Misalignment Management in Joint Ventures: Drafting JV Agreements to Prevent, De‐escalate, and Resolve Disputes Open Access

Joint ventures and other partnerships can be uniquely valuable corporate vehicles to access capabilities, expand into new markets, gain scale, drive cost synergies, share risks, or meet regulatory requirements for local ownership.¹ But such ventures are also prone to misalignment, dispute, and deadlock as each partner inevitably harbors their own evolving strategy, commercial interests, financial constraints, and decision‐making style. As joint venture and other partnership formations accelerate in many markets (Ankura Consulting LLC 2021), it is timely to reexamine how companies might structure JV contracts to manage those misalignments. When most companies think about managing misalignment in deal negotiations, they too often use boilerplate dispute resolution language that focuses on the ultimate legal solutions of arbitration or litigation—and neglect other terms to proactively manage misalignment more quickly, cost efficiently, and with less rancor.

This article offers a range of practical insights for drafting joint venture legal agreements to better manage misalignment, leveraging the authors' analysis of dispute‐related terms² in more than 100 JV agreements³ and experience working on hundreds of JV and other partnership transactions around the world.⁴ This benchmarking of dispute‐related terms looked at contractual clauses, provisions, or sections that would help to minimize, address, or eliminate partner misalignments, including terms related to voting, governance, dispute resolution, exit, and covenants regarding JV or parent activities. The article is intended to encourage dealmakers and managers to use the information gained from this benchmarking and analysis to proactively include fit‐for‐purpose and creative terms in JV agreements to minimize, address, or even eliminate partner misalignments and, when working in active JVs, to utilize these mechanisms.

Research conducted by the authors and others has shown that JVs are inherently prone to misalignment. The authors asked 260 JV board directors to evaluate their perceived level of alignment and trust among JV partners, and less than 40 percent characterized alignment and trust as good or very good. Other researchers have assessed the frequency, extent, and impact of misalignment in JVs, and similarly found that partner misalignment is widespread and a common cause of underperformance and failure (Rinaudo and Roswig 2016).

To understand the costly effects of shareholder misalignment, consider Tiffany Watch Co., the ill‐fated joint venture between Swiss watch manufacturer Swatch Group and U.S. luxury jeweler Tiffany & Co. The JV was formed to develop and produce Tiffany‐branded watches, which the joint venture would distribute worldwide through Tiffany, Swatch, and independent retail outlets. However, differences over design and distribution plans drove a wedge between the partners. Tiffany felt the watches lacked class and Swatch felt Tiffany was failing to adequately promote the watches. Swatch terminated the relationship following what Swatch charged was “Tiffany & Co.'s systematic efforts to block and delay development of the business” and filed claims for damages. Tiffany filed hefty counterclaims, alleging Swatch failed to allocate proper resources to the project and uphold its end of the bargain. An arbitration panel sided with Swatch, requiring Tiffany to pay almost $450 million in damages, plus interest and legal fees (Adams 2013). Tiffany appealed the ruling, and the parties continued to fight for the next five years through the Dutch court system, until the Dutch Supreme Court ultimately upheld the award (Posses 2018).

When contemplating a JV, companies need to prepare for and manage misalignment. Managing misalignment starts with thoughtful partner selection and rigorous due diligence. Diligence should include not just financial, legal, and technical due diligence, but also strategic and cultural due diligence that evaluates the counterparty's fit and alignment with the company's strategy and culture, including the counterparty's relative level of potential commitment and conflict with the joint venture over time (Bamford and Fennell 2015). Similarly, how a company prepares for negotiations can also be determinative. Some companies wisely conduct “misalignment scenario planning” in the early stages of negotiations to think through where the partners might become misaligned and identify strategies and practices to mitigate those risks (Bamford and Fennell 2015; Bamford 2016).

This article focuses on contractual terms within joint venture agreements. Specifically, to manage misalignment in JVs, companies should closely evaluate three categories of contractual terms: (1) dispute prevention, (2) internal dispute de‐escalation, and (3) external dispute resolution (Figure One).

Dispute prevention terms help prevent disputes by managing misalignment before a dispute has arisen. In contrast, dispute de‐escalation provisions provide contractual mechanisms that can be deployed in real time when a dispute arises to resolve the matter by the partners internally, while dispute resolution terms manage misalignment when partners are unable to resolve a dispute among themselves and require a third party to make the call. The analysis below focuses on disputes that stem from misalignment rather than bad acts, such as breach, embezzlement, or fraud, which are generally already well covered by dispute resolution provisions in JV agreements. While not every term or technique will be appropriate for every JV or type of misalignment, our experience and analysis suggest that many of these contractual terms offer untapped potential. Therefore, JV dealmakers should consider including more of these terms in their JV legal agreements, and JV managers and governors should consider employing some of the techniques discussed, whether or not they are set forth in the JV's legal agreements.

