September, 2016 - Parry Field Lawyers

It was great to participate in the Canterbury Tech Summit this year. The overarching theme was about disruption and how it will impact work in the future. We had a booth and had a good flow of people visiting and chatting about this topic and others. Our interest in this area is how digital disruption will impact on lawyers and how we work in the future. The event was sold out with around 650 people in attendance including a surprise visit from the Prime Minister who gave a speech about the IT industry in New Zealand and shared his thoughts on the future.

We noticed that from several different speakers there was a real message about “listening to your customer” when working out where your business was going. That fit well with our theme of “hacking your service provider” which was really a message about what you can expect from service providers and how to get the most out of them in light of new technology and digital disruption.

At the end of the talk we wondered if there would be many questions and there were – always a good sign! We enjoyed the discussion with people about topics like AI and how that will affect professionals as well as how lawyers will deal with new technology that pushes the boundaries of existing laws. Our overall message was that disruption can actually improve the customer experience with professional services firms. You should be challenging your service provider to explain how they will use the new ways of doing things to provider a more improved and efficient service to you.

For more on this topic see the following article that we wrote which outlines our views on this subject: http://innovate.parryfield.com/2016/09/13/digital-disruption-new-law/

We had been unsure what to expect from the Tech Summit but reflecting on the event it was a great opportunity to connect with others in the same sector and to chat to them about what they are doing.

Introduction

When considering entering into a joint venture arrangement in New Zealand with another party it is important to be aware of potential issues before they even raise their head and become problems. This article describes some of the key points to watch out for if you are considering a joint venture in New Zealand. It can also serve as a good reminder of a checklist of points to consider to review the health of your joint venture if you are already in one.

1. Valuing different contributions

It can be hard to value what each party brings to the table. Typically a joint venture will be entered into because each party has recognized that the other one is able to bring some unique skill or background to a proposed business. Often for one party this may simply be the ability to provide capital such as finance or land while the other party has a certain expertise. Alternatively, two companies who are generally competitors may decide that working together will help them to scale up and achieve more.

Either way the key point is not to undervalue what you bring to the joint venture. If the other party has an ingenious idea but no financing and you can unlock capital for their idea to grow, then you hold significant bargaining power. Equally if you are the one with the industry expertise and knowledge then you should not sell yourself short in negotiations with a financier. We have seen this from both sides and often wondered why one party wasn’t more highly valuing what they bring to the table. Sometimes there is a tendency to value tangible contributions over the intangible ones, which may not always be appropriate. So, in each case hold out for as much equity and participation in the joint venture as you can.

2. Form of joint venture

Most commonly we would see a new company formed under the Companies Act 1993, which has two shareholders. That way the new entity will be a standalone venture separate from each of them. Typically it will have its own set of advisors and employ its own staff (although one party may second certain individuals in to assist). Profits will be returned as dividends to the shareholders.

However, that is not the only option. Alternatively there could simply be a joint venture agreement between two parties which sets out how they will work together. This is called an unincorporated joint venture. There is no separate legal personality of the joint venture so it cannot contract on its own with third parties. This model may be used for financing, tax or accounting reasons.

Another possible structure is a Limited Partnership under the Limited Partnership Act 2008. This structure may be particularly attractive when one of the parties is an overseas entity because tax liability sits at the level of the partners rather than in the corporate structure. Also the details of the limited partners are less publicly available.

It pays to work through the possible structures well in advance so you know what you want to propose to the other side.

3. Ownership shares and deadlock

You may think that an equal sharing in ownership is fair and that is usually correct. However, the danger of an equal split is that decisions can get stalled if the parties cannot agree and so deadlock can result. This can have a negative impact on the profits and reputation of the joint venture. There are some ways to deal with a situation of deadlock though which are outlined in the next point.

4. Overcoming deadlock

A deadlock situation can be fatal to a joint venture. This is especially so when the shareholding is the same and there are also an equal number of directors appointed by each party. One way to deal with this is to have a rotating chairman who has the casting vote. Also, there can be a list of really key issues which are reserved as decisions for the shareholders rather than directors. All joint venture arrangements should have clear disputes resolution procedures, including, where appropriate the ability to refer matters to independent experts or umpires.

5. “Service” arrangements and extraction of value

Commonly we see that one party is the expert in the subject matter of the joint venture and so they often end up contracting to provide services to the joint venture. That is fine, but the other party should closely look at those agreements and build in clauses that ensure these will be “arms’ length” arrangements. If one party is an overseas entity they may be relying on their local partner to provide a lot of the “on the ground” work. They may not realise that the same local partner is extracting a lot of value from the arrangement with the company through charging of high consultancy services, management fees or other arrangements.

6. Exiting the joint venture

There should be a clear pathway for getting out of the joint venture. For example, if one party wants to exit they may have to first offer their shares to the other party before they can they sell to a third party. Such pre-emption rights can be included in the joint venture agreement.

