International commercial arbitration can offer a highly effective means of resolving disputes between commercial parties operating internationally. Joint ventures (JVs) frequently involve partners from different countries sometimes operating in a different country again. Where disputes arise the partners will usually be unwilling to submit disputes to the state courts in each other’s home jurisdiction. Equally, the courts of the country where a joint venture company (JVC) is incorporated or the agreement performed may not be suitable. For example, they may lack expertise in trying complex commercial cases.
Arbitration gives parties the freedom to appoint their own tribunal of arbitrators with experience not only of JV disputes in general but also of the industry sector, geographic region and commercial cultures relevant to the JV. Arbitration also allows parties to adopt procedures tailored to their case, for example, to put forward expert evidence, to stay the proceedings for settlement negotiations, and to manage the costs of the case. This article considers how the procedures of arbitration can best be adapted to JV disputes.
What is a joint venture?
A ‘joint venture’ is not a precisely defined legal concept.1 Black’s Legal Dictionary, for instance, defines a joint venture as ‘a business undertaking by two or more persons engaged in a single defined project’2. Sometimes it is unclear whether parties have entered into a JV as opposed to, for example, a distribution agreement. This article follows that broad and non-technical view. Often the partners will found a JVC specifically for achieving their goals. Most JVs are based on the idea that each partner will contribute some special know-how or experience that the other partner or partners lack, and will benefit the cooperation as a whole.
For example, partners may enter into a JV in the following cases:
a foreign mining company cooperating with a local partner in order to explore and exploit natural resources;
- an international telecommunications company with advanced technical know-how working with a local partner in order to gain access to a local market and establish a new mobile telephone network in an underdeveloped market;
- a cooperation between the inventor of a new product and an industrial company with a view to making the invention suitable for mass production;
- several construction contractors combining their resources in order to bid for and construct a major project, such as an airport or football stadium;
- a foreign company and a local partner, company or person, who can obtain approval for the shared project from the relevant governmental agency; in some countries foreign partners will be legally required to work with a local partner; and
- two companies pooling resources so as to benefit from economies of scale or to develop a product that neither could afford to develop on its own.
JVs may take different legal forms: ‘A Joint Venture can, but need not, be carried out through the means of a separate corporation or other legal entity.’3 The form of the legal entity will vary depending on the jurisdiction. Examples include incorporated and unincorporated companies, partnerships, or einfache Gesellschaft or société simple under Swiss law. In other cases, a JVC in the more complex form of a limited liability company will be created; this will be a separate legal person. Some jurisdictions are more formal and require JVs to be registered and comply with local requirements.
Because JVs take different forms and arise in a range of industry sectors, it is not always easy to capture them in the statistics of arbitral institutions.4 The LCIA Registrar’s Report classified 12 per cent of referrals to arbitration in 2013 as involving JV and shareholder disputes, compared with 9 per cent in 2012 and 13 per cent in 2011. The SCC recorded that JV disputes made up 13 per cent of new cases in 2013. The ICC Arbitration Bulletin does not record JV disputes as such, but notes that 18 per cent of all cases initiated in 2013 arose out of construction and engineering projects, with another 13 per cent from the energy sector.5 These are industries in which JVs are common.
What sort of disputes arise in JVs?
Disputes can arise at almost any stage of the parties’ cooperation. They may be triggered as much by the project’s commercial failure as its success, which may give rise to disputes over profit sharing, for instance. Disputes vary considerably but they all have some contractual basis in the JVC, and often involve allegations of a failure to cooperate. Some disputes arise at the beginning of a collaboration, and others only after the parties have worked together for several years.
Disputes during the early phases of a JV
A JV may fail during the early stages. For example, the partners may be unable to agree on one or more essential conditions for completion under the joint venture agreement (JVA), such as the incorporation of the JVC or a business plan, or they might disagree over financial commitments that one or more of them should make to the JVC. In extreme cases, the JV will fail even before the JVA has been finalised and one party will accuse the other of having breached obligations to negotiate in good faith.