The old adage that “an ounce of prevention is worth a pound of cure” holds true in JVs. This section offers guidance on contractual terms that can help prevent serious misalignment in JVs before such differences turn into formal disputes. Including such terms in JV agreements can prevent disputes altogether and thus should be seriously considered by JV dealmakers and utilized by JV managers and governors.

One way to avoid disputes is for the potential partners to agree on certain plans and decisions prior to deal close. In most JV negotiations, the parties will spend time not just performing due diligence and negotiating the contractual agreements, but also developing plans for where and how the business will operate (Safina 2020). As such, it may be possible and advantageous for the parties to pre‐agree on items such as the five‐year business plan, near‐term future capital investments, the year‐one operating plan and budget, organizational design and staffing plans, dividend and distribution policies, key operating policies, and other matters essential to operationalizing the business. Such pre‐agreed plans may be attached as a schedule to, or referenced as a closing condition in, the shareholders agreement. Agreeing on such matters upfront is a powerful way to test for and drive alignment before a deal closes, after which fundamental misalignments can be extremely costly to address.

Our analysis shows that pre‐agreeing on certain critical decisions is not common in JVs. For instance, while most JV agreements state that the JV board needs to approve any shareholder dividends and distributions, more than 60 percent of JV agreements do not include any guidance on what those distributions should be. By not setting a pre‐agreed distribution policy, which can be overridden by majority, supermajority, or unanimous consent, the net effect may be that partners disagree and, at least for the shareholder that favors more aggressive earnings repatriation, excess cash is trapped in the venture unable to be deployed elsewhere. In many instances, the partners are better off pre‐agreeing on a distribution policy—which might range from, minimally, agreeing to distribute earnings to shareholders sufficient to cover flow‐through tax obligations or, more expansively, to distribute all available cash beyond working capital.

A failure to pre‐agree on such matters leaves partners vulnerable to disputes. For example, Verizon Wireless, once a large and highly profitable JV between Verizon Communications (55 percent) and Vodafone (45 percent), was originally set up with a dividend policy that balanced the shareholders' dual desires to receive dividends and pay down debt. The policy required the JV to distribute 70 percent of its net income (so long as certain debt levels were not exceeded) and to pay down the JV's debt by leaving 30 percent in the JV (Cellco Partnership 2000). However, the policy expired after five years and Verizon Communications, as the majority owner, wanted to keep cash in the JV and blocked any further dividends. Vodafone, which wanted the cash, was denied access to nearly $6 billion in dividends until it eventually sold its interest to Verizon Communications (Taylor and Parker 2007; Ashton 2010).

Lawyers and others involved in negotiations may hesitate to have partners hammer out key plans and decisions pre‐closing, fearing the deal may be delayed or killed, or that circumstances may change, rendering such decisions obsolete. However, the agreements can be structured such that pre‐wired decisions can be overridden by supermajority or unanimous consent. And after all, key decisions will need to be made at some point. So, while it may take a little more time to negotiate the deal, it is often in the partnership's best interest to identify and work through material issues before the parties are locked into a structure that may not work for one or more of them and therefore is ripe for disputes.

Companies should also consider drafting contractual terms to reduce the number of decisions that can lead to deadlock. This can be done by limiting the number of decisions requiring unanimous or supermajority consent, which is especially important in JVs with majority–minority ownership structures or those with three or more partners (Kwicinski and Ernst 2013; D'Costa, Pyle, and Bamford 2021). While it may be reasonable for minority partner approval to be required for amendments to legal agreements or bankruptcy filings, it is quite unlikely that a 10–20 percent owner should have the right to veto the annual plan and budget or a proposed dividend distribution, block future capital investments, or prevent the hiring of a CEO supported by the other shareholders. While a minority owner's ability to veto such items is ultimately a matter for negotiation, limiting the number of unanimous or supermajority decisions reduces the likelihood of deadlock.⁵ It is also important to provide for voting rights to evolve as partners' ownership interests change over time. Some 44 percent of JV agreements include a loss of rights provision whereby a minority partner significantly loses decision rights if their interest drops below a threshold, which is typically 10 percent (D'Costa, Pyle, and Bamford 2021). By being explicit about how rights will change with dilution, dealmakers can tailor what rights will be removed and retained and at what threshold.

Companies should also carefully consider what decisions they should delegate to the JV management team. The more decisions that are delegated to management, the fewer opportunities there are for the shareholders and board to argue about tactical matters, as well avoiding shareholder over‐reach and enabling management accountability. In the authors' experience, delegation thresholds are generally set too low in JVs, meaning more decisions need to be elevated to JV boards or shareholders. For example, in our data set, the median delegation to JV management for unbudgeted expenditures was just $100,000, which is quite low and typically less than 1 percent of the JV's annual operating budget, the minimum the authors would suggest. These low delegations mean that far too many decisions end up in the hands of JV boards composed of busy, inquisitive, often invasive, and not‐naturally aligned groups of parent company executives who may simultaneously demand additional information that is time‐consuming to collect and also take significant time to come to a decision given that being a JV board director is a small piece of their job, thus delaying decision making. Practically, these more day‐to‐day decisions would be better made by a CEO who has integrated accountability for outcomes. Similarly, too often, delegations do not evolve over the life of the JV. Delegations are set at a dollar threshold that is not revisited at regular intervals as the size of the business increases or even adjusted for inflation over time. Well‐calibrated delegations of authority help the JV operate smoothly and reduce partner friction.

