What Is a Consortium Agreement?
A consortium agreement is a legally binding arrangement between two or more entities who through the agreement agree to work together on a specific project for a specific period. It is important to note that a consortium agreement is not a partnership; parties involved in a consortium are not agents, partners, or employees of each other. A contract between consortium members is instead a strictly relational one to achieve a common objective by the parties. A consortium of parties is bound by its consortium agreement to cooperate in an effort to achieve a specific purpose. Rather than the individual contracting with the owner, the consortium makes proposals for and damages claims against the owner on behalf of itself and its members.
Consortium agreements generally include the scope of the consortium, establishment of management and reporting processes, and control of engineering and design decisions by the participants in a manner deemed to avoid conflict. After the agreement has been executed, the consortium typically negotiates a contract with the owner based on the terms and conditions of the consortium agreement . The consortium agreement is not enforced against the owner unless incorporated into the contract. Additionally, if the consortium fails to fulfill its obligations to the owner, the owner may enforce its rights against each member of the consortium.
An owner may use a consortium agreement in the following situations:
• In projects in which different components and specialties are required and are outside the expertise of one firm;
• In cases in which it is advantageous to have more than one party participate in the bidding process, thereby giving the owner multiple options from which to choose; and
• In projects where multiple parties can have collective bargaining power or can more effectively allocate risks.
Similarly, a contractor may set up a consortium for the following reasons:
• To relieve itself from undertaking highly complex projects that require several different specializations; and
• To increase its chances of being awarded a contract by forming a joint and competent team.
Important Components of a Consortium Agreement
The structure of each consortium agreement will vary depending on the requirements of each party and the country in which the project is being carried out. Equally, the form of the consortium will be determined by the legal requirement of the jurisdiction in which the consortium is enacted; for example, in Spain the consortium is a recognised legal entity under the Law on State Funded Research and Development (Spanish Act 13/1986 of April 27). Thus, the main elements normally found within a single agreement include: The aim of the consortium agreement is to detail the basic responsibilities of the parties, the goals of the consortium, the confidentiality restrictions imposed on the parties, and how the revenues accrued from the consortium will be distributed among the members. The parties’ responsibilities usually concern what scientific and technical work each party is obliged to do, the storage of data, the dissemination of results and exploitation of the results. However, the distribution of the revenues generated can be a contentious point; the Revenue and Customs Act 2005 (RCA) levies tax on any profits of a business including any profits generated from exports and overseas markets. Thus, the consortium agreement must properly reflect how the profits will be allocated.
Types of Consortium Agreements
Consortium agreements can take various forms, including joint ventures and strategic alliances. These arrangements can be broadly classified as either project-based or functional-based, based on the characteristics of the members or the type of activities to be carried out.
A project-based consortium agreement is where the parties are brought together by a common goal, such as a single project or activity, like a construction project, event, or even a film. In this case, the agreement will last only for the duration of the specific project. This agreement gives the members of the consortium a clear understanding of their obligations during the life of the consortium. An example of this type of arrangement is the agreement entered into by Otto Franke and Louis Rees which had a single purpose of constructing a cable-stayed bridge across the Harsha River between the towns of Pahadisharifabad and Amarkantak in the state of Madhya Pradesh, India. The consortium agreement entered into between the parties detailed the rights and obligations of the parties with regards to the design and construction of the bridge.
A functional-based consortium is where the members decide to enter into an agreement on a functional basis, for instance, sharing services for the purposes of increasing sales, geographic expansion, etc. The members usually enter into a long-term agreement where members can either pool their resources for the purpose of carrying out certain activities, or enter into exclusive relationships to carry out a particular function. A functional-based consortium agreement is usually based on the functions that the parties intend to pursue as opposed to carrying out a sole project. For instance, in the 1990s, two South Korean companies entered into a consortium arrangement to co-manufacture and market a car. One company was in charge of production while the other handled marketing, for the purpose of competing against foreign automobile companies. Five years later, the arrangement was terminated as the companies were unable to compete against these foreign companies.
