Secrets of Successful Joint Ventures: Partner Up to Build Wealth While Avoiding Legal Pitfalls
Individuals, entrepreneurs and organizations large and small have limited resources. So what do you do when you know you could achieve more, if only you could pool your resources – whether effort, information or capital – with those of others?
Joint ventures offer an attractive method to raise capital and leverage equity in executing various types of deals and projects to generate profit in less time and with less effort. The JV is now a well-known option for both beginners and seasoned investors looking to grow their portfolio and build their wealth.
Joint ventures, however, encompass some very specific legal ramifications in Quebec.
Joint Venture DefinedA joint venture (JV) is a business agreement in which two or more parties agree to develop a new entity and new assets by contributing equity in order to achieve business goals they would not have been able to accomplish on their own. In real estate, for example, JV allow two or more parties to pool resources, complete transactions more easily and quickly and generate profits for each party.
The term “joint venture” may be generally used to describe many forms of real estate ownership, such as a co-ownership, partnership or corporation. In some cases, it may be used to describe a contractual relationship among the joint venturers which may be similar to, but distinguishable from a “partnership” (which is a formally recognized type of business relationship under Quebec Law). What makes the joint venture unique is that it allows parties to pool resources – knowledge, expertise, labour or capital, for example – for the achievement of a specific objective in a predetermined timeframe and without the pile of legal obligations that come with a partnership.
The Difference Between A Partnership and A Joint VentureWhile joint ventures are a legitimate type of business relationship now common in the marketplace, what’s interesting for us in La Belle Province is that Quebec law does not formally account for this type of partnership. Unlike the “partnership”, which is clearly defined under the Quebec Civil Code, and thus, referred to as a “determined” or “nominate” contract, joint ventures are created by fact and circumstance. As a result, the rules governing joint ventures are not set in stone. A judge can’t just open up a book and turn to the joint venture section for guidance.
Despite the lack of a clear definition for a JV in Quebec law, the two forms of business relationship demonstrate 4 important differences as follows:
1. DurationMost often, a joint venture is established with the intention of carrying out a specific project and is generally dissolved once the project has come to fruition. A partnership, in contrast, tends to be ongoing with no predetermined end.
2. Obligation of LoyaltyParties that enter a partnership are legally bound to be loyal to one another. Not so with joint ventures. Unless it is stipulated between them contractually, the partners of a joint venture have no legal obligation to demonstrate loyalty to one another. They may therefore continue to operate their respective businesses, despite any competition or conflict of interest that may exist amongst them.
3. Division of ProfitsIn a joint venture, each party has the right to share in the profits or proceeds, but those gains do not have to be split equally. For example, if one party brings in $10,000 in capital and the other contributes $50,000 in equipment, the contract can be prepared so that the benefit each party receives from the venture reflects what he or she contributed.
Under Quebec law, in a general partnership, the share of each partner in the assets, profits and losses is equal unless otherwise specified in the contract.
4. Decision MakingArticle 2216 of the Quebec Civil Code states that in a partnership, decisions are made by a majority vote. Only when the decision seeks to modify the signed contract between the partners does this change and a unanimous vote is required.
Decision-making in a joint venture is different, functioning right out of the gate on the principle of unanimous consent. Important decisions in a JV require the consent of all partners and as a result, no one partner has veto power. Even if one of the partners takes on specific responsibilities or carries out important tasks for the venture on behalf of the other partners, this partner is granted no more power than the others.
5. Ownership of AssetsIn a partnership, everything is shared equally, unless the contract determines otherwise. While the parties specify how profits will be divided, they give up their rights to what they contribute (unless the contract states otherwise) and if the partnership is dissolved, the assets will be divided equally between the parties. Under a joint venture, however, when the project is dissolved, the participants may reclaim what they contributed. For example, if one partner in a JV contributed the use of his property, when the venture ends, he will still hold title to that property.
The Trouble with JV’s in QuebecSince joint ventures are not formally recognized as a distinct type of partnership, the judicial inclination is to characterize joint ventures as a type or sub-type of partnership. If a dispute occurs, the parties may soon find, much to their surprise, that the terms of the agreement they thought they’d consented to don’t actually apply. Since a joint venture is not a formally recognized form of legal partnership under Quebec law, if you find yourself in court due to issues stemming from a JV, cases have shown that a judge will tend to look at what does exist under Quebec law, which is the partnership.
The Law in PracticeAlthough this example is slightly dated, it demonstrates perfectly what those entering into a joint venture may experience if they ever face a dispute.
In the case of Cam Meyers v. The Royal Bank of Canada, a joint venture was concluded by a brief written agreement. The agreement confirmed the existence of the joint venture and listed its founding purpose. In light of the factual circumstances and notwithstanding the fact that many of the elements of joint venture appear to have been present, the Court nevertheless characterized the relationship between the parties as one of partnership and not as one of a joint venture. The Court underlined, essentially, that the finding of a joint venture was based on the factual circumstances surrounding the relationship and not solely on a claim by the parties participant.
With this in mind, one must underline the importance of the parties’ intention. When appearing before a judge, this will be the ultimate point of analysis in differentiating a partnership from a joint venture.
What this means to you is that just because you consider your business relationship a joint venture, doesn’t mean the law will. Upon examining the legitimate intentions of the parties, if a judge decides the relationship is a partnership, all the laws governing partnerships will apply. For example, Quebec law clearly states that when individuals form a partnership, they unquestionably owe each other loyalty. Therefore, if a judge ultimately concluded that the true nature of the JV participants relationship is, in fact, a partnership, the obligation of loyalty would become imperative and any clauses in the contract permitting competition amongst the partners would be rendered null and void.
Joint Ventures: Tips for Staying Out of Hot WaterDespite the potential legal hiccups, joint ventures remain an effective means of achieving business objectives and growing your wealth. To get the most out of JV’s and avoid potential pitfalls, make sure to sign a written contract and that achieves 4 principal objectives. The contract should:
1. Define the objective of the joint ventureA joint venture is often a desirable form of business relationship because the parties are spared the legal obligations that a general “partnership” brings. Considering this, when forming a JV, it is best to ensure that the written contract clearly states the objective of the venture and clarifies the scope of the project. This helps to prevent the joint venture from being transformed into a partnership (or personal enterprise) under the law, both of which do not have fixed objectives and limited scopes, not to mention additional legal obligations.
2. Specify the duration of the joint ventureWhile it is possible to launch a joint venture without a set completion date, it’s not recommended. Without a completion date set down in the contract, if ever the parties find themselves before a judge, the judge could rule that the business relationship was a partnership and not a joint venture. When a completion date is set and a judge must evaluate the relationship, the date will serve as an indicator that the true intention of the parties was not to form an ongoing partnership.
3. Specify the limited liability of each partnerOne of the disadvantages of a partnership is that one partner can be held liable liable for the misconduct or negligence of another. Therefore, when forming a JV, it is important to limit the liability of each individual partner and thus diminish the potential of exposure to any losses. This will help to clarify each partner’s risks and potential responsibilities. By limiting liability in the joint venture, if the venture suffer losses, each partner’s potential losses should be limited to the value of his or her initial investment into the venture.
4 Include an exit clauseBy establishing in writing upfront within the contract the conditions to be followed if one of the parties does not fulfil his or her duties, wants to leave the relationship, or if the group as a whole wants to dissolve the agreement, an exit clause is an important and often effective way of preventing conflicts or legal battles. The contract should stipulate the conditions in which a partner may terminate his or her alliance and include precise clauses as to in what manner this will be done.
NOTE: Special thanks to Leigh Gantman on our legal team for researching and helping us put this post together!