Companies should also seek to memorialize in the JV agreement or other pre‐close documents governance practices that promote partner alignment. Board structure is one area to which attention should be paid. Limiting the size of the board to between five and eight members promotes personal accountability and strategic discussion, which larger boards find challenging (Lublin 2014). Similarly, designating one person from each shareholder's director group to serve as a lead director—that is, a first among equals who is expected to drive alignment within their own organization and meet informally with the other lead director(s) and the JV CEO to work through issues—can also be a powerful way to promote alignment. Conversely, in our experience, having alternate directors tends to expand the size of the board and, thus, diffuse accountability.

JV boards also struggle with high director turnover, which makes building and maintaining alignment elusive (Farber, Bamford, and Ernst 2020). One contractual mechanism to promote director continuity is, paradoxically, the establishment of fixed‐length director terms. Typically structured as two‐ or three‐year renewable terms, such arrangements tend to result in directors serving out their terms rather than departing as soon as their internal roles change. Selecting more senior leaders from the parent company also promotes continuity, as these executives tend to change internal roles less frequently.

Committee design is another area that can impact alignment. It is typical for JVs to have three to six committees, with the most common being finance, audit, and human resources. However, many JVs have far more committees—with such oversight groups paralleling the functions of the business, such as strategy, capital projects, technical, procurement, operations, and marketing. It is also typical for committees to be composed entirely of shareholder functional experts who are not JV board members. While this reduces the time demands of JV board directors and brings expertise into the governance system, it also de‐links the committees from the board, and can dramatically elevate the number of competing voices among the shareholders—and, ultimately, increase positional negotiations and misalignment. A better approach is to limit the number of committees and require, at minimum, that each committee contain at least one board member, potentially serving as the chair (CalPERS 2015; Bamford et al. 2020).

Another innovative technique is to appoint someone who is available on an ongoing basis to address disputes—a practice drawn from the alternative dispute resolution world. In a JV context, this “relationship facilitator”⁶ is appointed by all shareholders, ideally at the outset of the venture, and is a respected external party who will have a long‐term relationship with the venture. The relationship facilitator's role is to help establish a collaborative working relationship among the partners by regularly meeting with board members, other shareholder executives, and venture management throughout the life of the JV to set a congenial tone, encourage the partners to interact in a forthcoming and cooperative manner, and identify and work through issues early to avoid disputes (Groton and Dettman 2011).

A related and more progressive practice is to include one or more independent directors on the JV board—that is, individuals who are not current employees or otherwise affiliated with a shareholder. While independent directors in JVs are often nonvoting or otherwise unable to act as swing votes, they have the potential to be natural advocates for the interests of all shareholders and, assuming the right people are selected, natural and trusted brokers to foster consensus (Groton and Dettman 2011). Thus, independent directors can, in a way, serve as relationship facilitators.

Many other contractual terms may directly or indirectly help to reduce the likelihood of disagreement and dispute among JV partners. For instance, the parties might agree to a lock‐up period where neither party can exit for a period of time, so that all partners are committed to the JV's success for at least a minimum period, such as three years. Analysis shows that only 25 percent of JV agreements include a lock‐up period (Pyle, Elliott, and Bamford 2022). Alternatively, the agreements might structure financial arrangements so as to minimize off‐P&L returns—for example, by limiting the use of partner‐provided services, technology, leased or other shared‐use assets, or other commercial and operational interdependencies, which tend to be the source of asymmetric influence and returns and, thus, partner tensions. Similarly, the JV's authorized scope may give the venture the exclusive right to compete in a specific market—for the life of the venture or for a defined period of time, which might be extended based on achievement of specific performance targets—thereby preventing direct conflict with either parent (Medish, Pyle, and Bamford 2020). Alternatively, as seen in many ventures in developing countries, the JV may be established for a defined period, such as 20 years (which may be renewed by the parties' mutual consent), to promote good behavior and future flexibility.

It is typical after a JV has been operating for a period that misalignment will rear its ugly head. Perhaps one partner wants the JV to pursue an expansion project and others do not, or perhaps the partners cannot agree on next year's budget. Dealmakers should prepare for this day when drafting the JV agreement by including mechanisms that help the partners to navigate through such disputes. Below are some tools to help the partners efficiently de‐escalate their disputes internally, through (1) terms that effectively solve the dispute without partners reaching an agreement, or (2) terms that set out processes to aid partners in negotiating a resolution to a deadlock without the involvement of outside parties.

