Main idea: The contractual alliance contract is a framework for an alliance or collaboration between two parties where no separate, jointly owned, corporate entity is created. The alliance is based solely on contractual arrangements between the parties.
Required tailoring. Each contractual alliance or collaboration is different, and the ITC Model international contractual alliance contract therefore provides a series or a “menu” of possibilities, depending on the purpose of the alliance. Of course, provisions that are not relevant to the particular alliance should be deleted. Moreover, if the context of the contemplated collaboration makes it desirable to provide for a different arrangement, then this different configuration should be negotiated or adopted. After all, contract law facilitates flexibility and autonomy for the parties to tailor their relationship.
Costs and benefits. The ITC Model Contract anticipates that the two parties will share pro rata in the costs of the alliance. It is important to establish what types of costs are to be shared, especially to the extent that this would require cash payments from the parties. If a party is to be paid for its work or other contribution, the basis for remuneration should be clearly established – either at the outset or through the management committee. Appropriate compensation schemes can be: time-based (i.e. per hour, day or month), fixed pricing (e.g. one lump sum compensation or divided into milestones), a commission or a pro rata sharing of revenues (e.g. a percentage of turnover or net sales). It is recommended that you be explicit about costs and cash benefits.
Organisation and decision making. The ITC Model Contract envisages the formation of a management committee, on which the two parties are jointly represented. In this regard, it may be appropriate in some cases to (i) spell out the authority of particular individuals or subcommittees, or (ii) ensure that certain “reserved matters” require unanimous decision. See also the related provisions in the ITC Model international corporate joint venture agreement (Articles 6, 7 and 8). It is important that issues involving ownership, (strategic) business scope, non-compete and intellectual property rights remain subject to consensus (i.e. unanimity). If more parties are involved, these issues might be subject to a veto or qualified vote.
Party contributions. In the ITC Model, Article 3 contemplates that each party will have areas of responsibility to contribute towards the success of the alliance. In some cases, these will be expressed in general terms – and not involve formal legal commitment (see examples in Article 3.3.1, 3.2.1 and 3.3.2). In other cases, specific legally-binding commitment will be appropriate. Especially in larger or complex alliances, it is common to subdivide the agreements: the alliance agreement becomes an umbrella for adjacent (project) agreements. Article 3 would refer to those agreements, which are attached as a schedule. For example:
- Commitments related to promotion and sales of alliance products could be based on the ITC Model Contracts international commercial agency or international distribution of goods.
- Commitments to supply certain goods to the alliance (or to another party) can follow the format of the ITC Model international long-term supply of goods.
- The provision of services, the joint development of a ‘work’, product or component can be inspired by the ITC Model Contract international supply of services.
Joint development. If the alliance is a joint development agreement, Article 4 (‘joint projects’) is helpful: the ‘organisation’ established in Article 2 is attributed the authority to define and monitor the joint development work, and the parties commit to fund such joint projects. In many cases, it is indispensable to specify technical requirements, technical tolerances of results and external licences in a separate ‘statement of work’ to be attached as a schedule, as well. If the joint activities include an exchange of staff or key personnel, Article 8 establishes a few safeguards.
Intellectual property rights (IPR). Article 6 sets out provisions for a relatively straightforward sharing of know-how and technical development. The ITC Model Contract provides a framework of key points. It envisages that specific IPR developed under the alliance will be jointly owned and that “going to market” will require the consent of both parties. Clarity is important regarding rights after termination of the alliance. In many cases, more detailed licence agreements will be appropriate to cover the IPR arrangements, particularly where one party’s IPR is made available for use by the other party under the alliance.
Preferred supplier. In many cases, one of the parties is likely to be appointed a preferred supplier or distributor of products developed under the alliance. In such cases, the ITC Model’s Article 7 may inspire such an arrangement, which typically grants a first opportunity (or, alternatively, a right of first refusal) to one party to supply the other party, subject to price, specification, quality and delivery times being agreed and no less favourable than other potential and comparable suppliers. It must be noted that preferred supplier arrangements may constitute an infringement of competition law in the countries where the party-suppliers are established or where the alliance will become operative.
Non-compete clause. Many alliances contain a clause restricting the parties’ freedom to undertake activities competing with those of the alliance. This may take the form of a non-compete clause (see Article 10.1 of the ITC Model Contract), as well as a certain level of exclusivity of the cooperation (Article 10.2). Usually, the scope and duration of these clauses are heavily negotiated. It is therefore important to be accurate as to what is prohibited and what is permitted. It is common (and generally not subject to competition law restrictions) to provide for a non-solicitation clause as well: Article 10.3 prohibits the partners from enticing away each other’s (key) employees.
The duration of such restrictions is often extended beyond the term of the alliance agreement. The prevents one party from opportunistically terminating the alliance when it appears that cooperating requires the efforts of a struggling marriage, but key skills or learning points of the other party seem replaceable. While a post-termination continuation of a non-compete is justifiable for the viability of an alliance, competition law also limits how long that continuation may last.
Duration. Establish the duration of the alliance. Most alliances are related to the term of a certain project. Once the project has been completed or when the results appear unachievable, the parties may (freely) either consider extending the scope of the initial project or go their own ways. In the ITC Model, Article 12 provides for the case where the alliance will continue indefinitely subject to a party’s right to terminate – either unilaterally by giving notice or in specified circumstances. Alternatively, the alliance parties might agree on a specific term with subsequent renewal requiring mutual agreement.
One termination ground is particularly common for alliances and close cooperations: termination on the ground of a ‘change of control’ over the other party. The reason behind it is based on the personal nature of cooperation and the mutual trust required in collaborations. This mutual trust would typically be diminished if the partner has been taken over by a competitor or if the commitment of the partner’s management is in doubt following replacement of the people most directly involved.
Tax and liability implications. A contractual alliance does not usually involve the creation of a separate, profit-making business in which the parties share profits as well as costs. If the arrangements do involve income or profit-sharing, it is important to note the potential liabilities that might arise. An alliance might fiscally or legally be qualified as a ‘partnership’ that:
- triggers tax filing obligations and specific tax treatment; and
- entails the considerable risk that, especially if the alliance operates vis-à-vis third parties, each party could become jointly liable to third parties for any claims arising out of the activities of either party in the alliance.
Formalised partnership status. If the venture does involve a separate profit-making business, this will normally require a more formal ‘partnership’ agreement or the creation of a corporate joint venture. Such a formal partnership agreement can be based on the ITC Model international corporate joint venture agreement (where the terms ‘shareholder’, ‘director’ and ‘JVC’ should be replaced, respectively, by the terms ‘partner’, ‘managing partner’ and ‘alliance’.