What if one party wants to exit and the other party does as well? This can be built in as “tag along” rights so that the party who is selling their shares to a third party may need to allow the other party to join in that sale. Other typical rights could include “drag along” rights where a party is able to force their joint venture partner to also sell their shares to a third party. All of these options need to be considered and worked through at the start of the joint venture.

7. Other points to consider when setting up a joint venture

The following issues should also be considered at the beginning:

capital and funding obligations going forward;
scope of the JV company;
will it be permissible for the shareholders to enter into other joint ventures or initiatives that may compete with this joint venture?;
business plan and budgets;
management and who will lead the joint venture;
ownership of land;
circumstances that may trigger termination;
tax implications;
minority protection rights;
information flow to parent companies;
marketing arrangements;
powers of veto;
will there be parent company guarantees;
confirm no competition law issues; and
if a foreign company is involved, whether Overseas Investment Office (OIO) approvals needed.

8. No one situation …

… is like the other. Many joint ventures can have more than two parties, with variable negotiating power, parties with different skills, land or finance available. It is important to tailor the documentation to the situation.

We have experience in setting up joint ventures and providing advice about different situations and would be happy to discuss your circumstances.

Any construction or building project will involve a number of people to make it a success. These could include architects, engineers, surveyors, contractors and landscapers. It is important to get the early engagement right on a project and this will generally take the form of a consultancy agreement.

The legal arrangement could be directly between the person who wants to develop the project or they could appoint someone who then engages with the different consultants. Duties will be owed by those consultants to the client and that is why the consultancy agreement is critical because that is where these duties will mainly (but not exclusively) be set out (duties are also inferred by statue and common law).

Generally standard form consultant agreements are drafted by bodies that will be looking out for their member base. Examples are the Institute of Professional Engineers of New Zealand and the New Zealand Institute of Architects. Such documents need to be checked closely and the exclusions and limitations analysed thoroughly to check what they say eg that limits of liability are not set too low.

Key issues for Consultancy Agreements

Some of the key issues to be considering when looking at a consultancy agreement are:

Standard of care: The standard of care in the consultancy agreement will generally be based on market practice. An example of this is in the Conditions of Contract for Consultancy Services 2009 (published by the Institute of Professional Engineers New Zealand Inc.) which says:

In providing the Services, the Consultant must use the degree of skill, care and diligence reasonably expected of a professional consultant providing services similar to the Services.

Scope of services: the services to be provided should be within the expertise of the consultant. When drafting the contract it is important to check if there is a gap between what the consultant is to do (to the standard of care mentioned above) and what others in the project will do. Clear discussions over who exactly does what is very important at the early stage.

Design warranties: These should be included where the design risk is high – eg bespoke buildings. Design warranties may help focus the parties on the key risks and ensure the contractor stands behind it’s work. It may be that a discussion is also needed with the contractor about what insurance it has in place (or needs to take out) so that there is insurance if a design warranty is breached.

Indemnity: These are often the subject of much discussion because a consultant will not want to give indemnities. They are a potential liability where the consultant will have to pay if something in particular happens – and continue to pay where there is ongoing loss. It is important to be clear about what exactly will trigger an indemnity, who it will cover and how much the indemnity will be for. There are a variety of indemnities which may be used and those should be discussed with your lawyer in advance to find the best combination that works in the particular situation.

Limitation of liability and exclusion clauses: These are commonly included and essentially involve one party trying to get out of, or limit, it’s liability. Wording used should be clear, particularly if trying to exclude “consequential” losses. For example, “consequential” may not include loss of profit which may be considered a direct loss. So the wording used will be critical and should be clear.

Insurance: Consultants may try to have their liability linked to their ability to recover funds under an insurance policy. However, that means there is an extra step involved and it may even be possible that the insurance does not respond because it has not yet been triggered by an actual legal liability. The insurance position of the consultant should be clearly understood.

Construction Contract Act: From 1 September 2016 the definition of “construction work” has been expanded and applies to many consultancy agreements eg design, engineering and quantity surveying. This means that certain provisions will be included in Consultancy Agreements eg default provisions relating to payment.

Other issues: Other practical points to be covered in a consultancy agreement are (very briefly):

Key people: specify if a particular person is to be involved;
Price and payments: how much is paid and when? This may involve setting out milestone and deliverables and a design program;
IP: who owns what?;
Novation: ability to novate or assign eg if you later want to novate to a contractor;
Variations: how will these be requested and priced?;
Disputes: how will these be handled?;
Reporting: What reports are required and when?;
Health and safety: Who is responsible for what and who is a PCBU?;
Sub contracting: To what extent will this be done, and who is responsible for this?;
and Termination: Ability to terminate and what happens then?

In New Zealand consultants will often put forward a set of the industry standard terms and say “this is non-negotiable” – or words to that effect. These agreements are often signed before a lawyer is even involved. This is in contrast to the situation overseas where consultancy agreements are often drafted for particular projects to address the unique set of circumstances of an individual situation.

We hope these comments help you as you think through the content of your consultancy agreement. We would be happy to discuss your specific situation in detail with you.

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