JV agreement terms that automatically “solve” certain types of disputes without partners needing to agree can keep JVs from getting bogged down by misalignment. Our benchmarking of 137 JV agreements examined the prevalence of five key terms for automatically de‐escalating disputes (Figure Two). This section describes the results of the benchmarking and how these mechanisms can be deployed effectively. All of the examples are taken from JV agreements that we analyzed.

Parties to a joint venture may choose to predetermine outcomes for certain types of decisions for which they are unable to achieve the needed voting threshold (i.e., pass mark). We found that 36 percent of agreements included such provisions for one or more decisions. Such “default decisions” are most often used in situations where decisions are necessary for the continued operation of the JV and failure to agree would be extremely costly or cumbersome. For example, to anticipate a time when the board cannot obtain the approvals needed for an upcoming fiscal year's proposed annual plan and budget, an agreement might stipulate that the JV “defaults” to using the prior year's budget, often adjusted for inflation, to allow the JV to continue operating.

Setting a default decision in the case of disagreement can also be used for less routine decisions. For instance, in a 50:50 technology manufacturing JV, the sourcing of all critical materials and components requires unanimous partner consent. To avoid a situation where the JV is stuck in limbo without necessary inputs, an agreement stipulates that if one partner vetoes the sourcing of a material or component but does not recommend an alternative, the original request from management is deemed approved. Similarly, in a 50:50 mining JV, an agreement includes a provision for proposed expansions such as major upgrades to the facilities or adding new areas to mine. The agreement states that if the partners are deadlocked over a proposed expansion but certain financial criteria are met, the expansion can be financed internally by the JV or with a loan that is not guaranteed by the dissenting party.

Alternatively, a JV agreement might lower or otherwise change the voting threshold for one or more decisions in the event of nonagreement. We found such provisions in 29 percent of the agreements in the data set.

There are three common dynamic voting resolution mechanisms. First is the casting vote, often held by the board chair. For example, in a 50:50 JV, an agreement states that all management appointments require approval from a majority of the board but if the board cannot agree, the chair is granted a casting vote to break the tie. A second dynamic voting mechanism is pass mark reduction. For example, in a 40:40:20 JV, unanimous consent is required to approve the annual plan and budget but if unanimous consent cannot be achieved, the agreement provides that majority consent is deemed sufficient. Third, some agreements provide for deemed consent after an elapsed period of time. For example, in one JV, unanimous consent is required to issue a press release but if a shareholder fails to respond after two days, it is deemed to have consented.

Forced resolution by dynamic voting can be particularly helpful when deadlock would prevent the JV from meeting minimum contractual obligations or otherwise fulfilling its fundamental purpose. Consider a large Central Asian oil and gas JV. Under terms of the license agreement between the partners and the host government, the JV is required to drill a certain number of exploration wells within the first five years after the license award. Under terms of the JV agreement, the required pass mark for shareholder approval of drilling campaigns and other capital investments is 76 percent. But the agreement also states that if the pass mark cannot be reached and it is management's opinion that the drilling or other investment is required to meet the JV's minimum commitments to the host government, the pass mark is reduced to 51 percent. If management still cannot get the required votes, then the decision is delegated to management to allow the JV to meet its obligations to the government and not risk loss of the license.

Sole risk and nonconsent provisions are two contractual devices that allow investments to proceed without participation from all parties—and thus offer additional ways to manage partner differences, especially concerning investment and risk appetites. A sole risk provision allows a subset of partners to proceed with an investment for which the level of approval is below what the JV agreement requires (Zanfagna, Farber, and Bamford 2020). For example, consider a five‐partner mining JV with a 30:30:20:10:10 ownership split in which major capital investments require 85 percent approval. The JV's sole risk provision allows a subset of partners constituting a majority to proceed with certain types of investments at their sole risk, expense, and liability. The nonparticipating partner(s) are shielded from liabilities and benefits associated with such investment and do not have their ownership in the JV diluted.

A nonconsent provision is the flip side of a sole risk provision. It allows partners that voted against a new investment that did achieve the needed vote to opt out of funding it (Zanfagna, Farber, and Bamford 2020). Such nonparticipating partners are not diluted and are shielded from the liabilities and benefits associated with such investment.

Allowing partners to pursue new opportunities independently or opt out of such opportunities can allow some partners to pursue growth while protecting others who want to preserve capital or take a more conservative approach without getting diluted. However, these approaches only work if the new investment can be isolated from existing JV operations.

In the JV agreements we benchmarked, 22 percent include sole risk provisions, 12 percent include nonconsent provisions, and 5 percent include both sole risk and nonconsent provisions. Long used in upstream oil and gas ventures, such provisions are also useful in JVs that develop and commercialize new technologies, including those in sectors such as renewable energy, plastics recycling, mobility, and industrial automation, where partners often want greater flexibility to participate or not participate in future investment opportunities. Consider a 50:50 JV between two global companies formed to develop and commercialize a new biofuels technology. The legal agreement for the JV states that each parent can propose that the JV build and operate a new production facility to manufacture biofuels using intellectual property licensed to the JV. The JV agreement requires the board to decide within four months as to whether the JV will pursue that opportunity through the JV structure. If not, the initiating parent has the right to pursue the investment on its own or with third parties, provided that it gives the other partner the right to participate at 20–50 percent ownership, and an option to buy in down the road. If the initiating parent pursues the opportunity outside the JV, the JV is obligated to grant a license to the entity that will own the new facility, regardless of whether it is owned by one parent, both parents, or parents and third parties. In the right circumstances, providing this type of flexibility can make JVs more workable and sustainable.

