The Hidden Risks in Joint Venture Liability Allocation under the ICC Model Contract

The 2024 revision of the ICC Model Joint Venture Contract continues to provide a valuable framework for structuring cooperation in complex commercial and construction projects. However, certain aspects of its liability regime under Article 12 may benefit from further clarification and refinement, particularly in relation to the internal allocation of liability among joint venture members.

In our earlier work published in Business Law Review, we examined the liability structure of the 2018 version of the Model Contract and identified areas that could potentially create interpretive uncertainty. Following that publication, we shared our suggested drafting refinements with the ICC. The 2024 edition largely preserves the existing structure of Article 12. This post builds on that earlier analysis and proposes targeted amendments aimed at enhancing conceptual clarity and contractual coherence.

The proposed refinements focus on four interrelated issues: (i) structural clarity between external and internal liability provisions, (ii) allocation of recourse liability following third-party indemnification, (iii) the appropriate liability threshold between joint venture members, and (iv) introduction of contractual exemption mechanisms.

Structural Clarification Between Articles 12.1 and 12.2

Article 12.1 is intended to address the liability of joint venture members towards the employer and third parties. However, the final sentence of the current provision introduces internal allocation concepts by referring to the proportionate sharing of rights, obligations, liabilities, and risks among members. This may blur the distinction between external liability and internal allocation mechanisms.

The proposed amendment removes the final sentence of Article 12.1 and relocates the internal allocation logic to Article 12.2, which is structurally better suited to address relationships among joint venture members. This modification seeks to improve drafting coherence.

Allocation of Liability in Recourse Scenarios

In the context of recourse following indemnification of a third party by one or more joint venture members, it is important to distinguish between two scenarios. In the first scenario, the third party’s loss cannot be attributed to non-compliance with the joint venture agreement by any member. In the second scenario, the third party’s loss stems from such non-compliance by one or more members.

In the first scenario, where no member is at fault, the loss may properly be treated as a business loss and allocated between joint venture members based on the proportionate values set out in the main agreement. Sharing business risks in this scenario is in accord with the general principle that, absent any provision to the contrary, all profits and losses resulting from joint venture activities are shared between members in accordance with the proportionate values set out in the joint venture agreement.

As to the second scenario, sharing liabilities or losses caused by non-compliance with the joint venture agreement is conceptually different from sharing pure business losses. Here, liabilities or losses caused by non-compliance with the joint venture agreement should ultimately be borne by the defaulting party based on general principles of contractual liability.

To reflect this distinction, existing Article 12.2 is preserved as the relevant provision for the first scenario (general rule), with an additional statement addressing the second scenario as an exception.

Reconsidering the Liability Threshold: From Gross Negligence to Negligence

The current Model Contract adopts a ‘gross negligence or willful misconduct’ threshold for internal liability among joint venture members. In principle, ‘gross negligence or willful misconduct’, as proposed in Article 12.2 of the Model Agreement, may be difficult to reconcile with credible and well-founded contractual liability standards, without clear rationale or justification. To put it in perspective, allocation of liability between joint venture members in cases of non-compliance with the joint venture agreement should basically follow the general principles of contractual liability, which may take either of two forms: first, fault liability (or means guarantee); second, strict liability (or end guarantee).

As a consequence of the above, the problem with the gross negligence standard in Article 12.2 is twofold. First, in general, it does not fit into internationally recognised theories regarding the bases of contractual liability. This is especially problematic when the Model Agreement is adopted by parties from a common law background. Since the standard basis for contractual liability in many common law countries (and even some non-common law countries) is end guarantee or strict liability, agreeing on gross negligence or willful misconduct may be difficult for parties to accept.

Second, from a practical perspective, the gross negligence standard is not fully aligned with some other parts of the present joint venture agreement which, like any other contract, clearly outline the responsibilities and obligations of the joint venture members and sanction any non-compliance accordingly. In particular, applying the gross negligence standard may be problematic in establishing contractual liability in situations set out in Articles 9.5, 13.1(iv), and 13.6. In these settings, conditioning remedies for non-compliance on proof of gross negligence or willful misconduct may make establishing liability unnecessarily difficult without clear justification.

Having addressed the limitations of the ‘gross negligence or willful misconduct’ standard, the next level of inquiry involves selecting between fault liability and strict liability as a potential substitute. The author is of the opinion that, compared to fault liability, strict liability serves a more realistic and sensible purpose in defining contractual liability. Nevertheless, in order to minimise deviation from the original text, the ‘gross negligence or willful misconduct’ standard is replaced with ‘negligence’ (and not strict liability) in Article 12.2. Negligence, a fortiori, would also incorporate gross negligence and willful misconduct.

If ‘negligence’ (and not strict liability) is substituted for the gross negligence standard, I propose adding a provision establishing a rebuttable presumption of fault or negligence in all instances of contractual non-compliance by one or more joint venture members vis-à-vis the other members. This is to create a more refined and equitable contractual equilibrium. Such provision shifts the burden of proof to the non-complying party to demonstrate absence of negligence in cases where a claim for breach of contractual obligation is raised.

Introduction for Contractual Exemption Mechanisms

The Model Contract does not currently contain a comprehensive force majeure or equivalent contractual exemption regime. It is possible that the relatively high liability threshold in Article 12 partially reduces the perceived need for such exemptions. However, if the liability threshold is adjusted toward negligence or strict liability concepts, the inclusion of force majeure and related contractual exemption mechanisms may help maintain contractual equilibrium.

Concluding Remarks

The ICC Model Joint Venture Contract remains an important and widely used contractual reference point. The refinements proposed here are intended to contribute to ongoing dialogue on how liability provisions can be structured to maximise clarity, predictability, and commercial fairness while preserving drafting continuity with the existing model framework.

Constructive engagement between practitioners, academics, and drafting bodies remains essential to ensuring that model contracts continue to evolve in response to practical experience. I welcome further discussion and perspectives from colleagues working with the Model Contract in practice.

Shahab Jafari is an Associate Professor at the Islamic Azad University, Tehran (Science and Research Branch) and Partner, Peace Tribunal Law Firm, Tehran.