Legal Issues in a Consortium Agreement
Here, we touch on the key legal issues that may arise in connection with a consortium agreement, in particular: potential liabilities of consortium members and dispute resolution mechanisms.
Potential liability of consortium members
Members of a consortium are typically joint and severally liable in respect of their obligations in the consortium agreement. The joint and several liability of consortium members in a consortium agreement means that any one member can pursue a claim against one or all of the other members in a consortium agreement for the full amount due from all members in a consortium agreement.
Under English law, a person who enters into a contract as agent for a disclosed principal, for whom that person has authority to contract, is not personally liable on the contract. However, if a consortium member enters into a consortium agreement in its own name as principal, then that consortium member could be liable for the performance of the obligations of all consortium members.
Consortium agreements will usually provide for the members to indemnify each other against any liability or obligation incurred by a member in breach of clause or obligation in the consortium agreement, including costs and expenses incurred in recovering a liability that has not been paid. There may also be an obligation to ‘hold harmless’ which is essentially an equitable remedy requiring a party to refrain from causing loss to another party.
Dispute resolution
If a dispute cannot be resolved by amicable discussion it is useful to include a mediation process in a consortium agreement. Mediation is a process whereby an independent third party, the mediator, encourages the parties in dispute to reach a negotiated conclusion. The mediator has no direct role in the formulation of the terms of the settlement but acts as a facilitator in the negotiation process.
Other forms of alternative dispute resolution include expert determination and adjudication. An expert determination is a process whereby an expert is jointly instructed by the consortium members in dispute to decide on certain issues. A dispute can also be referred to adjudication. Under the Housing Grants, Construction and Regeneration Act 1996 (the "HGCRA"), adjudication is a process whereby a temporary interim, which is too fast for litigation but binding until determined by a court, resolution of a dispute is achieved. The decision of an adjudicator appointed under the HGCRA is enforced through the courts and binding until the dispute is finally resolved by arbitration, litigation or agreement.
An alternative to mediation, the referral to adjudication can be a useful and comfortably quick method to resolve disputes in the construction sector, where contractors are normally under pressure to resolve matters quickly because of the possible effect of a dispute to slow progress and cash flow.
With the above in mind, it is important that the provisions of a consortium agreement are reviewed prior to execution, to ensure that the required steps have been taken to enable a consortium member to exit an project if this becomes necessary because of a dispute among them.
Sample Consortium Agreement Provisions
As consortium agreements typically involve a variety of different terms and conditions, the following are some examples of the types of clauses which may be included within a consortium agreement:
Termination
"Notwithstanding any provision of this Consortium Agreement, the Authorized Representatives may terminate this Consortium Agreement: By mutual written consent of the Partners or at any time on one hundred eighty (180) days written notice to all other Partners. Such termination shall not affect the Partners’ rights and obligations under this Consortium Agreement that, by their terms, continue after termination or that are necessary to accomplish the purposes of the Consortium."
Co-Funding Obligations
"The Subcontractor shall fund continually its own contribution to the Project or through contributions from other partners or other financing sources, and ensure that the progress of the Project is not interrupted. The Consortium shall not have any obligation to fund the Subcontractor’s expenses."
Intellectual Property Rights
"Any Partner holding Intellectual Property Rights (background intellectual property or foreground intellectual property) shall notify the Coordinator prior to implementing the Project, and shall grant the Consortium Partners a royalty-free and non-exclusive license for its own use (but for evaluation and/or testing purposes only), in accordance with the Project specifications , with a term of up to [1 year] after the end of the Project, to exploit such background intellectual property or foreground intellectual property with respect to the territory in which the Project is implemented."
