When Partners Can Punt Disputes to a Third Party

FEBRUARY 2023 – When dealmakers are planning for how partners will resolve future disputes, an elegant solution can be to deploy to a neutral third-party, such as an independent expert or arbitrator. We’ve seen this approach be highly effective – and also fall flat.

When does this approach make sense? In general, such approaches work best for discrete factual decisions where clear standards can be applied and independent experts exist – and less well or not at all when the decision is highly subjective, such as whether and how the venture should expand or whether new partners should be admitted. Below are a few examples of how we have seen JV Agreements effectively deploy expert decision-makers.

• Defining the competitive boundary with owners. A 50:50 aerospace and defense JV, formed between two competitors at the behest of a major government customer, was given exclusive rights to operate within a given market segment. Given the forced marriage, the partners heavily negotiated the authorized scope and non-competition provisions of the JV at the outset and wanted a method for determining whether new opportunities were within the exclusive domain of the JV or whether either parent could compete for those opportunities on its own. The partners agreed that the JV would establish the position of Charter Review Person to serve as a neutral external expert with the exclusive power and authority to determine whether any proposed new investments or work were within the authorized scope of the venture. The expert’s determination would be final and binding, allowing the JV to quickly move forward without expensive and lengthy battles on what was in and out of the partnership.
• Impact of sole risk investments. The JV Agreement for a six-partner oil and gas JV in Australia allows a subset of partners to pursue new wells through the JV even if the expansion does not receive the required vote of the JV shareholders or Board. The partners who vote in favor of the expansion will bear the costs, risks, and rewards of the expansion and the partners who vote against the expansion will be shielded from its costs and liabilities. If the new well reduces the capacity of the JV’s preexisting wells, then the partners pursuing the expansion will need to compensate the non-participating partners. If the partners cannot agree on how much the new wells have reduced the capacity of the JV’s existing wells, the partners will mutually appoint a petroleum engineer to review the projections and actual performance of the wells and make the determination.
• Resolve disputes about changes to workplan. A 50:50 renewable energy JV in South America involved a large capital project. Under the JV Agreement, the partners were allowed to propose changes to the original workplan if those changes met a “Reasonableness Test.” The Reasonableness Test was defined in the JV Agreement as a change that was “reasonable and necessary for the further funding and development of the Project given the nature of the Project and the objectives of the shareholders set forth in [the JV Agreement].” If the partners disagreed on whether the proposed change to the original workplan met the Reasonableness Test, then the partners would appoint an independent engineering firm to look and decide. If the engineering firm determined that the proposal met the Reasonableness Test, then the proposed change would be deemed approved.

Independent third parties are not the only way to manage disputes, of course. Business sponsors and dealmakers should also seek to prevent and mitigate disputes more holistically, thus limiting disputes that may pass to a third-party decider. 

Are you negotiating a JV or partnership, restructuring an existing partnership, or in a disagreement with a JV partner? Ankura can help. We provide comprehensive guidance on misalignment management for new JVs and help find a productive path forward for existing JVs. Contact us to learn more.