Mismanagement and failure to cooperate
More often, disputes arise over the management of the JV. The commercial failure of the project often exacerbates or creates tensions between parties. This happens especially in the case of the bankruptcy of a JVC or one of the JV partners, which in turn adds to the legal complexity of the dispute. Areas of dispute include the following related categories:
- disputes over corporate governance – these include disputes over the control of the JV generally and shareholder disputes in particular, for example, where one partner accuses the other of having abused its rights as a shareholder by blocking a decision for the benefit of the JVC;
- disputes over failures of cooperation – these are related to the previous category and include disputes resulting from the parties’ inability to work together. Such difficulties may be exacerbated by linguistic difficulties and differences in business culture;
- disputes arising from one partner’s alleged failure to commit sufficient resources to the JV, for example, providing staff with certain qualifications, and making necessary investment in the JVC. Sometimes a partner will go further in alleging that the other partner actually hindered the JVC;
- disputes resulting from parties’ recognition that a project was simply not viable, for example, because it proved impossible to develop a product for technical reasons. The parties may then turn on each other;
- allegations of fraud and dishonesty – for example, one partner may allege that the other was self-dealing or enriching itself at the expense of the JVC or its partners. In those cases a partner may seek a civil remedy, typically damages, from the other partner or partners; and
- misappropriation of proprietary information – this is a special but not unusual instance of the previous category. Often one partner will contribute know-how to the JV, such as expertise in the mass production of a technical product, only to find that the other partner has misappropriated the knowledge for its own (as opposed to the JVC’s) use.
Why arbitrate JV disputes?
A leading commentary sums up the main attractions of international arbitration as ‘neutrality’ and ‘enforcement’6 to which one might add procedural flexibility. International arbitration frequently offers the only viable neutral forum. Where, for example, a German party and an Indian party enter into a JVA relating to a project in two countries in Africa, it is unlikely that the parties will agree to refer disputes to the German or Indian courts or to the local courts of either African country. In contrast, by agreeing to refer disputes to arbitration in the JVA, the JV partners can appoint their own hand-picked arbitral tribunal and choose a seat of arbitration that is pro-arbitration in terms of the courts’ approach to supporting arbitral proceedings and setting aside awards.7
A well-drafted arbitration agreement will also deal with the practical issues, which can be as important as the applicable law or the seat, such as the number of arbitrators (usually three in a high-value contract) and sometimes their qualifications, the language of the arbitration and whether the arbitration is to be administered by an arbitral institution.
A party’s freedom to choose an arbitrator and to contribute to the selection of a chairman or presiding arbitrator is particularly valuable in JV disputes. A party will typically choose someone familiar with the relevant industry sector and applicable law, or experienced in working with the laws of different jurisdictions, as well as sympathetic to the commercial culture of the appointing party. The last point is important because many JV disputes involve a clash between business cultures, for example, different views as to the appropriate levels of formality, the creation of a paper trail, language barriers and the implementation of decisions.
In this respect, it is desirable to appoint an arbitrator who is comfortable working with numbers and accounting principles.
Another advantage of international commercial arbitration is the comparative ease of enforcement of awards under the New York Convention (to which 156 countries are signatories), which allows for enforcement to be refused in only a limited set of circumstances.8
Arbitral proceedings and the documents on the record are usually but not invariably confidential, but arbitral proceedings may still often offer a higher degree of confidentiality than state court proceedings.9 Sometimes information is particularly sensitive, for example, because it raises questions of competition law. An arbitral tribunal may then impose extra measures. For example, the circulation of a document may be limited to a group of named party representatives. Awards are frequently not published at all or only in redacted form, and the proceedings themselves are closed to the general public unless the parties agree otherwise, as in investment arbitration cases, for instance.
This is advantageous in JV disputes because the fallout from a failed collaboration is often delicate and partners will want to keep the details from their competitors and the business press, especially in projects that involve state-owned enterprises.
A number of jurisdictional difficulties may arise in JV disputes. These include the scope of the arbitration agreement and in particular whether it extends beyond the main contract to ancillary contracts, and to non-signatories such as different companies in a group of companies.
Sometimes a respondent will deny the arbitrability of a dispute. This may happen where contractual claims are linked to statutory claims or local law issues, such as insolvency. State entities often rely on statutory constraints under local law to evade accountability to their contractual partners.
Putting forward and defending a claim
As with any claim, claims in JV disputes must be formulated with a view to obtaining a particular remedy. A claimant must first decide what it wants to achieve in the arbitration. For example, if it wants to recover substantial damages, there is no point in bringing a claim that will lead only to a declaration or order for specific performance. Equally, an award for damages against an impecunious respondent may be of no value.
Legal bases of a claim
Typically, any claims will be formulated as claims for breach of the JVA in the first place, because the arbitration clause in the JVA will cover disputes arising out of and under that contract. The terms of the JVA, which may include addenda and additional agreements, will likely be central to the arbitration.
The JVA in turn, will be governed by the law of a particular jurisdiction, usually chosen by the parties, as discussed above. The law may include certain rights and remedies of stakeholders, prohibitions on self-dealing and rules of contractual interpretation. Such provisions also determine the parties’ relations and need to be considered in formulating claims.