In certain circumstances, it may be advisable for an agreement to provide that one or more partners can trigger dissolution of or exit from the JV in the event of nonagreement on fundamental decisions—decisions that are so important that the parties have determined that agreement on them is required for the venture to continue. The triggers for exit can be narrow and include only a few key decisions. For example, under the agreement for NC2, a truck and engine manufacturing JV between Navistar (50 percent) and Caterpillar (50 percent), the JV automatically dissolves if the partners cannot agree on an annual business plan after year three and initial funding is exhausted. This is the only decision where deadlock can trigger exit from the JV (Caterpillar, Inc. 2009). However, sometimes the exit triggers are broad. The agreement for BMW Brilliance—a car manufacturing JV between BMW (50 percent) and Brilliance Auto (50 percent)—provides that any deadlock over a decision that would “materially and adversely affect the business operation of the JV Company and would cause serious harm to either of the Parties' material interests” can trigger exit (BMW Holding BV 2009). Between these two extremes, JV agreements may include a short list of highly material decisions where deadlock can trigger exit, such as continued failure to pass a new budget or business plan or disagreement on whether the JV should expand its scope or operations.

Exit rights also can be structured to allow one partner to force another partner to exit, without dissolution of the JV. This would allow a majority partner to override a minority partner's veto on a key decision. This was the arrangement in the agreement for Glad Products Company, a highly successful JV to develop and market plastic trash bags and food storage containers owned by Clorox (80 percent) and Procter & Gamble (P&G) (20 percent). According to the agreement, if P&G exercised its veto right with respect to certain key decisions (e.g., acquisitions and related party transactions), then (after certain conditions were met) Clorox had the right to exercise a call option to purchase P&G's shares (The Glad Products Company 2003). While some disputes trigger exit, exit provisions more often provide the context and negotiating leverage for one or more partners while negotiations are ongoing. In many cases, despite having exit as a means for addressing disputes, parties will address disagreements through alternative means, coming to a negotiated agreement.

While 72 percent of JV agreements benchmarked include at least one of these five dispute de‐escalation mechanisms (considering sole risk and nonconsent separately), only 36 percent of the agreements include more than one, suggesting there is room for agreements to be more nuanced and comprehensive. Different mechanisms are better suited for different decisions (Figure Three), so including one dispute de‐escalation mechanism likely does not adequately address the many decisions that can result in dispute. Certain decisions, like passing an annual budget, should almost always be coupled with a dispute de‐escalation term to allow the JV to have a budget for the next fiscal year. Yet, 40 percent of JV agreements do not include a procedure for addressing failure to pass a new budget, which can leave the JV in limbo or force the partners to resort to the JV agreement's often draconian general dispute resolution mechanisms (Bhargava and Bamford 2018).

Sometimes a disagreement among JV partners cannot be resolved by baking a solution into the JV agreement that does not require partner agreement as discussed above; such disputes require the partners to agree on a solution. Although two of the procedures (mediation and standing neutral/dispute review board) involve the assistance of third parties, in each of the three procedures described below the partners ultimately retain control over the outcome of the dispute.

Escalation requires senior members within each partner organization to meet and try to reach an agreement. Escalation is intended to give parties the opportunity to resolve a dispute among themselves early in the process before positions are crystallized and the relationship has broken down. Well over half of JV agreements (62 percent) include provisions for formal escalation. Moreover, escalation is even more prevalent in practice as it often occurs informally when not required under the JV agreement. Fifty‐one percent of the escalation clauses require CEOs or other senior executives from each parent company to meet. Such provisions allow for new voices and the involvement of individuals with decision‐making authority. Twenty‐two percent of the escalation clauses require sending the dispute to a governing body of the JV (e.g., an executive committee). The remaining escalation clauses either did not specify who was required to meet or vaguely required a meeting between the parties and/or their representatives. Escalation clauses generally involve between one and three levels of escalation (i.e., required meetings).

A common concern with including a formal escalation requirement is that it will drag out a dispute by adding one or more extra steps, but the median time permitted for escalation is just 30 days. Interestingly, a closer look at 68 of the 137 agreements we reviewed showed that the escalation timeline is largely unaffected by the number of levels of escalation (Figure Four).

