Global joint ventures require consistent approach to liability

Out-Law Analysis | 04 Dec 2020 | 2:13 pm | 4 min. read

Joint ventures (JVs) delivering major infrastructure projects are set to play a significant role in the global recovery, but their members need certainty about the extent to which they must individually bear risk.

In a recent paper (18-page / 282KB PDF), leading international commercial arbitrator Professor Doug Jones examined the Australian law position on JV proportionate liability in comparison with the equivalent law in other jurisdictions.

Jones, who spoke last month at an annual public lecture attended by delegates across Europe, Africa, the Middle East, Asia and Australia, hosted by Pinsent Masons the law firm behind Out-Law, concluded that the law in Australia on proportionate liability is not sufficiently clear.

While every jurisdiction has its own considerations - and approaches across common law and civil law jurisdictions differ - the imperative is for clarity so JV members can properly assess the relevant risks, and to encourage participation from the likes of technology companies. Of particular urgency is the need to avoid imposing unduly heavy burdens by operation of law on those who cannot properly bear them.

The Australian position

According to Professor Jones, Australia's proportionate liability regime is both broad in its application and uncertain in terms of scope. Parties may agree to contract out of the regime in some Australian states and territories, but are not permitted to do so in others.

There is also doubt over whether the proportionate liability regime can be applied in arbitration proceedings, rather than proceedings before the courts. This uncertainty is particularly unsatisfactory, given that arbitration is usually the main dispute resolution method in the infrastructure world – whether between public procurers and contractors, or between JV partners.

At the Pinsent Masons lecture, Jones struck a typically thoughtful tone while provoking debate as to what the right approach ought to be to proportionate liability among JVs delivering infrastructure projects. This debate could not be more timely: major economies around the world are looking to the procurement of infrastructure projects to stimulate growth as they build out of the pandemic and, as we have previously identified, many of these will be delivered by JVs.

Indeed, according to IJ Global, of the 31 project finance schemes valued at US$500 million or above that reached financial close during 2020 across Europe, Asia Pacific, the Middle East and North Africa (MENA) region and sub-Saharan Africa, more than two thirds are to be delivered by JVs. This is more than reflected in non-project financed jobs.

Proportionate v joint and several liability

In this debate, we are concerned with the position of JVs where there is a difference in participation shares among the members or where it is a non-integrated JV – as opposed to a fully integrated JV where the shares are equal among the members.

Major infrastructure projects involve the owner, contractor, subcontractors, suppliers, designers, operators and others. In order for these projects to succeed, parties must have certainty over the risks they are assuming, and freedom of contract must be protected.

The imperative is for clarity so joint venture members can properly assess the relevant risks, and to encourage participation from those of lesser financial strength but whose contribution is becoming increasingly important to the success of major infrastructure, such as technology companies.

In many jurisdictions, the default legal position is that 'joint and several' liability applies. This means that an owner, for example, can pursue any one member (or all members) of the JV and seek recovery for costs caused by breaches of the construction contract. It is then for that liable party to seek contributions from the other JV partners, usually under the JV agreement. Different considerations arise for claims under tort, on which local law will usually provide for how joint wrongdoers bear shares of liability.

In a proportionate liability regime, such as that in Australia, an individual JV member could only ever be responsible for its own share of the costs arising from a breach of contract – that is, the extent to which that party's own failures caused the loss.

In Jones' view, a joint and several liability arrangement provides commercial parties with the certainty that they will be able to recover in the event of a dispute. Under a proportionate liability regime, on the other hand, the owners of the project have to assess the relative financial position of each party to any major construction work - affecting the commercial risk and viability of projects, with a knock-on effect on who wins projects and on what basis.

Jones also highlights the insurance implications of a proportionate liability regime; complicating as it does insurers' estimations of commercial parties' exposure to risk and, potentially, increasing the cost of premiums.

He therefore asks whether it is economically and legally sensible to maintain a regime of proportionate liability which is uncertain in its application, varying across Australia's states and territories; and in concept inimical to the effective financing and delivery of construction projects across the board.

A consistent solution

In practice, however, proportionate liability is usually considered attractive commercially for a JV, with the parties often effectively implementing their own version of such a scheme by way of cross indemnities in the JV agreement.

The joint and several liability approach, while offering certainty to project owners, is less attractive to JV members – particularly those of lesser financial strength but whose contribution is becoming increasingly important to the success of major infrastructure, such as technology providers.

Perhaps the solution could be to adopt a consistent law applicable to such arrangements to ensure that the extent of an individual party's contribution reflects the extent of its culpability. This could, of course, still be contracted out of depending on the demands of a particular project, preserving the parties' freedom of contract.

Care would have to be taken to avoid any unintended consequences of such legislation. There is a risk that, without careful drafting, this could be seen as a 'divide and rule' charter for unscrupulous claimants, causing parties to turn on each other instead of putting forward a unified position and ultimately a common defence in the case of an unjustified claim for breach of contract.

As identified in Pinsent Masons' guide "Joint Ventures: Delivering Mega Infrastructure Projects" and its current campaign "Restructure, Reset, Reinvent", JVs are set to play a significant role in the global recovery, but their members need certainty about the extent to which they must individually bear risk.

For this reason alone, the debate should be held now, and urgently.