Qatar is one of the economic hotspots of the Middle East and is continuously building world-class infrastructure to support its expanding economy.
According to the Second Global Infrastructure Index 2014, Qatar is the second most attractive market in infrastructure investment. A number of mega-projects worth billions of dollars have been launched recently, including Qatar Rail, Lusail City, Entertainment City, the Qatar-Bahrain Causeway and a number of world-class football stadiums. In order to produce state-of-the-art infrastructure, each project requires significant expertise. Local companies often enter into international joint ventures with foreign companies to ensure that the required expertise is available. However, studies have shown that 43% of joint ventures end up in disputes before completion of the project. From a legal perspective, it is advisable to understand how joint ventures work and how to prevent disputes.
Cross-border joint ventures are common in many countries, particularly growing economies. Some jurisdictions require joint ventures to be registered and incorporated, while other jurisdictions have no such requirement and joint ventures can operate without formal incorporation.
In Qatar, joint ventures are governed by the Commercial Companies Law (11/2015), particularly Articles 53 to 61. According to Article 53, joint ventures need not necessarily be registered and incorporated. Unincorporated joint ventures can operate within the state once they comply with relevant laws and regulations.
Parties operate through unincorporated joint ventures for various reasons. One such reason is to avoid the burden of compliance with the Commercial Companies Law and other laws and regulations in order to operate in a hassle-free manner. Another reason is to avoid incorporation costs.
The incorporation process can be time consuming, particularly if the business activities require approval from ministries other than the Ministry of Economy and Commerce. Therefore, when parties wish to begin their operations urgently, they should choose to operate through unincorporated joint ventures to save time. Additionally, unincorporated joint ventures provide parties with the ?exibility to manage their a?airs as per their mutual agreement, as there are no particular requirements regarding the management of unincorporated joint ventures.
On the other hand, some parties choose to formally incorporate their joint ventures – for example, to limit their liability or to create a set-up for a long-term business. In case of formal incorporation, the best choice regarding the form of the legal entity is a limited liability company, where liability is limited to the percentage of shares held by each party. Among other available options, a private joint stock company can also be useful to limit the liability of the parties and to attract more investors.
Parties usually enter into joint ventures in order to participate in bids and win tenders on various mega-projects. Some tenders require joint venture companies to be incorporated before the submission of bids, while others require undertakings from parties to formally incorporate a joint venture company if the tender is awarded to them.
On the other hand, some tenders merely require a formal joint venture agreement and do not require parties to incorporate their joint ventures at all. Therefore, it is important to draft a joint venture agreement in line with the requirements of the tender and main contract.
It is always important to draft the joint venture agreement with due care and attention in order to make it a comprehensive, unambiguous and foolproof document to govern the relationship between parties. For unincorporated joint ventures, a comprehensive joint venture agreement has more weight, as the provisions of the law regarding unincorporated joint ventures are not detailed.
Clear division of responsibilities
The joint venture agreement should clearly divide responsibilities among the parties with respect to the project undertaken. In most cases, the scope of work is broad and detailed; the parties therefore tend to mention only the main responsibilities in the agreement.
However, this practice can prove detrimental due to a lack of clarity regarding responsibilities and can result in disputes which may delay completion of the projects and can open doors to liabilities.
This can be prevented by adding a schedule detailing the scope of work for each party. It may be helpful if the schedule also mentions the date of completion of each aspect of the work; however, such dates should be reasonable and practicable.
Normally, in case of incorporated joint ventures, issues relating to management are governed by the relevant provisions of the law, which lay down broad guidelines relating to the management of companies. However, the details regarding management and control are set out by the parties in the joint venture agreement and articles of association.
In case of an unincorporated joint venture, the law is silent on its management, which gives the parties ?exibility to agree on any arrangement to manage the a?airs of the joint venture. Joint venture partners usually appoint a board of directors and managers who are entrusted to decide on the management of day-to-day company a?airs.
The right to appoint directors usually depends on the contribution of each party to the share capital of the joint venture company. However, the parties are free to agree on voting rights. It is advisable to reserve certain key decisions for the unanimous approval of the joint venture partners. Under Article 60 of the Commercial Companies Law, an unincorporated joint venture company must take all of its decisions by unanimous vote of the joint venture partners. However, the parties are free to agree on a di?erent decision-making scheme in their joint venture agreement.
It is important to have a clear understanding of what constitutes pro?t and how it should be distributed among the joint venture partners.
Before agreeing on any scheme of distribution of pro?ts, the parties must consider issues such as:
- interest payable to lenders;
- compensation to contractors;
- compensation to joint venture employees; and
- statutory reserve requirements, in case of incorporated joint ventures.
In a joint venture, each partner relies heavily on the role and expertise of the other partners. The failure of any partner to ful?l its obligations can cause delays in completion of the works, which can result in various degrees of liability. However, in unincorporated joint ventures, an aggrieved third party can claim directly from the defaulting joint venture partner.
Under Article 57 of the Commercial Companies Law, a third party can have a recourse against the whole joint venture company if its existence is revealed by any means to such third parties while transacting with them. It is therefore advisable to address liability by incorporating the necessary provisions in the joint venture agreement.
The other precaution to prevent liability is to conduct proper due diligence on a partner before entering into a joint venture to ensure its capacity to perform.
A joint venture agreement should clearly state the events that trigger the exit of partners from the joint venture. Lack of clarity on exit issues can cause delays in completion of projects, meaning that joint venture partners may be liable to pay compensation. The events triggering an exit are usually non-recti?able defaults committed by a joint venture partner.
A proper exit policy should be established in order to avoid any delays in the execution of works undertaken by the joint venture. The exit policy should include options such as replacement of the defaulting partner or the buy-out of the defaulting partner's shares by the remaining partners.
It is advisable to agree beforehand on the buy-out price; otherwise, the exit policy may not serve its purpose and could result in deadlock.
There are numerous opportunities in cross-border joint ventures between companies in order to participate in ongoing and future mega-projects in Qatar. However, in order to maximise the prospect of a successful joint venture and minimise the risk of a dispute, it is advisable to seek legal advice and draft a proper and comprehensive joint venture agreement before undertaking any project.
For further information on this topic please contact Rashid Al Saad at Sharq Law Firm by telephone (+974 4444 2230) or email (email@example.com). The Sharq Law Firm website can be accessed at www.sharqlawfirm.com.
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