Joint Venture Company (Partnership in Participation) under Kuwaiti Companies Law

A Joint Venture Company (Partnership in Participation) is one of the forms of companies regulated by Kuwait Law No. 1 of 2016 Promulgating the Companies Law. The Law regulates this type of company under Chapter Five, specifically Articles 76 to 79.

A Joint Venture Company has a legal nature that differs significantly from most other forms of companies. It is essentially based on the internal relationship between the partners, does not have a separate legal personality, and its contract is not subject to registration in the Commercial Register or to publication requirements.

These characteristics are of considerable practical importance, as they allow two or more persons to participate in a particular project or business activity and regulate their financial and legal relationship without the company, as a general rule, appearing before third parties as a separate legal person.

What Is a Joint Venture Company?

Article 76 of the Companies Law defines a Joint Venture Company as a company formed between two or more persons and limited to the relationship between the partners, without being effective against third parties.

Accordingly, the essence of a Joint Venture Company is an internal contractual relationship between the partners, under which they agree to participate in a business activity or project and share the resulting profits and losses in accordance with the terms agreed between them.

As a general rule, the company does not appear to third parties as an independent legal person. Instead, third parties deal directly with the partner or partners conducting transactions with them.

Characteristics of a Joint Venture Company

The principal characteristics of a Joint Venture Company under Kuwaiti Companies Law may be summarized as follows:

First: It Must Consist of Two or More Persons

A Joint Venture Company requires at least two persons who enter into a company agreement specifying the nature of the business or joint project, the rights and obligations of each partner, and the manner in which profits and losses are distributed.

Second: It Is Generally Undisclosed to Third Parties

As a general rule, the effects of a Joint Venture Company are limited to the relationship between the partners and are not enforceable against third parties.

Therefore, a third party dealing with the business is legally connected to the partner or partners with whom it contracted rather than to an independent legal entity known as the Joint Venture Company.

Third: It Has No Separate Legal Personality

The Companies Law expressly provides that a Joint Venture Company does not have a separate legal personality.

This is one of the most important distinctions between a Joint Venture Company and many other forms of companies. As a general rule, there is no separate legal entity independent from the partners, and third parties have no legal relationship concerning the company's transactions except with the partner or partners with whom they have contracted.

Fourth: No Registration in the Commercial Register

The agreement establishing a Joint Venture Company is not subject to registration in the Commercial Register.

This differs from other forms of companies that are subject to the registration and publicity requirements prescribed by law.

Fifth: No Publication Requirement

The agreement establishing a Joint Venture Company is not subject to publication or publicity requirements. This is consistent with its nature as a company primarily intended to regulate the internal relationship between its partners.

For this reason, the Companies Law exempts Joint Venture Companies from several general provisions concerning registration and publication that apply to other forms of companies.

Joint Venture Company Agreement

The Joint Venture Company agreement is particularly important because it forms the basis of the relationship between the partners and determines their respective rights and obligations.

Under Article 77 of the Companies Law, the agreement determines the rights and obligations of the partners and the manner in which profits and losses are shared, in addition to any other terms agreed between them.

In practice, it is advisable for the agreement to be clear and comprehensive and, depending on the nature of the project, to address matters such as:

• The identity and details of the partners.

• The business activity or project forming the subject matter of the company.

• The contribution or share of each partner.

• The partner responsible for managing the business and dealing with third parties.

• The limits of authority of the managing partner.

• The method for distributing profits.

• The manner in which losses are to be borne.

• The allocation of project expenses and costs.

• The duration of the company, where it is established for a fixed term.

• The consequences of the withdrawal or death of a partner, subject to the applicable law and the terms of the agreement.

• The circumstances in which the company may be terminated and the procedure for settling accounts between the partners.

• The mechanism for resolving disputes arising between the partners.

In all cases, the contractual provisions must not conflict with mandatory provisions of applicable law.

Must a Joint Venture Company Agreement Be in Writing?

A Joint Venture Company enjoys particular flexibility regarding proof of its existence and terms.

Article 77 of the Companies Law permits the Joint Venture Company agreement to be proven by all means of evidence, including witness testimony and presumptions.

