Consortium agreement
Consortium agreement this is a structure widely used in construction single-project joint ventures, and which provides the joint venturers with a more flexible way of catering for their particular needs than a partnership, but without having to create a new legal entity.
It differs from a partnership mainly in that there is no distribution of profits on a joint basis and the principle of agency does not apply. In addition, the parties' contributions are regulated by the agreement, to which contract law primarily applies.
Consortium agreements are quite common, particularly in a start up situation (new service offered to the market-place) or an initiative to develop business in a new geographical region. These are frequently loose arrangements and it is only when an individual opportunity is identified that the arrangement is formalized on a project-specific basis[1].
A consortium agreement is most frequently used to avoid having to set up the more formal arrangements necessary for a joint venture company or to avoid incurring joint and several liability under a partnership. The consortium contract usually provides the members with a direct interest in the assets and revenue of the venture. It is an arrangement commonly used by parties seeking to tender on a joint basis for a substantial contract or for a business enterprise which is of short duration or consists of a single undertaking or venture[2][3].
Components of consortium agreement
A consortium agreement should:
- Set out the scope and duration of the joint venture.
- Define the specific and detailed obligations of the individual members.
- Devise the machinery for financing the venture.
- Provide a mechanism for determining the sharing of profits or bearing of any losses which may result from the running of the enterprise.
The consortium agreement should also contain particular provisions to deal with any property to be used by the members and should determine, for example, which assets remain the exclusive property of the members and which assets are to be joint property.
Because the members are not partners, they do not owe any statutory duty to the other members and are not subject to any joint responsibility for the liabilities and obligations of the consortium, nor are they liable for the other members' acts or omissions[4].
Types of joint ventures
The main structures which joint ventures usually adopt are:
- consortium agreement
- limited liability company
- societas europaea (European company)
- partnership
- limited liability partnership
Because one of the joint ventures can become liable for acts or omissions of a co-joint venturers it is usual for cross indemnities to be given to enable an innocent joint venturer to collect any amount that it has paid from the co-joint venturer[5]..
Examples of Consortium agreement
- A Consortium Agreement is a contract between two or more parties that sets out the terms and conditions of their joint venture. It is typically used in construction and engineering projects that require the collaboration of multiple businesses. For example, a general contractor may enter into a Consortium Agreement with several subcontractors to ensure that the project is completed on time and within budget. The agreement will specify the roles and responsibilities of each party, as well as their respective rights and obligations.
- A Consortium Agreement is also commonly used in research and development projects. In this context, the agreement may set out the terms of collaboration between two or more universities, research institutes, or private companies. The parties may agree to share resources, such as personnel and funding, as well as to share the intellectual property rights arising from the project.
- A Consortium Agreement is also used in the banking industry. In this context, it is a contract between two or more banks that sets out the terms of their collaboration in providing a loan or other financial services. The agreement will typically set out the rights and obligations of each party, as well as the terms and conditions of the loan or services.
Advantages of Consortium agreement
A consortium agreement is a structure widely used in construction single-project joint ventures, and which provides the joint venturers with a more flexible way of catering for their particular needs than a partnership, but without having to create a new legal entity. The advantages of a consortium agreement include:
- Flexibility: Consortium agreements allow for the joint venturers to tailor the agreement to their particular needs and goals. This allows the venturers to structure the agreement to best suit their particular project, without having to go through the process of creating a new legal entity.
- Reduced cost: As the consortium agreement does not involve creating a new legal entity, the cost associated with setting up a new business entity is eliminated. This also reduces potential legal costs in the future, as the agreement can be used to address any potential disputes that may arise.
- Shared resources: Consortium agreements allow the joint venturers to share resources, such as personnel, equipment, and technology. This is beneficial as it allows the venturers to pool their resources to better complete the project.
- Risk sharing: Consortium agreements allow for the venturers to share the risks associated with the project. This helps ensure that the venturers are all equally invested in the success of the project, and reduces the risk of financial loss for any one venturer.
Limitations of Consortium agreement
A consortium agreement is a structure widely used in construction single-project joint ventures, and which provides the joint venturers with a more flexible way of catering for their particular needs than a partnership, but without having to create a new legal entity. However, there are certain limitations associated with this agreement, such as:
- The agreement does not create a separate legal entity, so the joint venturers are not able to use it for legal protection or to apply for loans.
- The agreement does not provide a framework for dispute resolution between the joint venturers, as each party is liable for its own actions.
- The agreement does not provide access to any additional funding or resources, so the joint venturers must rely on their own resources.
- The agreement does not provide any long-term stability or protection for the joint venturers, as it is only valid for the duration of the project.
- The agreement does not provide any tax benefits or other financial incentives to the joint venturers.
One approach related to Consortium agreement is the use of contractual joint venture agreements. This approach involves the parties to the venture entering into a legally binding contract that outlines the rights and responsibilities of each party. This approach allows the parties to tailor the agreement to their specific needs and requirements, while avoiding the creation of a separate legal entity. Other approaches related to Consortium agreement include:
- Creating a single-purpose legal entity: This approach involves the creation of a new legal entity, usually a corporation, that is specifically created to carry out the venture. This approach allows the venture to be conducted in accordance with the laws and regulations applicable to the entity.
- Creating a multi-purpose legal entity: This approach involves the creation of a legal entity that can be used for multiple purposes. This approach allows the venture to be conducted in accordance with the laws and regulations applicable to the entity, while maintaining the ability to use the entity for other purposes.
- Creating a Limited Liability Company: This approach involves the creation of a limited liability company that is specifically created to carry out the venture. This approach allows the venture to be conducted in accordance with the laws and regulations applicable to the entity, while providing the venturers with limited liability.
In summary, Consortium agreements provide a flexible way for parties to cooperate on a single project without the need to create a new legal entity. Other approaches to this type of agreement include creating a single-purpose legal entity, creating a multi-purpose legal entity, and creating a limited liability company.
Footnotes
| Consortium agreement — recommended articles |
| Selling Group — Assignment of claims — Musharaka — Types of joint venture — Working interests — Mercantile law — Deal structure — Organizational costs — Risk retention group |
References
- Edwards L., Barnes R., (2000), Professional Services Agreements, Thomas Telford, London.
- Luthar O., Mulej L., (2010), How to win a European project in humanities, Založba ZRC, Ljubljana.
- Minogue A., Baster J., (2010), Construction Law, Thomas Telford, London.
Author: Kinga Krzyściak
