by Michael Strogoff, AIA

Like the jilted partner wishing he or she had executed a better prenuptial agreement, business partners often find themselves engaged in costly disputes because of nonexistent or poorly negotiated contracts. Business marriages—usually built on respect, optimism, and trust—fall apart for myriad reasons, including lack of leadership, unclear roles and responsibilities, clashing cultures, poor client management, and failure to respond quickly to problems. And, absent the goodwill that accompanies the romance stage, business divorces get emotional and ugly when one party perceives that its financial or professional interests are threatened: client custody fights, anxious employees, division of assets and liabilities, betrayals, tarnished reputations, public relations battles, and attorneys’ fees.

To avoid costly disputes, heed these guidelines when negotiating a joint venture or strategic alliance agreement:

Document the rationale for forming the alliance. Document the rationale for forming the joint venture. Don't ignore this crucial first step by assuming that all stakeholders understand why the joint venture or alliance was formed. Avoid vague reasons such as, “for marketing purposes.” Rather, identify specific strategic reasons such as “to capitalize on ABC’s technical expertise and experience producing documents for large-scale facilities and XYZ's planning and design experience in performing arts centers.”

Define roles and responsibilities. The foundation of any team’s success is a clear understanding of how the parties will pool their resources and talent to meet their client's objectives. Assign primary responsibilities for client contact, management, design, production, consultant coordination, and accounting and name specific personnel to fill key roles.

Assign a single point of contact. A client's need for leadership and accountability by their design professional is even more important when contracting with multiple firms. The contact person need not be the same person throughout the project. A joint venture's design principal may fill this role during the design phases whereas the joint venture's technical director may fill the role during the production and construction administration phases.

Obligate the parties to develop a quality management plan. This plan should detail specific steps the team will take to maintain design and technical quality control and assign responsibility for managing each area to specific people.

Include an easy dispute resolution process. Expect disputes, ranging from minor staffing problems to major financial disagreements. Establish a policy board, comprising representatives from each party, to resolve disputes. Consider reserving the right to mediate or litigate should the board not reach a unanimous decision. Because some disputes require time to resolve, assign authority to make interim decisions so that work doesn't come to a screeching halt. This interim decision maker need not be the same person for each type of decision (e.g., one person may be assigned to make interim design decisions, another to make management decisions).

Allocate risks to encourage better management. Rather than allocating risks equally or to each party based on percentage interests in the joint venture or alliance (e.g., a party that maintains a 75 percent interest is financially responsible for 75 percent of all damages), consider assigning specific risks to the party that has the greatest ability to control that risk.

Maintain the right to remove non-performing staff. Don't lower your standards or expectations for staff members provided by a joint venture or strategic alliance partner. Require each staff member to perform and grant each party the right to have any staff member removed from specific projects.

Agree on how to allocate profit and loss. To make each party responsible for its own profit or loss based on its performance, apportion fees either on a lump sum basis or as a percentage of the team’s net fees. This methodology, which can be further defined by project phases, requires assigning specific areas of responsibility to each party.

To link each party's profit or loss to the team’s overall performance, reimburse for time spent at hourly rates below each party’s breakeven point. Then periodically distribute any cash surplus or require capital contributions to cover losses based on each party's interest in the joint venture or alliance. This will encourage each party to work efficiently. To further encourage efficiencies, adjust each party's interests based on the amounts billed to the alliance in the event of losses. For example, if a party had an initial interest of 50 percent but billed the alliance for 65 percent of the collective fees, then their portion of any losses would increase to 65 percent.

Special Protections. Protect against situations in which either party might unfairly benefit from information obtained through the joint venture. Place a moratorium on hiring each other's staff and prohibit each party from separately pursuing work with the joint venture's clients for a specified period of time.

Document, document, document. After all parties agree on these guidelines, document your understanding in a formal agreement. If the formation of your joint venture or alliance is predicated on receiving a commission, document the parties' preliminary understanding in a letter of intent and replace this with a formal joint venture or teaming agreement at the earliest opportunity. It is strongly recommended that you consult an attorney to ensure that your agreement is properly drafted and clearly reflects the intentions of everyone involved. Then work hard to keep your marriage alive.

Copyright 2005 Negotiating Strategies. Reprinted with permission.

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