Liability
"The Consortium shall be liable for the execution of the Project on the terms and conditions set forth in the GtP, which incorporates the standard Grant Agreement terms and conditions (Annex II) and any amendments to said terms and conditions, as applicable. The liability of each Partner shall be several (and not joint or joint and several), thus each Partner shall be only liable for its own acts, errors and omissions, or those of any of its subcontractors, its employees, agents or representatives; and such liability shall not exceed the amount of Project funds which the individual Partner has received. Notwithstanding the foregoing, the same or another Partner(s) shall remain liable for its acts or omissions and those of its subcontractors, its employees, agents or representatives if it is in breach of its obligations with respect to prior to the date of termination."
Suspension of Agreed Work
"Any Partner may, upon giving a thirty (30) day written notice to the other Partners and to the Coordinator, terminate a specific Work Package, Task or WP Submission, if any, should it not be possible for the Partners, acting with reasonable diligence, to mutually agree on the necessary amendments to the Consortium Agreement."
Advantages of Consortium Agreements
The benefits to a consortium agreement are far greater than some the individual participants would be able to achieve on their own; thus consortiums can be an effective means for smaller innovators to collaborate and share the associated risks of research and development. Forming a consortium agreement also fosters collaboration, and enables the neutral third party to monitor the project, helps to prevent competing interests from overpowering the venture, and allows the participants to more easily exit the venture if they need to. Furthermore, consortium agreements can promote the spirit of collaboration and reduce the potential for litigation with well constructed confidentiality clauses, non-compete clauses, and dispute resolution procedures signed by all participants.
A consortium agreement is especially useful for promoting knowledge sharing among participants. In a consortium, participating companies may be pursuing the same goal, or may be destined to be competitors in the commercial sphere. Sharing intellectual property rights with competitors could otherwise pose a serious problem; however, through a consortium, competitors can share intellectual property rights without having to worry about frivolous misappropriation suits, because such activity is permitted as part of a consortium agreement.
Potential Challenges and Risks of a Consortium Agreement
While consortium agreements can offer distinct advantages, they are also fraught with challenges and risks. A consortium is likely to involve multiple stakeholders, sometimes with clashing interests and risk appetites. In the case of a consortium public-private partnership (P3), for example, the private partner is seeking profit from the infrastructure that the public partner develops for the community, and those two objectives may conflict over the life of the project. Disputes can also arise over ownership of discoveries, allocation of control of intellectual property (IP) resulting from a consortium project, profit-sharing arrangements, and many other areas. In some cases, a consortium that includes many partners can face a "herding cats" challenge with respect to effective project management. It is important for a consortium agreement to take a holistic approach to the project, rather than channeling each partner down their own narrow path. In such cases, the management of the consortium should be assigned to a well-defined body, such as an executive committee, to coordinate project management among all the partners. Similarly, a consortium that includes partners from many different geographical locations, each operating under a different legal system, can be difficult to manage from a regulatory perspective. The legal requirements for a consortium partner in one country may not be met by a consortium partner in another country. That is why a consortium agreement should contain conflict-of-law provisions, allowing problems to be solved by reference to a clearly defined jurisdiction.
Best Practices: Conclusion
In summary, when drafting and managing consortium agreements, careful attention must be paid to the consortium’s objectives and how these will be best achieved. Early discussions between consortium members can avoid serious problems later on in relation to how the consortium members’ roles will be structured and the composition of the consortium board and management bodies. Agreement needs to be reached on the extent to which the consortium is responsible for third party (including government) payments, and the associated risks and liabilities of the consortium and members . Ownership of intellectual property developed by the consortium and the right for consortium members to use it must be addressed, and agreement reached on the application of anti-bribery laws to consortium members and actions that may be taken to avoid extending anti-bribery legislation to affiliates.
We would advise that consortium members consider the above issues at the inception of a project and develop a strong consortium agreement which should cover additional matters such as confidentiality, publicity, liability, ownership of intellectual property and dispute resolution. In addition, robust and effective governance is a key factor address in a consortium agreement which can significantly impact the performance of a consortium.