On a second level of relations, a claimant may also need to take account of the JVC as distinct from the JVA. In JV arbitrations, the JVA is sometimes governed by the laws of Jurisdiction A, whereas the JVC may be incorporated in Jurisdiction B and thus be subject to the corporate law of Jurisdiction B. A claimant may then bring claims under the JVA but will have to consider the laws of Jurisdiction B in doing so. The need may arise where the claims touch on areas subject to local law, such as the tax liability or insolvency of the JVC. A claimant may also need to consider the law of Jurisdiction B in relation to the governance of the JVC and, for example, the status of decisions by the board or supervisory board or the directors’ personal responsibility for them.
JVAs seldom regulate the minutiae of how a JVC is to be run. Parties often do not know exactly how their relationship will evolve when they sign the JVA. They may rely on boilerplate terms and adopt loosely phrased obligations, for example, that the partners should cooperate to achieve particular ends or use best efforts. Often the precise meaning of unclear or confusing provisions is decisive. These may relate to the partners’ financial contributions to the JV and the effects of a termination provision. The governing law of the JVA may also offer tools to close gaps in the parties’ express agreement. However, a statutory obligation to act in good faith and an implied obligation to act reasonably are broad and abstract, yet the harm alleged by a claimant will be attributable to specific events. The challenge to a claimant is to bridge the gap between a general obligation and a specific breach that occurred in a particular case.
Putting forward claims
Claims always depend on facts specific to the particular circumstances of the JV. Where there are more than two parties to a JVA, the first question will be whom to sue. Often, therefore, the best approach is to develop a claim based on the facts of the case and what a party can realistically achieve. Quasi-academic discussion of general obligations is best avoided. An experienced arbitral tribunal will approach the case as a commercial dispute and will judge the parties’ cooperation in light of the facts of the case.
The following points might help a party in the presentation of its claims:
- State every breach clearly – this is basic but where an alleged breach involves a course of conduct by the respondent or point of local corporate law, the claim needs to be especially clear.
- Show the commercial impact of every breach – an arbitral tribunal will need to understand why, for example, a decision by a JV partner to block a project was economically detrimental.
- Avoid making trivial allegations – JVs in developing economies are not for the faint of heart and arbitrators expect parties to face occasional difficulties: a series of cancelled meetings and a ‘string-along’ attitude may not amount to a lack of good faith.
- Keep claims simple – a claimant should use the simplest available legal basis in order to obtain the desired remedy; in particular, allegations of fraud, dishonesty and bad faith should be approached with caution as they can be difficult to prove, especially when the alleged conduct can be easily explained by extraneous circumstances or lack of business foresight or acumen. In practice, an arbitral tribunal may be reluctant to find that a poor business decision amounts to a breach of a good faith or best efforts obligation.
Some of the tactics for bringing a claim against a JV partner can also be adapted to defending a claim. Again, clear factual arguments that justify actions on the basis of commercial considerations are likely to convince an arbitral tribunal.
The following tactics may also assist a respondent in defending possible arbitration claims:
- Shifting the blame on the claimant or other partners in the JV – a JV requires the cooperation of all the parties: they are all responsible for its success. A respondent accused of acting uncooperatively in the management of the JVC may be able to argue that the claimant was really at fault or that actions of another partner acting uncooperatively caused the loss or damage in question.
- Putting a claim in context – a respondent may be able to deflect blame by showing that wider changes in the market, industry sector or regulatory requirements in fact caused the JV to fail.
- Redefining obligations – as explained above, parties often describe their contractual obligations using general terms such as ‘best efforts’ and ‘cooperation’. Usually a claimant will define such terms broadly, but it may be open to a respondent to redefine them more restrictively, thus limiting the scope of its obligations.
- Blaming a third party – a respondent may try to excuse its conduct on the basis that it was required to act or not to act in a certain way by a third party. It may rely on the doctrine of force majeure. This line of argument is sometimes used by state-owned parties that argue that they were prevented from discharging an obligation to their JV partners by a government requirement.
JV arbitrations are frequently fact-heavy. In order to state their cases, JV partners may need to set out a history of cooperation spanning several years; industry standards and practices relating to the JV; and evidence of damage and loss.
Every JV arbitration is the story of a commercial collaboration. Independent of any technical legal arguments, a party’s story must be credible. It is a particular difficulty that JVs often last several years before an arbitration is started and the arbitration will concern multiple incidents. This makes JV arbitrations different from, for example, a simple sale of goods dispute.
