Cross-Border Joint Ventures by Japanese Companies:
Contractual Framework and Dispute Resolution;
Case Studies on JVs in India

I. Introduction

A joint venture (JV) is one of the options for Japanese companies to expand overseas, and there are many examples of its use. According to the Ministry of Foreign Affairs' Survey on the Number of Japanese Companies' Bases for Overseas Expansion, the number of joint ventures totaled 5,541 as of October 1, 2021¹. The regional breakdown shows that 4,038 are in Asia, 57 in Oceania, 320 in North America, 256 in Latin America, 576 in Europe, 165 in the Middle East, and 129 in Africa, indicating that Japanese companies have invested in JVs all over the world.

JVs have the nature of "buyside" in the sense that it is an investment in the other party's business, as well as the nature of "sellside" in the sense that it is an acceptance of investment from the other party. At the same time, it is also a long-term and continuous type of transaction that is not a one-off purchase or sale but is operated over a long period of time requiring the alignment of both parties’ interests. Moreover, in many cases, it starts with much uncertainty as to when and how to exit. An additional complexity in the case of a cross-border JV is the applicability of relevant foreign laws, which requires careful consideration.

Given the complexity and long-term nature of JVs, it is challenging to preemptively address all contingencies in business plans and contracts, which often leads to disagreements between the parties involved. When such disagreements escalate into full-scale disputes, international commercial arbitration is often used as a means of dispute resolution, as it has advantages in terms of neutrality, enforceability, and confidentiality.

This article outlines (1) contractual relationships, (2) main causes of disputes, (3) international commercial arbitration as a means of dispute resolution, and (4) matters to be considered to prevent disputes in cross-border JVs, by taking Japan-India JVs as example.

II. Contracts Governing Cross-Border Joint Ventures

The contracts exchanged in JV cases are roughly divided into the following three types:

(1)    Contract that governs the period up to the establishment of the JV entity
(2)    Contract that governs the period after the establishment of the JV entity
(3)    Other contracts that are ancillary to the JV business

In cross-border JVs where business customs differ between the parties, the contracts tend to be quite detailed. Depending on the circumstances, types (1) and (2) may be consolidated in the same contract or divided into separate contracts.

Of the above, type (1) usually includes the following provisions:

• JV's corporate type, location, trade name, articles of incorporation, etc.
• Type and number of shares to be acquired by each party
• Details of assets and cash to be contributed by each party
• Representations and warranties regarding the contributed assets
• Conditions precedent for closing
• Pre-closing covenants and undertakings
• Pre-closing termination
• Governing law and dispute resolution

Type (2) usually includes the following provisions:

• Governance-related items
• Business plan, dividend policy, etc.
• Further financing by each party
• Non-competition obligations of each party
• Restrictions on transfer of shares
• Termination of JV
• Governing law and dispute resolution

Type (3) vary deal-by-deal but may include an agreement to license essential IPs to the JV, an agreement to sell/buy certain goods or services to/from the JV, or an agreement to second human resources to the JV. Being an "ancillary" does not mean that it is of low importance, and it may sometimes be longer and more detailed than the JV contract itself.

III. Japan-India Joint Ventures

The economic partnership between Japan and India has grown significantly over the past decade, with numerous Japanese companies entering JVs in India. These JVs are typically formed in sectors such as manufacturing, automotive, infrastructure, and technology, pursuant to India’s liberalized foreign direct investment (FDI) policies, which provides incentives and regulatory flexibility for foreign investors.

While these collaborations bring strategic benefits, they also pose unique challenges, particularly in the enforcement of contractual obligations and dispute resolution. Arbitration, as a preferred method of resolving disputes, plays a critical role in managing these conflicts.

In the following, we first provide an overview of contracts and disputes that are common in Indian JVs, followed by case studies of actual disputes that have arisen.

1. Typical Contracts for Japan-India JVs

India-Japan JVs generally follow the contractual framework explained above. Ancillary agreements typically seen in India-Japan JV are:

(a) Technology Transfer and Licensing Agreements regulating the licensing of technology from the Japanese entity to the JV and its protection.

(b) Supply and Distribution Agreements governing the commercial terms for the supply of goods or services between the JV and the parent companies.

(c) Top Employment and Management Agreements setting out terms for key management personnel, often with Japanese expatriates and Indian partners in leadership roles.

(d) Disputes frequently arise in these contractual relationships, often leading to arbitration as the primary and preferred mechanism for resolution.

2. Typical Disputes in Japan-India JVs

The following are the typical disputes arising in India-Japan JVs:

(a) Breach of contract: One of the most common disputes is the alleged failure of one party to fulfill contractual obligations, such as capital contributions, supply commitments, failure to reach or comply milestones, or exclusivity clauses.

(b) Corporate governance and deadlocks: Disagreements between shareholders over control, board representation, or management decisions may also trigger arbitration.

(c) Intellectual Property and Technology Transfer Disputes: Japanese companies often contribute proprietary technology to JVs, leading to disputes over misuse, confidentiality breaches, or unauthorized modifications.

(d) Exit and Valuation Disputes: Disagreements over share buyouts, valuation methodologies, and exit mechanisms, particularly in drag-along and tag-along rights scenarios.

(e) Regulatory Compliance Issues: Conflicts may arise due to alleged violations of Indian regulations, such as the Foreign Exchange Management Act (FEMA), antitrust laws, or labor laws, impacting the JV’s operations.

