Joint Ventures in Ontario: Limiting Liability
A Joint Venture Agreement ( “JVA”) creates a legal entity through a contract, and identifies the major rights, duties, liabilities and obligation of each participant in the joint venture.
One of the advantages of a joint venture is that each of its members maintains a distinct legal entity from the others and each will only be held responsible for its own personal faults against third parties. Each member of the joint venture retains ownership of his or her property.
For lawyer and judges, calling an agreement a “joint venture” without any legal context is simply not enough to create a JVA, and may have unintended consequences. The loose use of the term without providing any legal context in the JVA can inadvertently lead to a partnership rather than a joint venture. In a partnership, each partner is jointly and severally liable for the actions of the other partner, which can lead to unwanted liabilities.
In terms of taxation, a joint venture enjoys the benefits of being taxed in accordance with the business structure of each venturer. For example, if the venturer operates a sole proprietorship, the joint venture’s profits will be taxed in accordance with the tax rules applicable to a sole proprietorship. In the case of a corporation, the venturer would benefit from a lower income tax rate.
The details of a joint venture agreement vary based on the project and the goals of the parties, but most joint venture agreements typically include provisions dealing with the following matters:
- Formation and the Purpose of the Joint Venture
A well defined purpose that identifies the type of business and activity will help differentiate a joint venture from a partnership, since joint ventures are usually formed for a specific project. A partnership tends to have a longer term purpose. It is important to have a declaration that the organization is a joint venture and not a partnership to further enforce the intentions of the parties.
- Contribution, Role and Involvement of Each Venturer
What are the responsibilities of each venturer in the joint venture? The JVA should specify how much responsibility and involvement each venturer will have to the joint venture. Having a well defined list of responsibilities for each venturer can avoid future disputes between the venturers.
- Terms or Duration for Which the Joint Venture Will Exist
What are the terms of the joint venture? When and how will the joint venture be terminated? How will such items as guarantees, defects, and insurance be handled after termination? It would be useful to have provisions that include winding up procedures in the case of a termination of the JVA. This ensures a smooth transition during the dissolution of the joint venture. The possibility of the death, bankruptcy or insolvency of a member should be addressed in the JVA.
- Provisions for Management and Performance of Joint Venture Obligations
The JVA should set out the controls and the manner in which regular reporting will be provided. One or more of the venturers will be designated to manage the Joint Venture. Managing responsibilities includes registering bank account(s), insurance, licenses, acquiring equipment and retaining professionals such as accountants and lawyers. Consequently, there could be a management fee paid to the managing venturers for compensation in the management of the joint venture based on the parties’ mutual agreement. Having the appropriate provisions in the JVA dealing with these items will provide clarity to each venturer and minimize risk of unwanted disputes.
It would also be useful to have a provision within the JVA limiting the assignment or conveyance of the each venturer’s interest unless mutually agreed. Ownership or retention of patents, technology, and consultant reports should be addressed. Finally, a proper JVA should include provisions that protect the confidentiality of trade information passed between the venturers, respecting each other’s contribution to the joint venture.
- Allocation of Revenues and Expenses from the Project
A JVA usually includes a declaration of the participation of the parties and the percentage in which profits and losses are shared. These percentages are typically proportional to the contributions to the working fund. It would be helpful to add a provision providing that if the joint venture needs additional working capital, the parties will proportionally contribute the additional funds. This can ensure that financing is provided to the joint venture in a timely fashion.
- Dispute Resolution
A good dispute resolution provision can help the parties deal with any future disagreements. For example, a JVA might specify that in any dispute arising from the JVA, the parties must first resort to negotiation followed by mediation. This allows the parties to reconcile their differences before resorting to expensive litigation.These are just some of the basic provisions that an experienced lawyer will consider when crafting a JVA that will serve a client’s purposes.
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