ESCAPING THE SHADOW OF PARTNERSHIP: A NEW FRAMEWORK FOR DISTINGUISHING CONTRACTUAL JOINT VENTURES FROM JOINT VENTURE PARTNERSHIPS.

• Author: Cave, Branden

INTRODUCTION

Joint ventures are a popular strategy for pursuing profitable business opportunities while sharing costs among multiple parties.(1) Their popularity is attributable to the fact that they are a flexible mechanism by which two or more participants can engage in a single enterprise. At the most general level, a joint venture refers to any business undertaking where two or more parties agree to ongoing collaboration, cooperation, and contribution to a common goal.(2) Joint ventures are often used in developing computers, electronics, software, television and film production, manufacturing and distribution of machinery, industrial and medical products, real estate development, research, pharmaceuticals, automobiles, mining and other methods of natural resource extraction, as well as financial, insurance, and marketing services.(3)

Despite their increasing prominence as a commercial strategy, the legal status of joint ventures remains convoluted. The law concerning joint ventures has not developed with sufficient clarity for participants to safely predict the rights and obligations that will accompany their undertaking. Joint ventures are often misunderstood because they exist at the intersection of corporate law, partnership law, and contract law.(4)

The case at the core of this issue is Central Mortgage and Housing Corp v Graham,(5) a 1973 decision of the Nova Scotia Supreme Court. In that case, Justice Jones first recognized contractual joint ventures under the Canadian common law. Unfortunately, this recognition was premised on a problematic framework for identifying contractual joint ventures that is nearly identical to the framework used to identify partnerships. As a result, Canadian courts have struggled for the past 50 years with the issue of how to understand contractual joint ventures and, in particular, how to distinguish them from joint venture partnerships.

This article addresses how we should identify contractual joint ventures and distinguish them from joint venture partnerships. A new framework will be proposed seeking to reform the law and clarify the appropriate structure of contractual joint ventures so as to limit the possibility of such undertakings being miscategorized by courts.

This article is not the first to discuss and distinguish contractual joint ventures from joint venture partnerships in Canadian law. That honour goes to Melanie A Shishler and her 1998 article "The Graham Decision Revisited: The Fading Promise of the Joint Venture as a Distinct Legal Concept."(6) Unfortunately, the law of contractual joint ventures is no clearer despite her work and, over twenty years later, the problem remains.

1. OVERVIEW

   This article proceeds in four parts. Part One provides an overview of joint ventures and discusses the different types of joint ventures. Part Two discusses the problematic ways in which Canadian courts have distinguished and treated contractual joint ventures as compared to joint venture partnerships. Part Three reviews suggested approaches for solving the contractual joint venture problem. Part Four proposes a new framework for distinguishing between contractual and partnership joint ventures to assist courts in correctly identifying what arrangement is before them.

2. NOTE ON TERMINOLOGY

   Academics and courts have used varying language to describe joint ventures. The broad category of joint ventures encompasses three subcategories: the joint venture corporation, the joint venture partnership, and the contractual joint venture. These joint venture categories were used in the seminal Canadian legal treatise, "Joint Ventures: Legal and Business Perspectives" by Barry J Reiter and Melanie A Shishler(7) and have since been adopted by Canadian courts.(8) Each of these three subcategories refer to a specific manifestation of a joint venture, discussed in greater detail below.

   This article focuses on the contractual joint venture which is primarily contrasted with the joint venture partnership. In recent years, terminology has become more precise as courts have added qualifiers based on the legal foundation of the joint venture at issue. In older cases courts refer only to joint ventures and partnerships. The unqualified "joint ventures" can refer to either all types of joint ventures when discussed in isolation or just contractual joint ventures when being compared to partnerships.

   In this article, the term 'joint venture' will be referring to contractual joint ventures and the two terms will be used interchangeably. If referring to all types of joint ventures the qualifier of 'types of' or 'categories of' will be added.

