Parties typically enter contractual joint ventures (“CJVs“) to pursue discrete opportunities while maintaining separate business interests and to avoid joint liability. Despite the intent to limit joint liability, such liability may nevertheless arise because of poor contract drafting leading a court to find that the CJV is, in practice, a partnership.
Unlike partnerships, CJVs are not subject to a governing statute. This leaves ambiguous rights and obligations of co-venturers to be resolved by courts, which can have unpredictable and costly results. Courts will typically decide whether a CJV is a partnership based on the intention of the parties, as derived from the CJV agreement and the actions of the venturers. Unfortunately, there are no clearly enumerated factors that distinguish a partnership from a CJV. For parties entering CJVs, detailed drafting and the avoidance of blatant indications of partnership formation are the best available defences against a finding of joint liability.
The Common Law and Contractual Joint Ventures
Parties hoping to avoid joint liability through the formation of a CJV must rely on the rules of contract and the tendency of courts to defer to contractual provisions in commercial matters. The case law on joint ventures is muddled; there is no clear test to determine when a CJV will be found to be a partnership.[1]
Courts have focused on the intentions of the co-venturers (based on the terms of the contract and engagement of the venturers) to determine whether a CJV is a partnership in practice.[2] Intention to form a CJV can be derived from indicators such as whether (i) the venturers share revenues[3]; (ii) the CJV is purely for facilitating administrative objectives (e.g., coordinating separate businesses and/or decision-making)[4]; and (iii) the parties hold themselves out to third-parties as a joint venture.[5] However, without clear precedent, having one or more of these indicators does not guarantee a court will not deem the relationship to be a partnership.[6] This creates the possibility of joint liability with respect to wrongs committed during the ordinary course of business of the joint venture.[7]
Drafting Contractual Joint Ventures to Avoid Finding a Partnership
Care must be taken when drafting a CJV agreement. Venturers should assume that there is always a possibility that a court will find that the parties are engaged in a partnership. Even the perception of partnership formation may be enough to trigger joint liability.
To limit such risk, venturers should consider:
- ensuring that any contract with any third party clearly sets out the liability between the joint venturer’s vis-a-vis the third party;
- adding a clause in the CJV agreement that requires any co-venturer dealing with a third party to separately contract with third parties and/or emphasize that their actions do not bind the CJV;
- to the extent that there are agreements to limit liability amongst the joint venturers, bringing these to the attention of any third parties;
- limiting the objective of the CJV agreement to a single undertaking or “ad-hoc” enterprise by drafting the CJV agreement to give a strong indication of the independence of each venturer, and avoid the appearance of a common business venture, sharing in profits, agency, and any other indications of mutual fiduciary obligations; and
- stating in the CJV agreement that:
- the relationship is one of joint venture and not of partnership (although this is likely to carry little weight if there are signs of partnership in form)[8];the intent of the scope of the relationship, and the business and activities of each venturer; and
- no co-venturer has the authority to act for a co-venturer in a way that binds other co-venturers or otherwise restricts the authority of a co-venturer to act for the venture autonomously
Dealing with the Perceived Intentions of the Parties
Separate accrual of profits is a common protection against the misinterpretation of a CJV as a partnership. This can help to emphasize the distinct businesses of the co-venturers and suggests that the arrangement is not a sharing of the overall profits of a common business. If the relationship is not a partnership, it should be possible for one party to make a profit while the other makes a loss. For example, while all joint venturers may expect to obtain something of value from the joint venture, it does not necessarily have to be by way of profit of the business being carried on in common.[9]
Where possible, it is advisable to avoid joint committees with executive powers and/or establishing an arrangement where parties discuss rather than “decide” matters relating to the venture and each co-venturer’s role. This is especially important where co-venturers unequally participate in the management of the joint venture. The more one venturer exercises control over the decision-making for the project by all co-venturers, the more likely the court may find the arrangement is in fact a partnership. Veto rights or other arrangements that limit the perception of control by one venturer may also be contemplated.
Conclusion
Without a governing statutory framework and with uncertain case law treatment, a CJV can expose parties to unintended risks. It is critical that prospective venturers focus on contract drafting and ensuring that any CJV agreement is comprehensive enough to cover a broad range of eventualities (e.g., changes in economic fortune, project success and failure, engagement with third parties). The alternative is leaving ambiguities in the hands of the courts which can lead to uncertain outcomes, thus defeating the purpose of entering a CJV.
[1] Clarksburg Contractors Ltd. v Saks, 2012 ONSC 4903 at para 30-34.
[2] See: Woronuk v Woronuk, [2015] AJ No. 182 at para 337, 343-353; WCI Waste Conversion Inc. v ADI International Inc., [2011] PEIJ No. 23., leave ref [2011] SCCA No. 449
[3] Hayes v British Columbia Television Broadcasting System Ltd., [1992] 2 WWR 749, leave to SCC ref. [1993] 2 SCR viii.
[4] Canadian Imperial Bank of Commerce v Charbonnages de France International S.A, [1994] 95 BCLR (2d) 104, 117 DLR (4th) 262.
[5] WCI Waste Conversion Inc. supra note 2.
[6] See: Central Mortgage & Housing Corp. v Omega Investments Ltd. [1981] 34 NBR (2d) 291, 85 APR 291; and Fraser-Brace Maritimes Ltd. v Central Mortgage & Housing Corp, [1980] 117 DLR (3d) 312; and Carleton Condominium Corp. No. 11 v Shenkman Corp. Ltd., [1985] 49 OR (2d) 194; and also Central Mortgage & Housing Corp. v. Graham, [1973] 43 DLR (3d) 686, 13 NSR (2d) 183.
[7] Unitebill Credit Corp. v Apex Home Services Inc., 2021 ONSC 4633 at para 17.
[8] Hibernia Management & Development Co. v Newfoundland Steel Inc., [1996] 140 Nfld. & PEIR 91; see also WCI Waste Conversion Inc supra note 2 at para 43.
[9] See Hayes supra note 3 at paras 15-20.
This publication is intended for general information purposes only and should not be relied upon as legal advice.
