Consortium: A Risky Business Consortium: A Risky Business Consortium: A Risky Business Consortium: A Risky Business

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he execution o engineering projects is a risky business. 1he risks associated
with their supply are normally deined in writing in the contracts that parties
enter into. Contracts are in eect statements o risk, they contain obligations
that need to be complied with and corresponding liabilities i compliance is not
achieed. 1hey are the written record o how the risks associated with the deliery o
a gien project are to be diided between the parties.

1he orm o the written contract can hae a bearing on the respectie risks o the
parties. One particular type o contractual arrangement that has been speciically
designed to achiee a more een spread o risk sharing is the consortium or joint
enture approach.

A joint enture is a short or long term cooperation arrangement between two or more
parties or the purposes o undertaking a common project or enterprise. 1here are
two basic types o joint enture recognised by most legal systems. One is the
Corporate Joint Venture the other the Contractual Joint Venture.

1he Corporate Joint Venture as the name implies inoles the creation o a
corporation, an independent legal entity with shareholders and liable in law or all
obligations o its interests which are separate and distinct rom those o the
shareholders. Such an approach is most common between large companies who pool
their expertise in a particular ield to deelop markets or undertake large-scale
deelopment projects on a permanent or semi-permanent basis.

1he Contractual Joint Venture by contrast has no permanent structure, is goerned by
a contract entered into by the parties and is ormed mainly or the purpose o
deliering short-term one-o projects. 1he most common use o such entures in
engineering is a consortium.

1he Nature of a Consortium

1he consortium approach to project deliery is chosen because o the desire to share
as eenly as possible the risks inherent in that project. In this regard consortium
agreements are sharply dierent in concept to subcontracts. Most legal systems iew
consortia as partnerships, simple partnerships ,einache Gesellschat, socit simple,
subject to the laws o ordinary partnership current in the jurisdiction goerning the
Article
1
1
A Consortium is
a partnership
with shared
goals and
liabilities


contract. A consortium is like establishing a temporary business without the ormal
structure or tax liabilities, a business that is goerned by the rules laid down in a
contract or consortium agreement`.

1he key characteristic o an ordinary partnership ,or consortium, is that all partners
share responsibility or the perormance o the common purpose o the partnership
and the losses and proits incurred as a result ,normally on an equal basis unless
otherwise agreed,. So or example a ciil engineering contractor who joins a
consortium that has as its purpose the turnkey supply o a car actory will be liable or
the losses incurred in the equipment supply and erection up to its deined share ,een
though the ciil contractor only supplies the oundations, unless its liability is limited
in some way.

In the written consortium agreement parties are o course ree to decide exactly what
share o the liabilities they take, whether measured as a deined percentage ,or
example based on the relatie alues o their deined scopes o work, or limited in
some other way. 1he best approach is to deine with absolute clarity in the
consortium agreement which elements o the project are common elements`, or
which losses or proits arising rom perormance are shared ,and what the percentage
shares are,, and those elements that are solely the liability o an indiidual partner.
loweer, in the latter case clear regulations are needed on what to do in case o non-
perormance and what sanctions can be applied to the non-perorming partner. In the
case o non-perormance, the other partners will normally be bound to complete the
deaulting party`s work or the common purpose o the consortium will not be
ulilled. 1hereore it is ery diicult or any consortium member to limit its liability
simply to the risk attached to deliery o its deined scope o supply or the potential
losses on predeined common elements.

In the case o our ciil engineering contractor, i he were to limit his liability to
matters arising directly rom the supply o his scope o work only, there would be no
point in him being a member o a consortium. In such a case it would be better to
enter into a subcontract arrangement thereby giing the consortium better control
oer his perormance. 1he corollary to this is that it is unrealistic to expect a supplier
to join an engineering consortium as a member when the majority o the work
inoles the supply o elements so ar remoed rom the normal business o the
proposed member that he cannot judge the design and execution risks.

Advantages and Disadvantages of a Consortium

1he adantages o orming a consortium are:

a.e of orvatiov
No ormal procedure must be ollowed though most consortia are ormed in writing
by the execution o a consortium agreement. In addition no capital is required to
create the consortium.

teibitit,
Members o the consortium can change their contractual agreement at anytime to suit
changed circumstances.

a.e of 1ervivatiov
Consortia can be set to expire on a given date or on the occurrence of certain events without
the formal requirements needed in the case of the dissolution of a corporation.

1a 1rav.arevc,
1he consortium is not directly subject to taxation the indiidual members are.

Limiting liability
is not easy


Covfiaevtiatit,
Some o the members o a consortium may choose to be undisclosed` parties in
dealings with third parties.

Co.t.
1he cost o running a contractual joint enture is generally lower than running a joint
enture company.

1he are howeer certain disadantages:

iabitit,
It is diicult or a consortium member to restrict or limit its liability. Members may
een become liable to third parties or the non-perormance o other members o the
consortium or the debts o such members incurred in undertaking the common
project.

tervat Retatiov.bi. ava vvaivg
1hird parties oten ind it diicult to enter into contract with a non-legal entity like a
consortium. Because it is a non-legal entity unding is also normally only aailable to
the indiidual members and not the consortium itsel.

ac/ of Pervavevt trvctvre
1he lack o a permanent structure makes it diicult or a consortium to establish
long-term business relationships with third parties. In addition, the lack o
permanence means the consortium agreement is a crucial document and not easy to
drat. It must be clear on the rights and obligations o the parties, which need to be
ocussed irmly on the purpose o the consortium.

Leadership

It is quite common or one o the parties to a consortium agreement to be named as
leader o the consortium and be gien speciic powers or example as technical
manager or commercial leader. In such circumstances the consortium leader owes his
other partners a high duty o care. 1his duty o care is higher than owed by a normal
contractor to a sub supplier.

1he leader will need to account or his actions and make aailable all necessary
paperwork or inspection. 1his requires the leader to hae considerable skills in
project management and in particular be amiliar with open-book` procedures,
something some organisations might ind uncomortable.

In Summary: Be Clear

A consortium is a contractual arrangement speciically designed or use when two or
more parties wish to share the risk inherent in a common project. 1hereore beore
entering into a consortium arrangement the parties need to be absolutely clear as to
the common purpose o the enture and be completely aware o ,and hae clearly
agreed on, what elements o the common purpose or project they hae agreed to
share liability or perormance.

A written consortium agreement is crucial and requires to be drated with the utmost
clarity.

A Consortium
Leader owes a
high duty of care
to other partners