For example, the JV agreement for Acadia Power Partners—an energy JV owned by Cleco Midstream Resources (50 percent) and Calpine Acadia Holdings (50 percent)—has a provision that includes two levels of escalation before the parties can submit the dispute to arbitration. First, the JV's management committee has 15 days to try to resolve the dispute. Second, senior executives who are shareholders have 15 days to resolve it (Acadia Power Partners, LLC 2003). Some other agreements had only one level of escalation that allowed for 30 days to resolve the dispute before formal arbitration or litigation could commence. Escalation is a simple but powerful tool that involves little cost and delay relative to other dispute resolution mechanisms and can be effective for preserving goodwill among the partners, who may continue working together to manage the JV for decades to come. As such, dealmakers should build escalation provisions into JV agreements and JV managers and governors should seek to escalate disputes before resorting to other dispute resolution mechanisms.

Mediation is a process in which a third‐party neutral works with the partners to help them reach a negotiated agreement to settle their dispute. Unlike arbitration, the mediator does not make a decision. If the partners do not reach an agreement, then they can move onto binding dispute resolution procedures. If the partners do reach an agreement, it will be binding just like any other contractual commitment. A skilled mediator can help the parties communicate better and work through impasses, but the parties retain control over the outcome of the dispute. Binding mediation provisions were found in 22 percent of JV agreements reviewed.

In 80 percent of JV agreements with mediation clauses, mediation follows escalation as a second step to try to resolve the dispute by negotiated agreement. Mediation was the first step in only the remaining 20 percent of such agreements. Of the JV agreements with mediation provisions, 38 percent defer to a third‐party organization (e.g., the International Chamber of Commerce) to select the mediator and the remainder either explicitly or implicitly require the partners to select the mediator together.

There are three key benefits of mediation. It enables the parties to generate more creative, business‐focused outcomes than are likely to result from an arbitration panel or court; it is more cost‐effective than traditional dispute resolution methods; and it is better for the partners' long‐term relationship than arbitration or litigation. Mediation also tends to be effective, with around 85 percent of mediations resulting in a negotiated agreement (International Institute for Conflict Prevention and Resolution n.d.).

Provisions providing for an independent dispute review board or a standing neutral are highly effective at resolving disputes and are included in JV agreements with increasing frequency. This tool originated in the construction industry, in which disputes between developers and contractors are common and delays are costly. Aware of the high likelihood of conflict, partners engage a panel of three neutrals (or one neutral for smaller projects) with construction expertise. These individuals (one in the case of a standing neutral and multiple in the case of a dispute review board) are briefed at the beginning of the project and regularly updated on its progress (e.g., monthly or quarterly). When a dispute arises, the panel is quickly brought in to hear from the parties and issue a recommendation. While the recommendation is nonbinding, some 98 percent of disputes that have been referred to a dispute review board did not go onto arbitration or litigation (Hafer and Subcommittee n.d.). The International Chamber of Commerce has proposed the broad use of review boards in a wide variety of commercial relationships (International Chamber of Commerce n.d.).

One of the key factors in the success of dispute review boards is their ability to move quickly as the neutrals are preselected, have the necessary expertise, and are up to date on the project. The parties' ongoing relationship with the neutrals also incentivizes the disputing parties to make reasonable requests and approach the process cooperatively (Groton, Honeyman, and Schneider 2017). Engaging the neutrals over an extended period and keeping them up to speed requires expenditures of time and money, so dispute review boards or standing neutrals may not be appropriate for every venture. However, given the ongoing nature of the JV relationship and JVs' vulnerability to misalignment and conflict, dispute review boards or standing neutrals can save costs by reducing delays and averting more expensive dispute resolution processes like litigation (Vitasek, Groton, and Bumblauskas 2020). Thus, it is important for JVs—especially those that will involve significant capital‐intensive projects—to consider providing for standing neutrals and review boards.

Resolving a dispute internally not only saves money and time; it also helps preserve the partners' relationship, which may be damaged if parties enter into a legal proceeding where they become adversaries in a zero‐sum game. Moreover, the partners know their interests and the JV's business better than any third‐party decision maker. Thus, dealmakers should seek to include procedures that help partners to de‐escalate disputes internally and that facilitate an outcome on which all partners can agree.

For the instances when a dispute cannot be prevented and the partners cannot resolve the dispute among themselves, companies will typically include provisions in their JV agreements that provide for resolution by an expert, arbitration, litigation, or other dispute resolution process. Our closer analysis of 68 JV agreements found that roughly one‐third used several of these dispute resolution approaches, choosing the process on the basis of the nature of the dispute. Overall, 49 percent of the agreements provided for expert determination, 72 percent provided for arbitration, and 28 percent explicitly or implicitly provided for the dispute to be resolved through litigation (Figure Five).

The approach that a JV chooses is driven by various factors. In addition to the nature of the dispute, the unique characteristics of the partners—such as where they are located and their procedural preferences and concerns—are considered. As a prerequisite to using any of these mechanisms, companies may wish to require parties to use one or more of the internal de‐escalation mechanisms discussed above or simply to wait a certain amount of time (i.e., a “cooling off period”) before initiating external mediation, litigation, or other binding dispute resolution mechanisms. For example, some JV agreements require the board to meet and discuss a dispute multiple times prior to either party being able to formally file a dispute. In other cases, JV agreements require a partner to notify other partners that they have a grievance they intend to have a third party resolve and then, following such notice, the partner with the grievance must give other partners a period of time to “cure” the issue or otherwise discuss internally. Only after the parties have taken the requisite steps can a partner file for a dispute to be resolved by a third party through a formal, binding process.

