There are many reasons why two parties may decide to enter a joint venture (JV).
Each may bring complementary skills which they believe will work in combination. In other situations, the joining of finances from each side may help the parties realise involvement in a project that would otherwise be beyond them if they attempted it on their own.
It also allows the parties to share risk and liability if profits of the project do not eventuate. In Australia, a JV is also one way to allow foreign investment in a project.
In United Dominion Corporation Ltd v Brian, Justice (later Chief Justice) Mason described a JV as “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.”
Parties may create a JV for a business project or to buy a property interest but in either example, it is wise to create a JV agreement that sets out the obligations, rights and responsibilities of each party.
This agreement will benefit from being drafted by legal professionals with wide experience in corporate law matters, such as Felicio Law Firm.
What should be included in a joint venture agreement?
These agreements will generally cover the obligations of each party entering into JV, including:
- what each party will initially contribute to the JV;
- what actions each party will be obliged to perform during the life of the JV;
- terms on the reporting and governance of the JV;
- dispute resolution processes between the JV parties, and;
- what should happen at the end of the life of the JV.
What type of joint ventures are there?
It should be stated at the outset that unlike corporate structures, such as a limited liability company, the definition of joint venture remains largely undefined in Australian corporate law.
While joint ventures are subject to common law principles and different parts of various pieces of legislation, their essential nature is best described as a commercial arrangement between two or more independent parties, organised under one of several legal forms for the purpose of a business project.
There are three main forms of JV in Australia: unincorporated, incorporated and unit trust JVs.
Unincorporated JVs: Also referred to as a ‘contractual JV’, this form sees the parties enter into a contract that sets out the rights and obligations of each party.
The terms of the contract will typically address:
- That the rights and obligations of each party are several rather than joint.
- Operation of the JV may be undertaken by a manager that may be either of the parties, a third party, or a third party contracted manager.
- The operator is appointed separately by each party.
- The parties are not agents for each other, except where one of them is appointed the manager of the operator.
- The JV is conducted so as to give the parties a right to share in the product of the undertaking as a proportion of their financial interest in the JV.
- The management structure of the JV ensures that each party contributes its agreed percentage interest; and that decisions about the JV are made by an operating committee comprised of representatives of each party.
- The undertaking is a JV and not a partnership.
- Assets are held as tenants in common by the parties at common law rather than beneficially.
- Any transfer of the interests of the parties is usually subject to a pre-emptive option held by the other parties.
- The parties may decide to be in a fiduciary relationship with each other or deny such a duty by express terms in the contract.
Incorporated JVs: In this arrangement, each party agrees to incorporate a separate legal entity to undertake the joint project. Each party then holds a percentage of shares in the new company, which is why this form is sometimes called an equity JV.
In this form, the details of ownership of the business or asset will be set out in a shareholders’ agreement, though other rights and obligations may be separately negotiated in a JV agreement.
Formation of a new company under an incorporated JV means there is a different legal relationship between the parties governed by the provisions of the Corporations Act 2001 relating to shareholders.
Unit trust JVs: This hybrid form sees the parties to the JV create a unit trust with each holding units which reflect its equity in the business or property asset. The potential benefit of the trust structure is a reduced tax liability for the JV.
The trust should be formalised in a clear written agreement.
Case example: In Coyte and Anor v Norman and Anor; Centre Capital (Newcastle) Pty Ltd and Anor, a 2016 NSW Supreme Court case, claims of a breach of contractual obligations in an oral agreement relating to a unit trust JV did not succeed because the court did not find the agreement existed.
Speak with expert legal professionals
If you’re considering a joint venture to purchase a property asset, undertake a business venture, or participate in a one-off project, it’s important to establish at the outset which form is appropriate and what sort of agreement should govern its operation.
Felicio Law Firm has the expertise to advise on the best structure of JV to ensure expectations are managed on both sides and to create an agreement that covers the possibility of disagreement or dispute. Call us Erina lawyers today.