Joint ventures in the clean energy sector: Resolving deadlocks (part 1) – continuing the Joint Venture

What is a deadlock?

Although parties enter into joint ventures with the best intentions of being able to agree on all matters, it is crucial to consider the mechanisms for dealing with situations where agreement cannot be reached. Such situations are known as “deadlocks”.

Dealing with deadlocks

Mechanisms for addressing deadlock situations focus on either finding a solution to the impasse so that the joint venture can continue or triggering a process that results in the termination of the joint venture (such as through the winding up of the joint venture itself or through the exit of one of the joint venture parties).

There is no “right” mechanism and, indeed, the respective bargaining powers of the parties may make certain options more attractive depending on the circumstances.

The main options that can be included within a joint venture agreement to resolve a deadlock are as follows:

Casting vote

In a deadlock situation, one avoidance measure is to include a casting vote. Naturally, there may be a concern that this gives one partner effective majority control. These concerns can however be mitigated by (i) giving the casting vote to a chair (nominated in alternate years by each party) or (ii) by including an independent non-executive director with a tie-breaking vote in the event of a deadlock.

Escalation

This option involves passing deadlock issues to representatives of both parties, who are often senior figures within each joint venture partner. Senior decision makers who have not become caught up in the politics of the dispute are often better placed to make a pragmatic decision in the best commercial interests of the joint venture. This is informally referred to as a ‘gin and tonic’ clause, although resorting to alcohol is not often specifically set out.

Dispute resolution

Another mechanism open to the joint venture partners is to include a dispute resolution procedure in the joint venture agreement in order solve potential future deadlocks. This can take the form of expert determination, mediation, or arbitration. All of the dispute resolution options involve third party involvement and partners in a joint venture may be reluctant to open up commercial disputes to third party influence. However, the involvement of an impartial third party may be the only way to resolve a deadlock situation.

Termination

As mentioned, there are also a number of options that can be included within joint venture agreements which provide that, in a deadlock situation, parties can opt to terminate the joint venture altogether. We will discuss these options further in the next instalment of our series.