What is a Joint Venture – Australian law

The term Joint Venture does not have a settled common law meaning under Australia law.  It is therefore is not capable of a precise legal definition.  That said, Joint Ventures in certain industries generally exhibit certain characteristics.

What is the concept of a Joint Venture

One definition posited by Mason J in United Dominion Corporation Ltd v Brian (1985) 157 CLR 1:

“…it connotes an association of persons for the purposes of particular trading, commercial, mining or financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill.“

Further….”it is generally considered that the borderline between what can properly be described as a Joint Venture and what can properly be seen as no more than a simple contractual relationship can on occasion be blurred.

With the judicial background for guidance, we can see that Joint Ventures generally fall into three (3) categories:

1. Unincorporated Joint Ventures;
2. Incorporated Joint Ventures; and
3. Unit Trust Joint Ventures.

Unincorporated Joint Ventures

An unincorporated Joint Venture is an association of Participants which lacks both form and equity capital.  It is a bound by the terms of the contract between the Participants and the commercial activity that they agree to undertake collectively.  The term “creature of contract” is often used however the contract whilst best reduced to writing, may be verbal.

Unincorporated Joint Ventures generally fall into two (2) categories:

1. those which amount to common law partnerships; and
2. those which are not partnerships.

Those which aren’t partnerships are usefully referred to as “contractual Joint Ventures”.

The Joint Venture Agreement

The exact rights and obligations of the parties (Participants) are generally documented in the form of a Joint Venture Agreement.  Joint Venture Agreements usually include provisions such as:

• all obligations and rights of Participants are expressed to be several rather than joint and in particular the operator is separately appointed by each participant;
• the rights and obligations of the Participants are expressed to be several rather than joint;
• the operator is appointed separately by each participant;
• the Participants are not agents for each other, except where a participant is appointed the manager of the operator;
• the undertaking is conducted so as to give the Participants a right to share in the product of the venture in proportion to their percentage interest in the Joint Venture; and
• the day-to-day operations of the Joint Venture is conducted by a manager that may be either of the Participants, a third party company or third party contracted manager.
• There are generally two (2) tiers of management as follows:

1. the first tier ensures that each participant contributes according to its percent interest in the Joint Venture; or
2. the second tier of management ensures that certain decisions (generally referred to as policy decisions) are made jointly by an “operating committee” made up of representatives of each of the Participants;

• deny the existence of a partnership between the Participants and assert that the relationship is one (1) of Joint Venturers;
• assets are held as tenants in common by the Participants at common law rather than beneficially;
• the transfer of Participants interests are usually subject to pre-emptive rights to the other Participants; and
• the parties may decide be in a fiduciary relationship with each other or decide to negate this obligation by express agreement.

Incorporated Joint Ventures

An incorporated Joint Venture is also referred to as a corporate Joint Venture, an equity Joint Venture or a Joint Venture company.

In this category of Joint Venture the Participants arrange for the incorporation of a separate legal entity to undertake the project on their behalf.  The Joint Venturers’ level of equity is reflected in the percentage of shares they each hold.

It is usual for most of the same issues to be considered in a shareholders agreement. The rights and obligations are usually separately negotiated.

The relationships between the Participants

Incorporated Joint Ventures create a different set of obligations between the Parties as their legal relationships differ as follows:

• the relationships between the Joint Venture Participants in their capacity as shareholders;
• the relationships between Participants and the Joint Venture company itself; and
• the relationship between the directors and the shareholders.

Unit Trust Joint Ventures

In the case of Unit Trust Joint Ventures, a Unit Trust is established to combine some of the features of an incorporated Joint Venture with those of an unincorporated one.  The amount of units in the trust can reflect the percentage of equity held by each participant.

Further information

If you would like us to assist with a joint venture, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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