Case Study I: Dispute Over Shareholding Rights

A Japanese electronics manufacturer entered into a JV with an Indian company to produce and distribute high-tech components in India. The Shareholders’ Agreement (SHA) clearly stipulated that any changes in shareholding structure required the Japanese company’s prior written consent. However, the Indian company attempted to dilute the Japanese company’s 49% stake by issuing new shares to a local affiliate, thereby reducing the Japanese company’s holding to 30%. The Japanese company objected, citing a breach of the SHA.

After unsuccessful negotiations, the Japanese company initiated arbitration under the auspices of the International Chamber of Commerce (ICC) in Singapore, alleging breach of contract, unfair dilution, and oppression of minority shareholders. The tribunal found that the Indian company had violated the SHA by issuing shares without approval and ordered it to restore the original shareholding structure. Additionally, the tribunal awarded monetary damages to compensate for financial losses incurred due to the dilution.

When the Japanese company sought enforcement of the award in Indian courts, the Indian company raised objections on public policy grounds, arguing that restoring the shareholding structure would contravene Indian corporate laws. After a prolonged litigation, the Indian Supreme Court upheld the arbitral award, emphasizing the importance of honoring contractual commitments in joint ventures.

Case Study II: Technology Transfer and Intellectual Property Dispute

A Japanese automobile company entered into a JV with an Indian automotive manufacturer to produce hybrid vehicle components under a Technology Transfer and Licensing Agreement (TTLA). The agreement strictly limited the Indian company’s use of proprietary hybrid engine technology to JV-related production and prohibited independent commercialization or reverse engineering.

However, after several years of collaboration, the Japanese company discovered that the Indian company had allegedly reverse-engineered the hybrid engine technology and begun using it in its own vehicle production without authorization.

The Japanese company demanded cessation and compensation, but the Indian company claimed that the improvements made to the technology were independently developed.

Unable to resolve the dispute, the Japanese company initiated arbitration under the ICC rules in Singapore, alleging breach of the TTLA, misappropriation of trade secrets, and intellectual property infringement. The tribunal ruled in favor of the Japanese company, finding clear evidence that the Indian company had violated contractual obligations. It awarded substantial damages and ordered an immediate injunction against further unauthorized use of the technology.

When the Japanese company sought enforcement in India, the Indian company contested it under public policy grounds, arguing that the ruling restricted India’s technological development. However, the Delhi High Court upheld the award, reaffirming India’s commitment to enforcing foreign arbitral awards under the New York Convention.

3. Arbitration Clauses in Japan-India JVs

To mitigate the risk of litigation, most JV agreements between Japanese and Indian companies include arbitration clauses which typically provide for:

(a) Governing Law: Japanese companies often prefer the governing law to be Japanese law, while Indian companies may insist on Indian law. A compromise sometimes involves neutral laws such as English or Singapore law.

(b) Arbitration Seat: The most common arbitration seats are Singapore, Japan, Hong Kong, or India. Singapore remains a preferred neutral seat due to its pro-arbitration stance of its courts that exercise supervisory jurisdiction over arbitral proceedings seated in Singapore.

(c) Institutional vs. Ad Hoc Arbitration: Institutional arbitration under the JCAA, ICC or SIAC rules is favored due to its structured process and neutrality. However, some JVs still opt for ad hoc arbitration under the UNCITRAL rules.

(d) Number of Arbitrators: Generally, a three-member tribunal is preferred for high-stakes disputes, with each party appointing one arbitrator and the third being jointly nominated by the party-nominated arbitrators or designated by the institution.

(e) Language of Arbitration: English is the most common language, but there are cases where parties specify a bilingual approach with Japanese and English.

4. Best Practices for Mitigating Risks

Japanese companies investing in India or entering into JVs with Indian companies should consider the strategies that mitigate risks in arbitration and enforcement from the contract negotiations stage. We highlight some of these strategies as follows:

(a) Careful drafting of arbitration clauses: Clearly define the seat, governing law, and institutional rules to avoid ambiguities that could lead to judicial interference and with the parties incurring unnecessarily further legal costs.

(b) Choosing a neutral seat: Selecting an arbitral seat that can ensure neutrality and minimize local judicial intervention, with a robust and transparent judiciary that exercises supervisory jurisdiction over the arbitration.

(c) Comprehensive due diligence: Before entering a JV, conduct extensive due diligence on the Indian partner, including financials, litigation history, and regulatory compliance.

(d) Exit strategy planning: Structuring clear exit mechanisms in the JVA can prevent valuation disputes and facilitate smoother exits. Clearly worded termination clauses and the basis thereof is highly recommended.

(e) Proactive dispute resolution: Consider mediation or negotiation before arbitration to resolve conflicts efficiently and maintain business relationships, especially in long-term contractual relationships.

Arbitration remains the preferred mode of dispute resolution in India-Japan JVs, but parties must navigate complex legal and procedural hurdles. By adopting well-drafted arbitration clauses, choosing neutral arbitration seats, and proactively mitigating risks, Japanese companies can ensure smoother dispute resolution and safeguard their investments in India.

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¹ In the survey, “joint ventures” is defined as local subsidiaries in which Japanese companies hold 10% or more of direct and indirect equity. Subsequent surveys do not monitor the number of joint ventures.)

(Written by: Junzaburo Kiuchi / Earl Rivera-Dolera / Imran Khan)

* Japanese version available here

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*This newsletter is provided for educational and informational purposes only, and is not intended and should not be construed as legal or tax advice.
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