Contractual joint venture or partnership?

Overview

A joint venture may take many forms with more or less formality. Whilst it is common for joint ventures to be incorporated (with shares in a special purpose private limited company being held by the joint venture participants), this form is not universally used.

In some cases or at the early stage of a collaboration where the viability of the joint venture’s business proposition remains to be validated, the parties may prefer the relative simplicity of a contractual joint venture.

A point to watch in the context of a contractual joint venture is the inadvertent creation of a partnership under the Partnerships Act 1890 (PA 1890).

The creation of a partnership

S.1 (1) PA 1890, states that ‘Partnership is the relation which subsists between persons carrying on a business in common with a view of profit’. Taking each element in turn:

• ‘Person’ includes a body of persons corporate or unincorporated.
• ‘Business’ includes every trade, occupation, or profession.
• ‘Carrying on a business in common’ requires there to be a single business that the parties are carrying on for their common benefit and that they have expressly or impliedly assumed mutual rights and obligations between themselves.
• ‘With a view of profit’ has been taken to indicate the intention to make a profit.

Factors which may be taken into account to determine the existence of a partnership include:

• Mutual agency which has been described as ‘the essential nature of the relationship’ (good faith, common interest and ‘conditions of mutual trust and understanding’ have also been referenced as ‘symptoms’ of partnership).
• Participation in net profits, sharing of losses and common capital; and
• The basic non-assignability of the partnership relationship.

It is a mixed question of law and fact whether the conditions set out in PA 1890 are satisfied and it is for a person seeking to establish a partnership to prove that such a relationship exists.

The label given to an arrangement will not necessarily be conclusive and so a statement in a contractual joint venture agreement that it is not intended to create and does not constitute a partnership, may not be definitive.

Effect of a partnership

If a partnership is established, the key consequence is that the liability of the partners is unlimited and they have joint and several liability for:

• Debts and obligations of the partnership (S.9 PA 1890).
• Torts, crimes and other wrongs (S.10 PA 1890); and
• Misapplication of money and property (S.11 PA 1890).

Whilst a partnership does not have separate legal personality, some obligations arise with respect to partnership business, for example, it has obligations to file tax returns in respect of the tax obligations of the partnership such as employment tax or VAT.

Although the parties to the venture may agree cross indemnities between them in respect of the potential risks of a partnership, the effectiveness of these in the event of a third party claim obviously depends on the credit strength of the contracting parties.

Practical steps

If the commercial imperative dictates a contractual joint venture rather than any other legal form of joint venture, practical steps to minimise or mitigate against the risk of a partnership arising under PA 1890 may include:

• Making an explicit statement in the agreement as its intended nature and effect and in particular to set out that no partnership is intended or created. It is important and customary to do this even though such a statement is not definitive.
• Structuring the arrangements such that as few of the conditions for a partnership described above as possible are satisfied.
• Contracting through limited liability vehicles;
• Agreeing suitable cross indemnities to ensure that the risks and rewards of the joint venture are appropriately allocated.