It is not uncommon for joint venture partners to face impasses on operational matters during the lifecycle of a JV. These differences could be wide ranging, from day-to-day business issues to high-level strategic decisions such as capital expenditure, business expansion, entering into a new line of business, raising of funds, changing the business plan and sale or disposal of business or assets.
Often, parties resort to arbitration in order to resolve such commercial logjams. However, is arbitration really the most efficacious remedy for resolving operational issues while preserving the value of the JV?
Arguably, disputes over legal questions qua operational issues (where neither party may necessarily be in breach of any law or terms of the agreement) warrant differential treatment.
Unfortunately, arbitration is not the most efficient remedy for successfully resolving such issues on account of the following reasons:
- Arbitrators’ qualifications: Arbitrators may not have the necessary business and sector expertise and the experience to fully appreciate the commercial and operational issues the JV partners might be grappling with.
- No clear breach of the JV agreement: More often than not, an exercise of right by a JV partner resulting in a logjam may not be in breach of an agreement. In such a scenario, the arbitrator or a judicial forum may find it very arduous to pronounce a relevant verdict.
- Timelines: These operational issues are time sensitive and the more the logjam drags on, it will not only adversely impact the business but also strain the relationship between the JV partners. Regrettably, the entire arbitration process, including enforcement, is not always time efficient and may entail a period of two-three years. This defeats the value of the JV and may prove to be counterproductive.
Alternative mechanisms to tackle operational deadlocks
There is no ‘one size fits all’ solution, and a blend of various mechanisms is often adopted to tackle deadlocks in operational matters. Some of these are set out below:
- Escalation to senior management: Internal time-bound discussions among pre-nominated senior officials (identified with designation) for each JV partner are often benign but very effective to resolve such operational deadlocks. That said, in some cases, discussions between JV partners’ representatives may not be fruitful, especially where the fundamental difference lies between each partner’s opinions on the deadlocked issue.
- Referral to independent experts: Deadlocked matters which are technical in nature (for example, a dispute or difference over the valuation of intangible contributions to the venture by either party, or computation of royalty payments out of available profits) should be referred to independent experts in the relevant field. To the extent feasible, it is advisable to lay out the parameters basis which the expert is expected to be appointed to avoid a deadlock on the issue of appointment itself.
- Pre-agreed recourse: The JV partners could also provide for certain pre-determined alternatives which will be resorted to in case stalemates persist beyond certain agreed time periods. For example, in cases of deadlock on certain services or goods being provided by the JV partners, the JV agreement could provide for outsourcing this to the most commercially viable party shortlisted by way of a bid or tender.
- Well-drafted JV agreements: Capturing potentially contentious issues (to the extent foreseeable) in a robust and unambiguous agreement as also deliberating upon these during the negotiation stage can help minimise (if not avert) stalemates in the future.
- A few aspects the parties could consider at the negotiation stage are clearly defining roles for each party, elucidating the business plan and financing requirements for the next one-two years (or longer if the industry dynamics permit), setting out guidelines to be factored in while modifying a business plan or annual budget, listing unambiguous affirmative vote items, providing for expansion mechanics for the JV basis projected growth, and laying down an appropriate structure to minimise structural deadlock (for example, staying clear of 50:50 JV model).
- Guiding principles: If the JV agreement has broadly worded rights granted in favour of a shareholder (e.g. reserved matter rights), care should be taken to also put appropriate checks and balances (e.g. monetary thresholds) and guiding principles therein to illustrate how these rights are purported to be exercised. These will come in handy if the persons negotiating the JV agreement are not around at a later stage when the deadlock arises.
- Discouraging artificial deadlocks: To add a sense of deterrence to a party from frivolously abusing its rights and orchestrating an artificial deadlock, such party could be required to foot the entire legal cost and expense related to such expert determination.
As is evident from the above, no straight jacket formula will perhaps suffice to resolve each operational deadlock and parties will have to carefully assess as to what may work best for them in light of the particular facts and circumstances.
However, one thing is explicitly clear, that for purely operational deadlocks, arbitration or litigation may not be the appropriate recourse and parties would be well advised to take refuge of one of the several options outlined above.
The significance of a well-defined JV agreement also cannot be overstated as an unambiguously worded agreement can go a long way to minimise the potential areas on which a deadlock may arise.
Prasenjit Chakravarti is Partner and Akarshita Dhawan is Associate at law firm Khaitan & Co. Views are personal.