   I OVERVIEW OF JOINT VENTURES

1. FEATURES COMMON TO ALL JOINT VENTURES

   All types of joint ventures require a contract or agreement between the parties. This type of contract is referred to as a joint venture agreement and sets out the parties' relationship, the parameters for the undertaking, how each party will contribute to the venture, and their respective rights and obligations. The parties' ability to freely draft their joint venture agreement depends on the formal legal mechanism under which the joint venture is formed.

2. JOINT VENTURE CORPORATIONS

   Joint venture corporations are the most straightforward of the three categories to identify because they require the preliminary step of incorporating a new entity.

   To create a joint venture corporation, the parties agree to incorporate and house their contributions to the joint venture inside a new company.(9) For instance, a contribution of the knowledge of one venturer may be accomplished by appointing them as a director or officer while a contribution of capital or physical resources may be accomplished by transitioning ownership to the corporation.

   The benefits and costs of the joint venture corporation are the same as those generally associated with corporations more generally. The limited liability of corporations is an attractive feature which, along with the clear fiduciary duties of directors and officers to the company, allows parties to accurately predict what obligations and liabilities they will be taking on. The costs stem from the legal and incorporation fees required to set up the new company. Because they are complex, joint venture corporations might not be the best vehicle for a temporary or limited project.

   Joint venture corporations also benefit from the expansive corporate law jurisprudence. This jurisprudence can fill any gaps in their underlying agreement. In contrast, contractual joint ventures, despite their commercial nature, cannot make use of corporate or partnership law. The Manitoba Court of Appeal held, "[t]he contract among the investors sets out the conditions governing their relationship. If it is silent on any matter, the gap is filled in by reference to contract law, not to corporate or partnership law."(10)

3. JOINT VENTURE PARTNERSHIPS

   Partnerships are defined by statute as the relationship that "subsists between persons carrying on a business in common with a view to profit."(11) By this description, joint ventures are well suited to the partnership format because they are often simply a group of people conducting business together to make money. The term 'joint venture partnership' simply denotes a partnership formed for a single undertaking or ad hoc enterprise and will be used interchangeably with partnership in this article.

   Joint venture partnerships are similar to their corporate counterparts because they create a new entity. The partnership (or the firm) is an amalgamation of the individual partners, and there is a substantial body of law available to fill any gaps in the joint venture agreement. No action is needed to establish the partnership, which can result in significant savings when compared to incorporation. On the opposite end of the partnership, dissolution is likewise straightforward. Partners may dissolve a partnership simply by making their intention to do so clear and divvying up the partnership's assets.(12)

   Categorizing a joint venture as a partnership entails significant consequences for the participants because partnerships are relationships involving mutual agency, mutual trust, and mutual confidence.(13) These principles are appropriate for partnerships because of the partners' high level of integration and mutual control.

   The provincial statutes governing partnerships make mutual agency mandatory in all partnerships. This means that all partners are jointly and severally liable for the actions of a single partner and accountable to their contractual and tort creditors.(14) Partners cannot contract out of these provisions but may choose to indemnify each other. Mandatory mutual agency acts as protection for creditors, especially involuntary creditors, by allowing them to recover from more than just the offending partner.

   In contrast to the principle of mutual agency, provincial statutes allow partners to contract out of the default imposition of mutual trust and confidence. Partners generally must be able to trust and have confidence in each other to act in each other's best interests. This stems from the default right of all partners to engage in the ordinary business at the centre of the partnership.(15) Mutual control of the business is what establishes the default fiduciary duty between and among all partners.

   Parties entering into a partnership create new entities similar to how incorporation creates a new company. However, the partnership scenario is more nuanced because the identities of the parties are not fully subsumed into the partnership. Depending on the context, a partnership can refer to either an independent entity or simply a particular legal relationship between individuals.(16) A partnership is considered an independent entity usually when making reference to the partnership as a firm, the taxing of income at the firm level, the ability to use the partnership name in an action and in defending against an...