As an entrepreneur there are some things that you can’t do on your own. Working together is often the key to success. There are many different ways how you can do this: by entering into a cooperation agreement, by setting up a joint venture or by participating in a partnership. In what situation do you choose which option and what things do you have to consider as an entrepreneur?
The cooperation agreement
If two entrepreneurs want to make arrangements with each other about collaborating on a job or in a project, they can do so by entering into a cooperation agreement. In this agreement, both parties lay down how and under what conditions they wish to cooperate. Sometimes a single page will do the trick, but in practice that often proves to be insufficient. Many trade associations have a standard model for cooperation agreements, with or without accompanying general terms and conditions. Those models take into account the issues that must be arranged. The models or the general terms and conditions often contain standard arrangements regarding topics such as the division of responsibilities or the settlement of disputes. For construction projects there are standard models for cooperation as well (coordination agreements according to the model of VG-Bouw, the Dutch Association of National Building Contractors).
In some situations, cooperation requires a tailor-made approach and you can’t escape from having to think carefully about what should be included in the cooperation agreement. This endeavor starts with painting a clear picture of the responsibilities of both parties and gaining insight into the risks.
In dividing the responsibilities you determine who has to perform which tasks and what they’ll receive in return. An important thing to consider is the distinction between a performance obligation and a best efforts obligation. In the case of a best efforts obligation, a party tries its best but doesn’t guarantee the result. If something goes wrong it’s often difficult to hold that party responsible. A performance obligation, however, does make it possible to hold a party liable for not achieving the agreed result.
It helps to jointly define the risks. What happens if permits aren’t obtained or aren’t issued on time? What are the consequences of delayed delivery? By assessing the likelihood that a risk will occur and the effect that this will have on the cooperation or the project, the parties gain insight into the major and minor risks. For the major risks it can then be identified which control measures can be taken and which of the parties is best able to manage those risks. It’s a good idea to incorporate this in the cooperation agreement.
In the case of a one-to-one collaboration, a cooperation agreement is a good tool to shape the cooperation. When there are multiple parties involved, however, it quickly becomes complex and the number of agreements will increase. In these cases one could consider setting up a joint venture.
By setting up a joint venture, two or more parties can give shape to their cooperation in the form of a ‘vehicle’. This joint venture will then act as the contract party in the project and the participating parties can use the company’s structure and set-up to define their arrangements. In complex construction projects this is more often the rule than the exception. Frequently it is required that the parties cooperate in a so-called Special Purpose Vehicle (SPV) that is set up especially for the occasion. The SPV then acts as the contractor in a construction project, for instance. The advantage of a joint venture is that this company bears the project risks as a legal entity. If anything would go wrong that would lead to the company’s bankruptcy, the participating parties are not directly affected. A joint venture therefore offers extra protection in the case of complex, high risk projects.
Setting up a joint venture enables the parties involved to make suitable arrangements. The control over the company can be organized in many ways and the degree of participation and right to profit can also be arranged flexibly. The parties have a choice of different legal forms, each with their own (fiscal) advantages and disadvantages. A private limited liability company (BV) or a public limited liability company (NV) for commercial projects and a foundation for non-commercial purposes are usually seen as the obvious choice. Unfortunately, the option of a cooperative is often overlooked.
Particularly when it regards sustainable projects, where making a profit is not always the main objective (not-for-profit) and it is important to create a support base, a cooperative is an interesting legal form of collaboration. The cooperative combines the characteristics of a company and an association, and cooperation is achieved through a membership relationship. Because of this membership structure, parties with different goals can work together in a single partnership. Using different types of memberships, different rights and obligations can be defined, each offering a different degree of control. In this manner the cooperative can, for example, be the heart of a sustainable solar energy project where customers can benefit as members from the generated energy while investors and banks are involved through a different type of membership and are entitled to the agreed return on their investment. Even the Public Body of Bonaire could become a member through the use of a customized membership that defines the involvement with the project and offers a voice with regard to the social distribution of the proceeds via a voting right. Decision-making can take place via a meeting of members, with voting rights granted to (a representation of) the consumers/customers. This creates a broad support base.
The cooperative is also an alternative to be considered for other types of projects. Examples would be sustainable agriculture, wind energy or the management of shared facilities in a villa park. The flexibility and the cooperative principle are a solid basis for success.
There are many ways to cooperate. The classic idea of a cooperation agreement is perfectly suitable for clear-cut projects and collaborations. If things are becoming more complex and the risks increase, it’s a good idea to consider setting up a joint venture. For sustainable projects that require a broad support base, the cooperative is a serious and appealing alternative.
Tom Peeters is an experienced and specialized real estate lawyer and head of our Bonaire office. He regularly publishes about project development, sustainable energy projects, cooperative structures and (public) procurement. Via this blog he shares his knowledge about these and other legal topics that concern entrepreneurs in Bonaire.