Some JV agreements provide for subject matter experts to resolve certain partner disputes; the experts' decisions usually are not binding (International Institute for Conflict Prevention and Resolution 2019). Experts are most often used to resolve financial and accounting disputes, such as those involving the fair market value of contributions to the JV or the shares to which a partner is entitled if they exercise a put or call right. Expert determination can also resolve technical disputes.

A 50:50 aerospace and defense JV made creative use of an outside expert. Formed at the behest of a major government customer to create a single prime contractor, the JV consolidated certain contracts, assets, and operations of two major competitors into a single company. The agreements provided the new JV company with exclusive rights to operate within a given scope. Given the government requirement for the JV (and thus forced marriage for the partners) and noncompetition provisions, the partners wanted a method for determining whether new opportunities, including future government contracts, were within the exclusive domain of the JV or were opportunities for which either party could compete on its own. During the negotiations, the partners agreed to establish the position of “charter review person” to serve as a neutral external expert with the exclusive power to (1) determine whether any proposed new investments were within the authorized scope of the venture and (2) perform audits to ensure compliance with the venture's agreements. The charter review person was an independent industry expert mutually selected by the partners and served renewable one‐year terms. All new investment proposals and potential contract bids by the JV were required to be submitted in advance to the charter review person. Each partner had the right to submit a position paper explaining whether it believed the proposed investment or contract fell within the JV's charter. The expert's determination was final and binding, allowing the JV to move forward quickly without expensive and lengthy battles on what was in or out of scope.

Our benchmarking shows that experts are generally appointed by mutual agreement, but most JV agreements also include a fallback provision for times when the disputing partners cannot agree (Figure Six).

The fallback is most often (in 48 percent of JV agreements reviewed) deferring to an independent third party, such as a trade association or the International Chamber of Commerce, to appoint the expert. However, other creative fallback alternatives exist. For example, in one agreement, the partner requesting the expert determination proposes three nationally recognized accounting firms and partners take turns striking firms from the list; the final remaining firm serves as the expert. JV agreements also deal creatively in determining who will pay for the expert's fees. For example, to incentivize partners to reach an agreement on their own, 15 percent of JV agreements with expert determination provisions require the loser to pay the expert's fees. The JV agreement for the Solae Company, a soy ingredient supplier owned by DuPont (71.94 percent) and Bunge Limited (28.06 percent), states that the expert's fees shall be paid “in an inverse portion as they may prevail on the dispute,” which incentivizes the partners to be as accurate as they can in their initial proposals (Solae Holdings, LLC 2003).

The line between determination by an expert and arbitration is blurry, as both can be binding, and some arbitrators are experts. Using an expert is a simpler, more streamlined process that does not involve the formal, litigation‐like procedures of arbitration (e.g., document production and testimony) and experts will generally conduct their own independent investigation and analysis rather than rely on evidence and briefs provided by lawyers. For disputes that involve important legal issues, multiple types of claims, or claims that cut across multiple agreements, the more formal procedures of arbitration may be preferable. For discrete technical disputes, expert determination is generally the most expeditious and cost‐efficient approach.

All JV agreements that we reviewed provide for arbitration and/or litigation (explicitly or implicitly) as the forum of last resort for resolving disputes. Some agreements provide for both, the choice of process dependent on the type of dispute. The vast majority (72 percent) of the JV agreements benchmarked elect arbitration over litigation. Arbitration is a private dispute resolution process in which the decision of the arbitrator(s) is binding on the parties. It is often preferred to litigation because the proceedings need not be public (Devarakonda et al. 2021), the process is usually faster and more cost‐effective, and the parties have more flexibility to customize the process in various ways, such as selecting an arbitrator or arbitrators with particular expertise and setting deadlines, document production requirements, and rules governing witness testimony (Weinstein et al. 2017). Arbitrators will often have a legal background (e.g., retired judges), industry or subject matter expertise, or both. Our analysis shows that JV legal agreements establish different approaches for how arbitrators are appointed and paid (Figure Seven).

In a cross‐border context, arbitration can provide a neutral forum when the parties are reluctant to rely on foreign courts (Devarakonda et al. 2021), which may be unpredictable or provide one party with a home‐court advantage. Arbitral awards may also be easier to enforce against international counterparties than court judgments, as more than 160 countries are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (enacted in 1958 and commonly known as the New York Convention). To enforce court rulings, the parties must rely on bilateral or multilateral agreements between individual countries or groups of countries, which may not be applicable or enforceable. China, for example, has agreements with a number of its major trading partners, such as the UK, France, and Russia, but does not have an agreement with the U.S. and, as of 2019, had elected to enforce only two U.S. civil court judgments (Winston and Strawn LLP 2019; Sachs and Hill 2020).

