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  • Writer's pictureIRALR


Updated: May 2, 2021

Source : TNNG

This article has been authored by Himanshu Chandel, a third year law student at Campus Law Centre, Delhi.


COVID-19 has fundamentally changed the economic and operating landscape for businesses across the globe and Joint Ventures (“JVs”) have certainly been engulfed in the economic uncertainty. The pandemic has left very little or no scope for operation and adherence to prior agreed terms and arrangements for a lot of JVs. JV partners are fancying to cause their JVs to implement force majeure clauses in the JV agreement, eject assets of less significance, exercise termination rights and postpone expenses and investment. Recourse is also being considered to more radical steps in few cases such as to liquidation of the JV or to completely abort existing distribution and supply chains and other related party commercial agreements with their JVs. Innovative, strategic steps will be needed in order to maintain and honour the contractual arrangements agreed between the contracting parties to a JV, and allow them to re-focus on the long-term gains of these arrangements.

JVs are in itself a unique strategic partnership with two or more stakeholders coming together to provide the capital, the goods and services, or both, to form a jointly controlled commercial project. It applies to contractual and entity strategic alliances, including all sorts of arrangements that constitute strategic combinations or agreements between businesses or individuals. JV activity is highest in the recovery period following a major economic downturn. JVs are considered to be feasible and operable options as compared to Mergers and Acquisition (M&A) in times of economic uncertainty. Formation of new JVs particularly increases when the economy is not sound and recovering from a major setback as there are constraints surrounding capital requirements and investments in even moderate risky projects are avoided. The Coronavirus pandemic has taken a toll on the unique structures of JVs and particularly considering that the premise of “JVs are usually better off than most businesses in a major economic downturn” has failed this time, the situation is undeniably completely state of the art. The setting requires a careful grip on handling the circumstances to prevent uncontrollable deadlocks in decision making which can lead to severe issues of loss and financial instability, defaults and even voluntary liquidation or insolvency.

A unanimous approval by the partners of JV is required when principal and cardinal operational decisions are made. These decisions are usually related to capital investments and expenditures, budgets, debt and equity financing, material contract arrangements, related party transactions, operating plans, exit strategy, Executive management appointments and dissolution and liquidation of the JV. These are usually drafted as “reserved matters” in the JV agreement which is negotiated in advance among the JV partners.

Funding Additional Capital

The present scenario has forced businesses into a liquidity crunch and JVs have not been any exception. The sources of revenue have been shriveled with an added burden of rising operational expenses. In this new reality, parties to a JV will need to revisit the “reserved matter” provisions that form parts of the larger agreements that govern the JV. A business requires funds to pursue its operations and additional capital requirements have to be pooled in as and when the business requires. JV agreements usually provides for provisions related to mandatory or voluntary capital contributions. In case of a mandatory capital requirement, JV Partners can be called upon to fund business operations. Governance structures are tinkered with in case where one JV partner refuses or is unable to contribute capital to the business. The consequences of such refusal are usually laid out in the JV agreement. When a partner comes forward for a call for funding for business to fulfill its operational costs, then he may require revisions to the governance structure such as diminished operational roles for the non-funding partner or their affiliates, limited decision making and representation in the board and certain decisions that may deem fit to the circumstances might be taken. Non-funding partners are likely to restrain in agreeing to complete overhauls of heavily negotiated governance structures particularly with respect to participation in reserved matters which are truly fundamental in nature. Therefore a uniform and calculated strategy should be adapted in the beginning to deal with the possibility of such unmerited state of affairs. The partners should come together and increase their overall working capital borrowing capacity and draw down on their revolving loans in order to help alleviate these short-term liquidity concerns.

JV Agreements typically include one or more specific remedies to encourage each partner to fund its additional capital obligations. These usually include Partner Loan to the JV or Non-Funding Partner, Preferred Equity Contribution, Dilution of stake of Non funding partners, Removal and Promote Loss, Clawback on Fees, Personal Guarantees and other specific rights and remedies depending on the nature of the business or project undertaken. Some JV Agreements specifically waive a funding partner's general rights and remedies available to such partner at law and in equity, and limit a partner's ability to sue a non-funding partner for damages. If these rights and remedies are not specifically waived, the funding partner may elect to bring an action against the non-funding partner for a breach of contract claim.

Partners who are in a sound financial position to provide funds should necessarily do so without trying to exploit the situation. They can provide debt financing to the JV, the repayment of which can be kept on priority. In that way, the non funding partners will not to be prone to dilution of their stake in the JV. Taking a recourse to this will avoid any immediate economic loss to the non funding partner. In case a funding partner provides much needed capital to the JV then the same should not be provided at a higher rate. Remedies such as clawback on fees which allows the funding partners to clawback fees previously paid to a non funding partner should be used over enforcing personal guarantees which can trigger personal liability of a non funding partner. In case the funding partners are adamant on diluting the stake of a non-funding partner then arguments for force majeure or other equitable arguments under general law and other repercussions should be utilized.

