KCCLA and Sweet & Maxwell Fifteenth Annual Lecture
Construction joint ventures – anomaly or breakthrough?
Dr David
Mosey,
(soon
to be) Professor of Law and Director of
Presentation
————
April 2013
the Centre of Construction Law at King’s College, London, and
Consultant to Trowers & Hamlins LLP
What is a JV?
● JV - “A contractual arrangement in which resources are
combined – be they equipment, expertise or finance – by two
or more participants with a view to carrying out a common
purpose” (Vivien Ramsey - Construction Law Handbook)
● Construction JV – “a number of firms collaborating on a
project, or a number of projects, with a view to sharing the
profits, each firm being paid on the basis of its agreed
contributions in kind or in financial terms” (Stephen
Gruneberg and Will Hughes - Understanding Construction
Consortia: theory, practice and opinions)
Construction JVs – a model for collaboration on
construction projects?
● A means to tackle “deeply rooted structural reasons” that lead the
UK construction industry to focus on “short-termism” and sustain
“adversarial attitudes” (J Bennett: Construction – The Third Way)
● A means of reconciling “tribal” behaviour among different disciplines
of consultants and contractors (NJ Smith – Engineering Project
Management)
● A basis for creating “bilateral power” in team relationships rather
than “unilateral power” driven by “coercion” (I.MacNeil – Economic
Analysis of Contractual Relations)
● A means to clarify the “motivation” necessary to ensure that
participants “willingly do their parts in the whole undertaking”
(Milgrom & Roberts – Economics Organisation and Management)
JV - anomaly or breakthrough?
● Worth digging deeper in terms of common/divergent interests
and systems governing JV control, reward and liability
● Anomaly if a construction JV distorts or blurs the roles/duties
of JV members or fails to deal with divergent commercial
objectives
● Breakthrough if a construction JV establishes a commercially
viable model for greater efficiency and integrated working
among construction project team members
● Need to review carefully whether harmonising of interests
through a JV is vulnerable to “antagonistic sub-goal pursuits”
(OE Williamson – Transaction – Cost Economics)
Construction JVs – anomaly or breakthrough?
● Is it true that people need to be “coerced to perform using a strict
contract applied in an arms length manner” and that collaboration is
“not only impossible to achieve but an inappropriate way of doing
business”? (Cox & Townsend – Strategic Procurement in
Construction)
● What about the risk of the “free rider” making a minimum
contribution to a JV and undermining its success? (Milgrom &
Roberts – Economics Organisation and Management)
● And why do 31% of construction JVs end in dispute? (EC Harris
research figures for 2010)
JVs in the UK and international construction
landscape
● Horizontal JVs – between group of clients or group of
consultants or group of contractors in order to strengthen
market position –response to particular market sector or
individual project/programme of work
● Linear JVs – between consultants and/or capital project
contractors/ specialists and/or repairs and
maintenance/facilities management contractors/ specialists in
order to present a comprehensive solution over the life cycle
of a project/programme of work
● Vertical JVs - between (one or more) clients and (one or
more) contractors or between (one or more) contractors and
(one or more) subcontractors or suppliers
What drives the vertical JV?
● Clients seeking greater transparency in their dealings with
contractors and subcontractors/suppliers
● Clients seeking a part of the profit generated by contractors
and subcontractors/suppliers in relation to their own
project/programme of work or third party business
● Contractors responding to the above opportunities
● Contractors recognising the fundamental role of a
subcontractor/supplier in relation to a particular market or
project/programme of work
JV governance options
● JV company limits liability (or would do if clients did not insist
on joint and several liability) and creates financial flexibility in
terms of control and financial/ tax planning
● Limited liability partnership JV as above, plus greater tax
flexibility for members with different tax treatments
● Contractual JV with a separate JV entity lacks corporate
governance but offers simpler exit arrangements
● And a director of a JV company owes a duty of good faith (Re
Smith & Fawcett Ltd (1942))
JV case studies
● Client/contractor JV (UK) – North of England local
government Limited Liability Partnership for repairs and
maintenance services
● Main contractor/M&E subcontractor JV (UK) – Midlands
contractual JV for prisons project
● Funder/Service Provider JV (Bahrain) – Contractual and
corporate JV for utilities and energy management
Client / contractor JV
● Limited Liability Partnership JV
● £65m per annum repair and maintenance services
● Client transferred workforce/work stream and delegated
responsibilities in return for capital receipt, long-term
commitment and added value (e.g. employment and training)
● Arguably the sheer scale and potential overcame potential
conflicts of interest
● Open-book pricing with profit share
● Efficiency governed by performance measurement and risk of
losing exclusivity
Client/contractor JV
Client
Contractor
(Investment/
support/return)
Client
(Investment/expertise/
resource/return)
JVCo
(TPC2005 contract provision of works
and services, payment and
performance measurement)
Transfer to JVCo for capital receipt
TUPE/assets/goodwill
employees
Client/contractor/sensitivities
● Turnover or profit? – Contractor share of savings and value of
potential contract extensions needed to exceed attraction of
increased profit on rising turnover
