Legal Landmines in Joint Ventures

In our postmodern world, capital and technology move into companies through joint venture opportunities. The ability to access technology, know-how, business, trademarks and other intellectual property or service rights is critically linked with the law on joint ventures. Under the ambit of Indian law, a joint venture is governed primarily by the Indian Contract Act.

According to the Ministry of Corporate Affairs, over the years, several court judgments have been pronounced in India on the issue of the validity of joint venture covenants. As per the judicial view, recognition of such covenants through corporate action is possible only if they are made part of the Articles of Association of a company. 

However, in this form, they are subjected to the overriding effect of Section 9 of the Companies Act 1956. Thus, while joint venture agreements may take place and provide for certain exclusionary or extraordinary clauses pertaining to interventions by the joint venture partners, such exclusions are not generally compatible with the present Companies Act. 

They are, however, recognised under Contract Law. The effect of this framework is that dispute resolution in respect of joint venture provisions becomes subject to contract law provisions and is subject to lengthy arbitration, notes the Ministry of Corporate Affairs, while maintaining that the companies prefer that such aspects should be addressed more speedily through the corporate processes. 

The possibility of litigations in the sphere of JVs emerges when there is a breach in any of the agreements, which includes a breach of contractual agreement, breach of memorandum of understanding, through risks related to liabilities, flouting of taxes, etc. Legal issues also have a high degree of possibility of arising if the objective of the joint venture is ambiguous.

For example, in a contractual arrangement, the parties involved have their respective roles to perform, which are specified through a contract drawn. In cases where such obligations are not fulfilled, the room for a legal dispute may open. 

Similarly, the breaching of a non-disclosure agreement is also one of the reasons for which a company can claim damages. For example, take the case of two companies, A and B, entering into a joint venture where B is engaged in the marketing and distribution of A’s product named X. Now X has a secret ingredient whose disclosure in the market can significantly damage its market edge. To prevent such sensitive disclosures to the market, the two companies need to enter into a non-disclosure agreement. Now, if the secret ingredient of X is revealed for any reason, the concerned party/ies are liable for damages and can initiate legal action to recover the damages. 

Succinctly, if two companies operating in a joint venture have entered into a non-disclosure agreement regarding the secret ingredient of a product or service or any other aspect of the product or service that needs secrecy in order to retain its market edge, then the breach of this agreement can open the gates for legal action.

The breach of the MoU between the companies can also lead to one company in the venture seeking legal remedy against the other. For example, company B is obligated in the MoU to support company A with financial support for its marketing efforts but fails to do so. In such a case, company A can seek legal action against company B.

The government of India levies many direct and indirect charges on joint ventures, which include taxes on income generated and/or profit gained by the company. Then there is tax on dividends distributed to their shareholders, tax on goods and services, Double Tax Avoidance Agreement (DTAA), etc. The flouting of taxation can also expose the joint ventures to legal issues.

Exiting from a joint venture is always a possibility for each party. When the clauses pertaining to exit strategy are not drafted precisely, it may lead to disagreements among the partners, members, shareholders, employees, etc., which in turn can pave the room for litigation or arbitration. 

So, we can see that legal issues in joint ventures can arise from various directions, but not necessarily all legal issues lead to the dissolving of the joint venture. 

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