Qatar is one of the economic hotspots in the Middle East and is constantly building a world class infrastructure to support its expanding economy. As per the Second Global Infrastructure Index (2014) Qatar is the second most attractive market in the world of investment in infrastructure. A number of mega projects worth billions of dollars have been launched in the recent past including Qatar Rail, Lusail City, Entertainment City, Qatar-Bahrain Causeway and a number of world class football stadiums. In order to achieve a state of art infrastructure, each project requires the highest standards of expertise. As such a number of local companies enter into international joint ventures with foreign companies to ensure the availability of required expertise. However, studies have shown that 43% of joint ventures end up in disputes before the completion of the project for various reasons. Keeping this in view, it is very important to understand the working of joint ventures from a Qatari legal perspective and the ways to prevent such disputes.
Joint Ventures under Qatari Law: Cross border joint ventures are common across various countries and in particular the growing economies. Some jurisdictions require joint ventures to be registered and incorporated while the other have no such requirement and joint ventures can operate without being formally incorporated. In the State of Qatar, joint ventures are governed by the provisions of Law No 11 of 2015 (The Commercial Companies Law) and in particular by Article 53 to Article 61. Within the meaning of Article 53, joint ventures are not necessarily require to be registered and incorporated. Unincorporated joint ventures can operate within the state till they comply with relevant laws and regulations.
Choice of Legal Entity: The parties may choose to operate through an unincorporated joint venture for various reasons. One of the main reasons is to avoid the burden of compliance with requirements of Commercial Companies Law and other laws and regulations in order of operate in a hassle free manner. The other reason is to cut down the cost of incorporation. At times, incorporation process may be time consuming particularly if the business activity requires approvals from other ministries in addition to the Ministry of Economy and Commerce. Therefore, where the parties wish to start their operations on urgent basis, they choose to operate through unincorporated joint ventures in order to save time. Additionally, unincorporated joint ventures provide parties the flexibility to manage their affairs as per their mutual agreement as there are not particular requirements in respect of the management of unincorporated joint ventures as per the Commercial Companies Law.
On the other hand, some parties choose to formally incorporate their joint ventures for various reasons like limiting their liability or to create a setup for a long term business in the country. In case of formal incorporation, the best choice regarding the form of the legal entity is a limited liability company where the liability is limited up 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.
Participation in Tenders: In the State of Qatar, parties usually enter into joint ventures in order to participate in bids and win tenders on various mega-projects. Some tenders required the joint venture companies to be incorporated before the submission of bids while some tenders require undertakings from parties to formally incorporate a joint venture company if the tender is awarded to the venturing parties. On the other hand, a number of tenders just require a formal joint venture agreement and do not require the 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 the main contract.
Areas of Focus: Whether the parties choose an incorporated or an unincorporated joint venture, it is always important to draft the joint venture agreement with due care and caution in order to make it a comprehensive, unambiguous and fool proof document to govern the relationship between the parties. In case of unincorporated joint ventures, the need of a comprehensive joint venture agreement gains more weight as the provisions of the Commercial Companies Law regarding unincorporated joint ventures are not very detailed. While drafting a joint venture agreement, the following areas should receive a primary focus:
- Clear Division of Responsibilities: The Joint Venture Agreement should clearly divide the responsibilities among the parties with respect to the project undertaken. In most of the cases, the scope of work is very broad and detailed therefore the parties tend to mention only the main responsibilities in the joint venture agreement. However, such a practice can prove out to be detrimental due to the lack of clarity on responsibilities and can result in disputes which may cause delays in handing over of projects and hence can open doors for liabilities. Such a scenario can be prevented by adding a schedule setting out in detail the scope of work for each party. It may be helpful if the schedule also mentions the date of completion of each work, however, such dates should be reasonable and practicable;
- Management and Control: The other important issue to be tackled with in a joint venture agreement is the management and control of a joint venture company. Normally, in case of incorporated joint ventures, the issues relating to management are governed by relevant provisions of the Commercial Companies Law which lays down broad guidelines relating to the management of companies. However the details regarding the management and control are to be set out by the parties in the Joint Venture Agreement and the Articles of Association. In case of an unincorporated joint venture, the Commercial Companies Law is silent over the management issues which provides the parties flexibility to agree on any arrangement to manage the affairs of the joint venture. Normally joint venture partners appoint a board of directors/managers who are entrusted to decide over the management of day to day affairs of the company. The right to appoint the number of directors and their voting rights usually depend upon the contribution of each party to the share capital of the joint venture company, however the parties are free to agree on the voting rights otherwise. It is always advisable to reserve certain key decisions for a unanimous approval of joint venture partners. Under Article 60 of the Commercial Companies Law, an unincorporated joint venture company must take all its decisions by a unanimous vote of the joint venture partners. However, the parties are free to agree on a different decision making scheme in their joint venture agreement.
- Profit Splitting: It is important to have a clear understanding of what shall constitute profit and how should it be distributed among the joint venture partners. Before agreeing on any scheme of distribution of profits, the parties must consider the issues like interests payable to lenders, compensation to contractors, compensation to the employees of joint venture and in case of incorporated joint ventures the requirements of the statutory reserves.
- Liability: In a joint venture, each partner heavily rely upon the role and expertise of the other partners. The failure of any partner to fulfill its obligations can cause delays in handing over the works and projects undertaken by the joint venture which can result in various degrees of liabilities. Although in case of unincorporated joint ventures, an aggrieved third party claims directly from the defaulting joint venture partner with whom it has a dealing with. However, 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 concluding transactions with them. Therefore, it is important to cover the liability by incorporating necessary provisions in the joint venture agreement. The other precaution to prevent liability is to do a proper due diligence on a partner before entering a joint venture in order to ensure its capacity and capability to perform the assigned.
- Exit: A joint venture agreement should clearly state the events that trigger exit of partners form the joint venture. The absence of clarity on exit issue may cause delay in handing over of the projects and consequently joint venture partners are required to pay compensation. The events triggering exit are usually the non-rectifiable defaults committed by a joint venture partner. It is important to have a proper exit policy in place in order to avoid any delay in the execution of works undertaken by the joint venture. Keeping in view the Qatari scenario, the exit policy should include the options like replacement of the defaulting partner or the buyout of defaulting partners shares by the remaining partners. It is important to agree beforehand on the buyout price otherwise the exit policy may not serve its purpose and may result in a deadlock.
There are immense opportunities in cross-border joint ventures between companies in order to participate in the ongoing and future megaprojects in Qatar. However, in order to maximize the prospect of a successful joint venture and to minimize the risk of ending up in a dispute, it is always advisable to seek proper legal advice and to draft a proper and comprehensive joint venture agreement before undertaking any project.