Article 7 of the Companies Law also exempts Joint Venture Companies from the general requirement that a company agreement be made in an officially authenticated written instrument.

Nevertheless, preparing a detailed written agreement remains highly important in practice, as it assists in establishing the rights and obligations of the parties and reduces potential disputes concerning each partner's contribution, management authority, and share of profits and losses.

Relationship Between the Partners

The internal relationship between the partners of a Joint Venture Company is primarily governed by the terms agreed upon in the company agreement, together with the general principles applicable to company agreements.

The agreement between the partners is therefore particularly important in determining the extent of each partner's participation in the project.

The law also permits the partners to have recourse against one another in relation to the company's activities, the extent to which each partner is bound by those activities, and each partner's share of the profits and losses, in accordance with their agreement.

Distribution of Profits and Losses

The Joint Venture Company agreement should expressly specify each partner's share of the profits and losses.

As a general principle, the agreement is subject to the rules governing company agreements, including the general provisions relating to the distribution of profits and losses, to the extent compatible with the nature of a Joint Venture Company and the specific provisions governing it.

Clearly defining the relevant percentages and the method for calculating net profits, expenses, and losses is therefore important in reducing the possibility of disputes between the partners.

Liability of a Partner Dealing with Third Parties

Under Article 78, the general rule is that third parties have no legal relationship concerning the activities of the Joint Venture Company except with the partner or partners with whom they have contracted.

For example, if one partner enters into an agreement with a supplier in connection with the joint project in that partner's own name, the external legal relationship will generally arise between the supplier and that partner. The consequences of the transaction are then settled internally among the partners in accordance with the Joint Venture Company agreement.

This is one of the most important issues to consider before establishing a Joint Venture Company, particularly when determining which partner will be responsible for management and for entering into contracts with customers, suppliers, and other parties.

When Can a Third Party Rely on the Existence of the Joint Venture Company?

Kuwaiti law provides an important exception to the general principle that a Joint Venture Company remains undisclosed to third parties.

Article 79 permits a third party to rely on the company agreement where the company has dealt with that third party in its capacity as such.

This provision is particularly important because the manner in which the partners present themselves and their business to third parties may have legal consequences that differ from those arising where the existence of the company remains entirely confined to the internal relationship between the partners.

It is therefore important to distinguish between the existence of the Joint Venture Company agreement among the partners and the manner in which the partners or the business are presented to third parties when entering into transactions and contracts.

Difference Between a Joint Venture Company and Companies with Legal Personality

A Joint Venture Company differs from companies having separate legal personality in several fundamental respects.

A Joint Venture Company does not have a separate legal personality, and its agreement is not subject to registration in the Commercial Register or publication requirements. As a general rule, its effects are confined to the relationship between the partners.

By contrast, other companies recognized as having legal personality under the Companies Law acquire an independent legal status in accordance with the conditions prescribed by law and are subject to the applicable registration and publicity requirements for their respective legal forms.

Accordingly, a Joint Venture Company should not be selected merely because of the relative simplicity of its formation. The nature and size of the business, the manner of dealing with third parties, and the potential liabilities arising from such dealings should also be carefully considered.

Advantages of a Joint Venture Company

Depending on the circumstances of the particular project, a Joint Venture Company may offer several practical advantages, including:

• Simplicity in establishing the relationship between the partners.

• No requirement to register the company agreement in the Commercial Register.

• No publication requirement for the agreement.

• Flexibility in determining the rights and obligations of the partners.

• Flexibility in determining profit and loss sharing arrangements within the limits of the law.

• Suitability for certain projects or joint transactions where the parties wish to regulate their relationship contractually.

However, these advantages should be considered together with the legal risks associated with the absence of separate legal personality and the liability of the partner or partners dealing with third parties.

Risks Associated with a Joint Venture Company

Despite its flexibility, a Joint Venture Company may give rise to practical and legal risks, particularly where its agreement is brief, incomplete, or unclear.

Potential areas of dispute include:

• Proving the existence and terms of the company.

• Determining the amount of each partner's contribution.

• Determining the scope of authority of the partner dealing with third parties.

• Identifying the revenues and expenses attributable to the project.

