is taxed on his or her share of the profits or losses.