It is often difficult to show that a party acted uncooperatively or failed to apply the required best efforts to achieve a certain goal over a sustained period. Such a course of conduct may need to be supported by a large of number of individually proven incidents that have a strong cumulative effect.
Generally, arbitrators value contemporaneous documentary evidence. This may include the minutes and agenda of meetings, formal resolutions, objections to a party’s conduct or reasoned responses to them. The failure of a party to record its position or respond to complaints at the time may count against it. Email correspondence sometimes poses problems because emails are on occasion written in a condensed, casual style that is hard to analyse years later. At the other extreme, letters that seem too deliberate and legalistic may appear defensive. Good record keeping is advantageous.
Witness testimony is a widely accepted feature of international arbitration and frequently invaluable in helping an arbitral tribunal to understand how decisions came to be taken at the time.
However, compiling evidence can be difficult. Company officers come and go, the witnesses may find it difficult to recount events that took place over several years, and there may be cultural reluctance to giving evidence. Still, for the most part, arbitrators find it useful to hear witnesses’ versions of events. Almost all cases involve questions of cooperation and reasonableness that will allow the arbitral tribunal a measure of appreciation. Witness evidence can be decisive to the outcome of the case. Credible witness evidence will give the arbitral tribunal a flavour of how the partners felt, worked together and viewed commercial challenges at the time. Poor, irrelevant witness evidence or a refusal to put forward key witnesses may be especially detrimental. For example, if the case concerned an accounting dispute, a party would usually do well to call its CFO or other senior financial officer.
Document production is often an indispensable procedural step in a JV arbitration as a party will often need to rely on evidence held by the other JV partner in order to discharge its own burden of proof or challenge the other party’s case.
Expert witnesses assist the arbitral tribunal by explaining complex facts, often of a technical nature, and providing their opinion on them. Although the distinction is sometimes blurred in practice, expert witnesses differ from fact witnesses in giving opinions rather than just describing facts. Sometimes a single expert is appointed by the arbitral tribunal; but the parties are often well-advised to appoint their own expert witnesses as they can better control the process.10 Although expert witnesses must be independent and impartial,11 they tend to support the position of the party that has appointed them.
Experts are invaluable in technically or scientifically complex cases or cases involving heavily regulated industries, such as the mining and pharmaceutical industries, and cases involving accounting or valuation disputes. However, parties should not overuse experts. The arbitrators will usually be senior commercial lawyers and may have knowledge of a particular industry sector. Parties should consider whether the arbitrators will benefit from expert evidence or can form an opinion about an issue for themselves.
Most often a claimant will seek to recover monetary damages for loss suffered as a result of the respondent’s breach of contract. The measure of damages will vary according to the governing law of the contract but the following heads of damages are commonly encountered:12
- Loss of future profits – a claimant may seek to recover the profits that it would have earned from the JV had its partner or partners properly performed their obligations; this involves a calculation of the future performance of the JVC if properly run.
- Loss of value of the JVC driven by a loss of a particular contract or concession, imposition of taxes or a failed transaction.
- Reputational harm – sometimes a claimant may consider that its reputation has suffered as a result of its association with a failed JV. This particularly arises where the inventor of a new technology has worked unsuccessfully with an industrial company on adapting a product for mass production. In practice, however, reputational harm is difficult to prove and quantify.
- Disgorgement damages – in cases of self-dealing or breach of obligations of trust and honesty a respondent may be liable to pay any illicit benefits or profits to the claimant party.
Whatever the damages claimed, parties should set out their claim convincingly, taking into account the legal and factual bases of their claims. Usually, the parties will appoint damages experts, especially where profit calculations or valuations are involved. A serious arbitral tribunal will only award damages if it is persuaded of a claimant’s entitlement. Claims should be sober and realistic. It may be useful to break them down in subsidiary and alternative claims so that, if a claimant prevails only on some issues, it will be easy for the arbitral tribunal to award it part of the damages.
Apart from claiming monetary damages, parties may be able to claim other remedies:
- declaratory relief – this may take many forms, including declarations that a particular decision was valid;
- specific performance – an order requiring a party to perform a contractual obligation, such as contribute to the capital of the JVC;
- orders for the sale or purchase of shares to give effect to call and put options;
- orders for the JVC to be wound up or sold; or
- orders for a trustee or mandataire ad hoc to be appointed to carry out a particular order – this may be appropriate where cooperation between the parties has broken down totally and the respondent will not carry out an order by the arbitral tribunal.