During such unprecedented times, it will be advantageous to the JV and its partners to come together and seek third-party debt and/or equity financing to avoid the risk associated with making further contributions to the JV. Raising external debt is primarily a part of a reserved clause under the JV agreement and therefore would require approval of all the Partners. There begins certain limitations with raising external debt such as increase in Liabilities and other obligations on a JV partner which can lead to further deterioration of the JV if not addressed. The lenders might seek additional security and the capital structure of the JV is prone to change. Law of frustration may be made applicable, as available under Section 56 of the Indian Contract Act 1872 in cases where a JV does not provide for provisions related to rights and duties of partners which cannot be fulfilled in the present circumstances. The concept of "frustration" under Indian excuses a party from performance of its obligations. A critical area of focus will be access to funding in an emergency situation. The deciding factor would be the extent of the parties and ability to contribute.


The pandemic requires the JVs to take swift action in relation to the operational decisions which is something that the JVs are struggling with. These decisions are usually under the umbrella of reserved matters and therefore require approval of all partners. The operations of the business are conducted in accordance with the business plan approved by all the partners. JV partners may not be able to agree on major decisions for their JVs, and the situation gets even more complex when the partners to a JV have equal stake which will make them most vulnerable to deadlocks in decision making resulting in deterioration of the position of the JV due to the pandemic. Deadlock in any JV is a tough spot – it can trigger a slippery slope of increasingly more drastic and sometimes unforeseen outcomes for the JV partners.

JV agreements do provide mechanisms to tackle the issue of a deadlock. It often includes a “status quo” provision that requires the JV partners to maintain the operational status quo and continue to run the business consistent with past practice if deadlock arises. A coherent clause in the JV agreement such as this is valuable under normal circumstances, as it gives a one way solution and predetermines a path forward for the business. Maintaining the status quo may not, however, be in any JV partner’s best interest and doing so may, in fact, be financially or operationally devastating in the current economic environment.

Another popular form of a resolution in case of a deadlock is non-binding mediation or binding arbitration by third parties. This form of resolution process is also usually mentioned beforehand in a JV agreement. Dispute resolution method such as mediation and conciliation offers dexterity and offers swift and timely resolution which is the need of the hour in light of disruption caused due to COVID-19 and therefore this forum requires careful consideration. Less often JV agreements will mandate a buy-sell process if deadlock can’t be timely resolved by the partners which involves valuation mechanisms. Valuation has dipped to new lows due to the COVID-19 pandemic and as valuation mechanisms rely on historical financial results, a true valuation would not be represented.

If stalemate among JV partners persists and contractual resolutions are not available or palatable, then cash-rich JV partners may see this as an opportunity to potentially acquire a JV when the value of shares and assets have plummeted. In Contrast to a typical M&A transaction, a JV partner having the know how’s of the business can buy out the JV without needing a thorough diligence and value discovery process. The economic impact of COVID-19 may permit them to do so at bargain prices.

Provisions such as and related to Force Majeure will cover a wide range of circumstances than before and parties to the JVs will have to be diligent in including specific circumstances under a force majeure clause in the JV agreement. There is now no excuse for leaving such matters to chance.

Exit Provisions

Building a consensus on exit routes, termination clauses and the consequences of such termination will be challenging due to the COVID-19 pandemic and will involve careful negotiation while setting up a JV or in case the parties to an existing JV decide on reevaluating such clauses. Evaluation of partner obligation relating to any guarantees or security/collateral provided, funding commitments, existing loan arrangements, licenses and other intellectual property related issues which may continue to exist after the exit will become part of key considerations. The parties will weigh the viability of maintaining such obligations against any dilution in stake or liabilities that might occur in the event of failure to oblige by such obligations. All the partners will have to be diligent and focused to have a clear exit strategy in place from the very beginning of the collaboration. One of the preferable exit strategy is sale of assets to one of the partners. A joint venture must have a clear definition of scope that permits and defines partners’ freedom to compete outside that scope and equally prevents any competition within.


The COVID-19 pandemic is requiring JVs to navigate revised budgets, new operational structures, and potential deadlocks in decision making. As proved in the past to be an alternative to Mergers and Acquisitions during an economic slowdown and periods of uncertainty, JV activity is expected to increase which would also invite the unique complications with it. JVs will have to rapidly adjust and redesign themselves to such complications such liquidity crunch, disruption in supply chains, contract and employment issues. Maintaining a balance between fulfillment of contractual obligations and managing unanticipated risks will remain key. Parties to existing joint ventures will have to facilitate these changes and negotiate a way out which looks most viable. Swift decision making and resolving deadlocks should be the primary focus and priority for them. For new JVs which is going through the stage of negotiation of the JV agreement and for parties who wish to form a JV, and in the light of COVID-19, priority should be designated to governance structures, dispute resolution and incorporating force majeure clauses. Overtly legal arrangements rarely work. Aspects of governance need to be addressed. Investing time up front in the JV’s guiding principles will be time well spent.

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