Construction Law - September 2005

International Joint Ventures With Local Partners

Texas construction companies have been operating outside the U.S. for decades. In recent years, however, there has been increased pressure to form joint ventures with local companies for a number of projects. These pressures have come about for numerous reasons such as transfer-of-technology rules, local-content requirements and plain-and-simple politics. It is easy to ignore important considerations in the rush to put together a joint venture for foreign work.

While this article is about joint ventures, contractors should also consider other types of entities such as a partnership, a limited-liability company or a consortium. A consortium might be advisable where the parties have distinct scopes of work. For example, the Texas contractor might have design and non-local procurement responsibility while the local contractor might be responsible for onsite construction and purchasing. Importation of foreign items is often done by the local company. As noted below, no matter what type of entity is picked, there should always be a rather painless exit strategy if the bid is not successful.

Joint ventures typically have four aspects: bidding of the project, performance of the work, closing out the job and a general set of terms applicable to the entire venture. If a Texas company has done its homework and is interested in forming a joint venture, what follows are some points to consider. Although circumstances will of course vary, the key assumption here is that the two parties are both highly interested in winning and successfully bidding the project.

Bidding Absent some dire circumstances, neither party should be able to terminate its obligations, and the relationship should be exclusive for the project. The joint venture at this stage will be required to share a lot of data; mutual secrecy undertakings are appropriate. Another vital item is costs, i.e., should each party bear its own costs, or should there be a method whereby the joint venture pays each of them for work performed on the bid© The parties will likely wish to take exceptions or make clarifications to the Invitation to bid, and these comments can include technical, commercial or contractual matters. Also, bonding and terms of payment must be considered. Both parties should agree to the contents of the bid prior to its submittal. If the project is awarded to a competitor, the venture would then terminate.

Performance of Work The agreement between the parties should, at a minimum, have guidelines concerning each party's scope of work. The more specific details can be agreed upon award of the project.. Typically, each party has personnel in the other's offices for the duration of the project. Non-local purchasing can be done by a task force with each party's representatives or by the Texas company. As a general rule, local purchasing is done by the local company while subcontracting is effected by a group consisting of personnel from each company. Even on lump-sum projects each party is paid on a rate basis for the work it performs. Bank accounts invariably require two signatures, one from each party, and there are usually two or more accounts, one for local currency and one in U.S. dollars. The distribution of funds received from the owner is usually limited to creditors and the parties for work performed until the end of the project, at which time a distribution of profits is hopefully made.

Also, during the work, insurance, accounting and tax matters should be handled with care. Some tax matters or issues will remain long after the work is complete. The parties generally must agree upon change orders or claims before they are submitted to the owner.

Closing Out the Project As noted above, there will hopefully be a distribution of profits at the end of the project. In fact, the parties can make interim distributions during the work if they so desire. Of course, if there is a shortfall of cash, the parties will "call" each other to meet the situation. And the possibility of default should not be taken lightly. Notice provisions plus the opportunity to cure should be carefully reviewed before signing the joint-venture agreement. One scenario is replacing a defaulting party with a competitor, especially if there is one available.

General Terms In a joint venture, perhaps the most important element of the agreement is management and decision-making. Usually, this is done in a two-party venture by mutual agreement and escalation in each company if the representatives are unable to agree at a certain level. It should be in the interests of both parties to reach unanimity. Also, lines of authority within the joint venture should be clearly set forth, including purchasing authority and management of the work itself. Another important point, especially for U.S. companies, is to specifically mention the Foreign Corrupt Practices Act and all other applicable laws in a compliance section. Finally, dispute resolution is typically by arbitration in a neutral country such as England or Switzerland; the applicable law for the agreement and arbitration should be English because it is neutral and because common-law jurisdictions are better choices for commercial dispute resolution.

Of course, good local advice is paramount to projects of this nature. Generally, the Texas contractor should conduct a survey of local laws and ask questions including: Will a clause in a subcontract that calls for payment to the sub upon receipt of payment from the owner be enforceable© What about foreign-exchange laws© Are there regulations regarding the movement of dollars© Should the contractors use "dual contracts" with the owner, one for the in-country work and a separate one for the foreign work© Other than the Foreign Corrupt Practices Act, which U.S. laws are applicable© Can labor be easily brought into the country for the project (both supervisory as well as craft personnel)© Are there risks of kidnapping, sabotage or terrorism©

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