A joint operating agreement, sometimes abbreviated to “JOA”, is a legally binding contract between multiple parties that are collaborating on a specific project. The JOA is used to outline the terms, responsibilities, and obligations of each party throughout the business relationship.
Joint operating agreements are commonly used in industries like energy and real estate. The purpose of the contract is to establish guidelines for resource sharing, risk mitigation, decision-making, and asset management between the parties.
How Do I Review a Joint Operating Agreement?
It is important for all parties to review a joint operating agreement before entering into the contract.
When reviewing a joint operating agreement, follow these steps:
- Read the entire contract. Carefully read the entire agreement including all of the fine print. Always ensure that the provisions in the document accurately represent what all parties have agreed upon in negotiations.
- Take notes. Make notes about key terms, obligations, deadlines, payment details, and any other important provisions that stand out while you review the document. You may want to come back to these terms to renegotiate or for further clarification.
- Look for ambiguities. When a contract is unclear or ambiguous, it can create legal issues and disputes. Any terms that could have differing interpretations should be clearly explained to ensure that both parties understand what the term represents.
- Be prepared to negotiate. If there are any clauses that concern you, be prepared to renegotiate these terms to ensure a fair agreement that meets the needs of all parties.
- Seek legal advice. Before entering into a joint operating agreement, you should always consult with an attorney. It is recommended that each party have their own lawyer representing their interests.
Due to there being multiple parties involved in a joint operation agreement, these contracts can be complex. A thorough review of the agreement ensures that each party is adequately represented and protected.
What is the Purpose of a Joint Operating Agreement
The primary purpose of a joint operating agreement is to create a formal relationship between parties involved in joint operations. This contract is used to delegate duties and mitigate potential disputes.
A well drafted joint operating agreement will fulfil the following purposes:
- Define the roles and responsibilities of each party which could include their financial contributions, operational duties, and decision-making authority.
- Mitigate risk among the parties by specifying how risks and liabilities will be shared. A JOA will minimize the potential financial and legal consequences of unforeseen events like accidents or economic downturns.
- Establish a framework for decision-making processes and how the business relationship will be governed. This can include outlining voting procedures and dispute resolution mechanisms.
- Define asset ownership among the parties by specifying how assets will be shared, transferred, or sold if necessary.
While it is possible for entities to collaborate without a joint operating agreement, this contract provides protection and guidance for each party throughout the business relationship.
What Must Be Included in a Joint Operating Agreement?
A well-structured joint operating agreement should include the following key components:
- Party information. The names and legal entities of all parties involved in the JOA.
- Purpose. The reason why the parties are entering into the contract.
- Scope of duties. This section should include a description of the project or collaboration and how each party will contribute.
- Contributions and obligations. An outline of each party's financial and operational contributions including their obligations and responsibilities throughout the duration of the project.
- Decision making procedures. Procedures for decision making throughout the business relationship including voting rights, thresholds for major decisions, and the process for dispute resolution.
- Management and operations. A detailed outline describing how the project will be managed. It is common to appoint an operator who will be responsible for day-to-day activities.
- Funding and budgeting. The project funding requirements including capital calls, budget approvals, and financial reporting.
- Risk allocation. How risks, liabilities, and indemnities will be allocated among the parties.
- Default. The consequences of a party’s default.
- Termination clause. The conditions under which the JOA may be terminated by any of the parties.
- Asset ownership and transfers: This clause should address issues related to asset ownership, transfers, and exit strategies.
- Governing law. The governing law and jurisdiction that will apply to the contract.
Depending on the needs of the parties or the specific project addressed in the joint operating agreement, the contract may require additional clauses. An experienced attorney can review your JOA to ensure that it is complete and includes all necessary information.
What is the Difference Between a JV and a JOA?
Both joint ventures (JV) and joint operating agreements (JOA) involve collaboration between multiple parties to complete a project or achieve a common goal. However, these contracts differ in their purpose, structure, and legal implications.
The purpose of a joint venture is to create a new business entity or partnership. The parties in a joint venture will contribute resources and expertise to pursue a new business opportunity that involves sharing profits and losses. This differs from a JOA which primarily focuses on a specific project or asset. Parties enter a JOA to operate and manage an asset as a team rather than creating a new legal entity.
Under a joint venture, the parties create a new separate legal entity like a corporation or LLC. Each party will hold ownership stake in the new business. Under a joint operating agreement, no new entity is formed and the parties remain separate except in their collaboration.
Finally, when making decisions in a joint venture, decision-making is typically governed by the structure of the newly created business. All parties will have ownership rights and voting power based on their shareholdings. In a joint operating agreement, the parties can outline the decision-making processes in the contract and customize the process based on the specific to the project.
Should I Hire a Lawyer to Review a Joint Operating Agreement?
Yes. It is strongly encouraged to hire a lawyer to review a joint operating agreement before entering into the contract.
Hiring a lawyer to review a joint operating agreement provides the following benefits:
- Legal expertise. An attorney familiar with JOAs will know what needs to be included in the contract to ensure it is legally binding and enforceable in your jurisdiction.
- Clarity. A lawyer can explain any complex legal terms that may be difficult to understand. This ensures that you are fully aware of your rights and responsibilities under the agreement.
- Negotiation. When you hire a lawyer to review a contract, your lawyer will view the agreement with your needs in mind. If there are clauses that seem unfair or put you at risk, your lawyer can help negotiate more favorable terms.
- Dispute resolution. If a dispute arises during the course of the project, your lawyer will already be familiar with the contract and can help solve the dispute or represent your interests in mediation or arbitration.
A joint operating agreement is a complex document. Hiring an experienced lawyer to review the contract will ensure that your interests are represented and protected.
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