Interim relief or provisional measures
The leading national arbitration statutes and arbitral rules provide that arbitral tribunals can order interim relief or provisional measures. Typically, they confer a broad discretion to do so.13 Such relief may also be available from national courts. The criteria for granting interim relief vary, but it is usual in international commercial arbitration to do so where an applicant can show urgency, a threat of irreparable or very serious harm, ie, harm that cannot easily be compensated with a payment of damages, and a prima facie case on the merits and jurisdiction, and that the measures will not amount to a prejudgment of the case on the merits.14
Interim relief may be very important in JV disputes precisely because the fate of a company may well result in a loss that cannot be compensated with monetary damages, especially where the company faces a loss of good will or of established client relationships or risks confidential materials becoming public. Orders may be granted in the following cases:
- an order to preserve a pre-existing state or status quo ante for the duration of the arbitration – where the dispute turns on whether the parties must carry on a business, the order might require the respondent to do so;
- an injunction preventing the respondent from selling or dissipating assets pending a final decision by the arbitral tribunal as to the parties’ rights over the assets;
- an order requiring a party to keep certain information confidential; and
- in exceptional cases, an order requiring a party to stop or refrain from parallel proceedings in local courts.
The procedures of international arbitration are flexible and well-suited to resolving JV disputes. As so often in arbitration, that flexibility brings with it a challenge to parties, their counsel and arbitrators to adapt the procedures to the commercial and legal peculiarities of the case.
- Jörg Risse in ‘Disputes arising from joint venture agreements’ in Edward Poulton (Ed), Arbitration of M&A Transactions (London, 2014), page 370.
- Edward A Garner, Black’s Law Dictionary (2nd Pocket Ed) (St Paul, 2001), page 376. An earlier edition defined a joint venture as ‘a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit’ (Joseph R Nolan et al, Black’s Law Dictionary, West Publishing Co (St Paul, 1990), page 839).
- Edgar Herzfeld, Joint Ventures, 2nd edition (London, 1989), page 4.
- Swiss Chambers’ Arbitration Institution, for instance, reported that during the 10-year existence of the institution only 1 per cent of its cases stemmed from JVs. However, at the same time, it reported that other cases that may include a JV element (such as cases from construction, shareholders’ agreements and IP disputes) total 12 per cent. See www.swissarbitration.org/sa/download/statistics_2014.pdf (accessed 11 December 2015).
- ICC International Court of Arbitration Bulletin, Vol 25 (2014), page 14.
- Nigel Blackaby and Constantine Partasides with Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, 5th edition (Oxford, 2009), page 31.
- For example, the ICC Bulletin referenced above cites Paris, London and Geneva as being the most popular choices of its users in 2013, and this has been confirmed by the International Arbitration Survey of 2015 by the Queen Mary University and White & Case, with 19 per cent of respondents mentioning at least one Swiss city as their preferred choice of seat, indicating the popularity of Switzerland: www.arbitration.qmul.ac.uk/docs/164761.pdf (accessed 11 December 2015).
- See www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html (accessed 11 December 2015).
- For a discussion of the legal issues see, for example, Jean-François Poudret and Sébastien Besson, Comparative Law of International Arbitration, 2nd edition (London, 2007), pages 315 to 321.
- On the differences between civil and common law approaches to expert witnesses, see, for example, Wolfgang Peter, ‘Some Practical Thoughts about Expert Witnesses and Tribunal-Appointed Experts’ in L’éclectique juridique - Recueil d’articles en l’honneur de Jacques Python (Zurich, 2011), pages 303 to 312; Bernhard Berger and Franz Kellerhals, International and Domestic Arbitration in Switzerland, 2nd edition (London, 2010), pages 350 to 353.
- The notion of the independence of experts is enshrined in articles 5.2 and 6.2 of the IBA Rules on the Taking of Evidence in International Arbitration (2010 edition).
- See generally, Yves Derains and Richard H Kreindler, ‘Evaluation of Damages in International Arbitration’, ICC Publication No. 668 (Paris, 2006).
- For example, article 26 of the Swiss Rules (2012 edition) provides inter alia: ‘At the request of a party, the arbitral tribunal may grant any interim measures it deems necessary or appropriate.’ Article 28 of the ICC Rules (2012 edition) empowers an arbitral tribunal to ‘at the request of a party, order any interim or conservatory measure it deems appropriate’ unless the parties have deemed otherwise. Article 25 of the LCIA Rules (2014 edition) and article 26 of the SIAC Rules (2013 edition) also give arbitral tribunals broad powers to order interim measures.
- For a discussion, see Gary Born, International Commercial Arbitration, 2nd edition (Alphen aan den Rijn, 2014), pages 2468 to 2483.
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