● Business stability or reduced workload? - Minimum turnover
guarantee so that savings and efficiencies were balanced by
award of additional work
● Motivation or complacency? – Staged capital payment to
client and performance-based contract extension provisions
secured ongoing JV members’ commitment
Main contractor and M&E subcontractor JV
● Contractual JV
● £200m capital project under prisons alliance
● Early design input by main contractor and M&E contractor in
collaboration with client design team
● Single project JV driven by need for close main contractor/
M&E subcontractor relationship
● M&E design innovations
● M&E critical deadlines
Main contractor/M&E subcontractor JV – sensitivities
● Primary liability of main contractor to client, exposure of M&E
subcontractor limited to M&E part of project
● Sense of JV joint endeavour limited by ultimate ability of main
contractor to issue instructions to subcontractor in line with
client instructions to main contractor
● M&E subcontractor right of objection/consultation could not
prejudice contractual demands of client build programme
● Performance of main contractor influenced client perception
of M&E subcontractor, addressed through membership of
contractual Core Group and Design Team
● Joint working on design and risk management subject to strict
contractual deadlines for notification of prospective change
and risk issues
Funder/Service Provider JV
● JVs a strong tradition in the Middle East linked to requirements for
local equity shares in consultants/contractors as well as client and
funder investments as owner/developer
● Corporate JV between Funder and Service Provider for provision of
utilities and energy management services
● Utilities - Chilled water system, reverse osmosis plant, waste water
treatment plant and associated infrastructure to provide services to
Development
● Developer comprised separate corporate JV of Funder and Land
Owner
● Grant of Concession Agreement by Developer to Funder/Service
Provider JV covering design and construction of facilities and
provision of utilities and services
Developer and Funder/Service Provider JV
Funder
(Involvement/
support/return)
Land Owner
(Investment/
support/return
Funder
(Investment/
finance/return)
Service Provider
(Investment/expertise,
resource/return)
Funder/Service
Provider JV
Developer
Concession Agreement
(Financing/design/construction of facilities and provision
of utilities and energy management services)
Award of Contracts for
finance/development of
network transmissions lines
Other contractors
Development
Agreements and
Leases
Agreements for
provision of utilities
Development
Customers
Funder/Service Provider JV - sensitivities
● Funding of distribution network and transmission lines by
Developer (including Funder) and funding of other Utilities
facilities by Service Provider JV (including Funder)
● Alignment of Utilities development with completion of other
development projects and uptake by customers of Utilities
● Reconciliation of interests of Funder as JV partner of
Services Operator and of Developer
● Interface between distribution network/transmission lines and
remaining Utilities facilities and customer facilities
● Impact of remedies for failure to meet capacity or failure to
provide facilities
IBM and three local authorities – client/contractor
joint venture: “South West One”
●
●
●
●
Reported only in press so facts not verified
Corporate JV
£585m 10 year shared services project
IBM 75%, Somerset County Council 11.75%, Avon and
Somerset Police Authority 8.15%, Taunton Deane Borough
Council 5%
● Dispute over payment, KPI, performance, changes to
contract, shortfall in expected savings
South West One - sensitivities
● Client JV partner reverting to traditional client role
● Financial dependence of JV on IBM finance and support of
IBM parent
● JV loss (2011) of £6.8m and accumulated net liabilities (2011)
of £43.2m
● “Partnership” attitude and culture at an end?
So what goes wrong and why?
● JVs often hastily created to close a deal or support a bid
● Is there a need for a JV? – Clients can obtain transparency,
control and even profit share through construction contracts
without investing in JVs
● Client and contractor directors will have conflicting loyalties to
their own companies and the JV
● Even with clear corporate governance, there is no guarantee
of consensus – “When there is a divergence of interests,
even moderate sized groups often find it impossible in
practice to reach a unanimously acceptable decision”
(Milgrom & Roberts – Economics Organisation and
Management)
Construction JVs and emerging trends
● Multi-party alliance or consortium –horizontal JV with
company/LLP/contractual governance issues and related
liability questions
● Project partnering –multi-party, horizontal, linear (and
vertical?) structure analogous to JV with its own contractual
governance and incentivisation systems – at what point does
project partnering translate into a construction JV, does it
need to and does this dilute other contractual rights and
obligations?
● New asset management structures – potential for long-term
client/contractor repairs and maintenance JVs(with or without
the LLP structures) e.g. client provision of workforce to JV to
maintain stability and increase VAT efficiency
So what future for construction JVs?
● JVs are attractive business models for joint working
● Complex JV governance and potential conflicts of interest
should lead to alternative non-JV solutions more often than
they do
● Breakthroughs where JVs create efficient construction teams
through combined skills and common purpose
● Anomalies where JV purpose or members’ roles are not clear
or where members’ objectives may conflict
● Anomalies can be overcome where potential conflicts and
tensions are recognised and worked through in JV
governance and project delivery contracts