• Calculating profits and losses.

• Claims for the rendering of accounts between partners.

• Determining ownership of assets used in the business.

• Terminating the relationship between the partners and settling their accounts.

• The legal consequences of dealing with third parties in the company's capacity as such.

A carefully drafted Joint Venture Company agreement that reflects the nature of the project is therefore an important means of protecting the interests of all parties.

Articles Governing Joint Venture Companies

Kuwait Law No. 1 of 2016 Promulgating the Companies Law regulates Joint Venture Companies under Chapter Five, Articles 76 to 79.

These provisions principally address the following matters:

Article 76: The definition of a Joint Venture Company and the limitation of its effects to the relationship between the partners.

Article 77: The Joint Venture Company agreement, its exemption from registration and publication requirements, the rights and obligations of the partners, the distribution of profits and losses, and the methods by which the agreement may be proven.

Article 78: The absence of separate legal personality, the legal relationship between third parties and the partner or partners with whom they contract, and recourse between the partners.

Article 79: The right of third parties to rely on the company agreement where the company has dealt with them in its capacity as such.

Frequently Asked Questions

Does a Joint Venture Company Have a Separate Legal Personality?

No. The Companies Law expressly provides that a Joint Venture Company does not have a separate legal personality.

Must a Joint Venture Company Be Registered in the Commercial Register?

No. Under Article 77 of the Companies Law, the Joint Venture Company agreement is not subject to registration in the Commercial Register.

Is a Joint Venture Company Subject to Publication Requirements?

No. The Joint Venture Company agreement is not subject to publication or publicity requirements under the Companies Law.

Must a Joint Venture Company Agreement Be Notarized?

The Companies Law exempts Joint Venture Companies from the general rule requiring a company agreement to be executed in an officially authenticated written instrument. The law also permits the Joint Venture Company agreement to be proven by all means of evidence, including witness testimony and presumptions.

Who Is Liable to Third Parties in a Joint Venture Company?

As a general rule, the legal relationship exists between the third party and the partner or partners with whom that third party has contracted, since the Joint Venture Company does not have a separate legal personality.

Can a Third Party Rely on the Joint Venture Company Agreement?

Yes. As an exception to the general rule, Article 79 permits a third party to rely on the company agreement where the company has dealt with that third party in its capacity as such.

How Are Profits Distributed in a Joint Venture Company?

The company agreement determines how profits and losses are distributed among the partners, subject to the principles and provisions of law applicable to company agreements.

Importance of Drafting a Joint Venture Company Agreement

Although Kuwaiti law permits a Joint Venture Company to be proven by all means of evidence, preparing a clear and comprehensive written agreement remains one of the most important measures for protecting the rights of the partners.

The agreement should take into consideration the nature of the project, the parties' respective contributions, management and signing authorities, financial and accounting arrangements, the distribution of profits and losses, the duration of the relationship, termination events, settlement of accounts, and dispute resolution procedures.

The more clearly these matters are addressed in the agreement, the lower the likelihood of disputes arising concerning the partners' respective rights and obligations during the project or upon its termination.

Conclusion

A Joint Venture Company is one of the forms of companies recognized under Kuwaiti Companies Law. Its principal distinguishing features are that it operates primarily within the relationship between its partners, does not have a separate legal personality, and its agreement is not subject to registration in the Commercial Register or publication requirements.

The relationship between the partners is governed by their agreement, which determines their respective rights and obligations and their shares in the profits and losses. As a general rule, third parties are legally connected to the partner or partners with whom they have contracted.

Given the particular legal nature of this form of company, preparing a comprehensive Joint Venture Company agreement and clearly defining each partner's authority, management responsibilities, accounting arrangements, and dealings with third parties are important measures for reducing disputes and protecting the parties' rights.

Legislative Reference: Kuwait Law No. 1 of 2016 Promulgating the Companies Law – Chapter Five – Joint Venture Company – Articles 76 to 79.

Disclaimer: This content provides a general overview of the provisions governing Joint Venture Companies under Kuwaiti Companies Law and does not constitute legal advice or a substitute for professional legal advice concerning specific facts or circumstances.