Many jurisdictions, including the U.S., seek to protect the parties' right to their “day in court,” so arbitration clauses must be carefully and clearly drafted to be enforceable, as seen in recent litigation involving a JV between DDK Hotels and West Elm. The JV was established to create a line of boutique hotels highlighting West Elm's home furnishings. The relationship between the partners quickly soured and resulted in a series of disputes. West Elm sought to enforce the JV agreement's arbitration clause but the Delaware court determined that it was too narrowly drafted and “the JV Agreement's incorporation of the American Arbitration Association (‘AAA’) Commercial Rules” was insufficient to demonstrate that the parties intended all disputes under the agreement to be subject to the arbitration clause (DDK Hotels, LLC v. Williams‐Sonoma Inc. 2021). Poorly designed arbitration clauses can also cut off or diminish a partner's ability to argue a claim by removing many of the rights and procedures afforded by litigation. Arbitration provisions must provide parties with the rights essential to the pursuit of legitimate claims—such as the rights to reasonable document production and adequate time to review facts and prepare responses—without making the arbitration as or more procedurally burdensome than going to court.

Of the JV agreements benchmarked, 28 percent provide for litigation as the ultimate forum for disputes either explicitly or implicitly (i.e., by failing to select arbitration as an alternative). Nine percent of the agreements provide for litigation as the only dispute resolution mechanism (i.e., there are no interim or alternative steps, like escalation or arbitration). Unlike arbitration, litigation is not confidential, but it is the only dispute resolution tool that has the power to set precedent and discourage other parties from bringing similar claims because they can see the court's decision and infer it will make a similar one in the future for similar claims.

A key question for drafting a litigation clause is choosing the jurisdiction in which the matter will be heard. Many factors should be taken into account. Partners will want to consider the potential for home‐court advantage, a court's predictability, a court's authority to enforce its judgment in places where the parties have assets, and, in some cases, differences in the laws of various jurisdictions (Sanga 2014). A creative solution for avoiding the home‐court advantage can be found in the 1985 JV agreement for Takeda Abbott Pharmaceuticals (TAP) between Abbott Laboratories, a U.S.‐based medical devices and healthcare company, and Takeda, a Japan‐based pharmaceutical manufacturer. The Abbott–Takeda agreement provided that any suit brought by Abbott would be heard in Japan and any suit brought by Takeda would be heard in the U.S. (Abbott Laboratories v. Takeda Pharmaceutical Company Limited 2007). The purpose of this provision was to discourage the parties from instituting litigation by requiring them to litigate on the other party's turf.

Litigation can be expensive, time‐consuming, and detrimental to the parties' ongoing relationship but it can be an effective tool to protect contractual rights and reach resolution on large, fundamental disputes—particularly disputes involving allegations of breach or bad behavior. For example, Dow Chemical Canada and Dow Europe (Dow) and NOVA Chemicals (NOVA), ordinarily rivals, found themselves as unlikely partners when Dow's parent company acquired Union Carbide, resulting in Dow's acquisition of Union Carbide's interest in a JV with NOVA that built and operated an ethylene production facility. Dow filed suit alleging, among other claims, that NOVA breached its contractual obligations by failing to run the plant at full capacity. The trial lasted eight months and involved 21 lawyers from six different law firms (Olijnyk 2020). The Alberta court found that NOVA had acted with willful misconduct and gross negligence and awarded Dow more than $1B in damages (Dow Chemical Canada ULC v. NOVA Chemicals Corporation 2018). The agreements governing the JV contemplate an 80‐year term, requiring Dow and NOVA to continue working together for decades. Thus, while the parties were unable to resolve the substantial damages claims among themselves, the Alberta Court of Appeals noted that litigation was not the best way to resolve the smaller disputes and “[s]ince the parties will want to work together in the future to their mutual advantage, a consensual resolution of the outstanding issues…would be preferable to one imposed by the Court” (Dow Chemical Canada ULC v. NOVA Chemicals Corporation 2018).

This article describes, illustrates, and provides benchmarking data on 15 terms that companies might include in joint venture legal agreements to help prevent, de‐escalate, and resolve partner misalignment and disputes. As most of these provisions cover decision‐making on a variety of issues (e.g., capital investments, external financing, amount or timing of dividends, and annual plans and budgets), we provide practical guidance on when and how each provision might be applied. Dealmakers and attorneys should consider including some or all of these terms in their JV agreements to increase the durability and effectiveness of the JVs they create; and JV managers and governors should use these terms to prevent, de‐escalate, and resolve disputes. Moreover, while this article focuses on contractual provisions, companies forming JVs have other tools at their disposal to manage partner misalignment and disputes—namely, selecting highly capable partners that are strategically and culturally compatible, and establishing governance and management practices that promote strong and open working relationships and foster alignment.