Working on business ventures in collaboration with another party is standard practice for projects of all sizes, and can provide a range of benefits in both scale and scope, however it is important to minimise risk by ensuring the business relationship is appropriate for the project.
While they may sound similar, partnerships and joint venture agreements are treated differently by the law, and understanding the different benefits and risks of each structure is critical in making the right decision for your business.
Partnerships in Queensland are governed largely by the Partnership Act 1891 (Qld) (‘the Act’), and in most cases other than certain professional partnership (legal and accounting for example) can range in size from two to twenty partners. Defined in section 5 of the Act as ‘the relation which subsists between persons carrying on a business in common with a view of profit’, the relation of partnership is more common in ongoing business ventures. High Court authority does however support the principle that these relationships can also be limited to a single venture.
Partnerships have obligations of both fiduciary duty and joint liability in relation to the partnership, and to other partners, and as such, parties to a business agreement may attempt to structure the terms of the agreement to avoid these obligations. Agreements such as these can be presented as joint ventures, or loans, however the courts have demonstrated a willingness to look to the nature of the relationship, rather than its form in determining its effect.
The phrase ‘carrying on a business in common’ references the foundation of a partnership being the mutual trust and confidence of partners, and the fiduciary relationship to act in the best interests of the partnership flows from the vulnerability of individual partners to each other. In ordinary partnerships, each partner is both a principal and agent for the partnership, and has the power to bind the remaining partners to agreements, provided they are connected with the firm’s ordinary course of business.
Further, while sharing of profit may indicate a partnership relationship, this is not conclusive in this regard, and while partnerships may provide taxation advantages due to the profit sharing, the partnership does not provide limitation of liability to partners in the same was as company directors. Pursuant to section 12 of the Act, partners are jointly liable with other partners for the debts of the firm, however this liability is curtailed in the legislation to the extent of the scope of the partnership, ie. its business, and does not extend to private debts incurred by partners.
Unlike partnerships, joint ventures in Australia are not regulated by specific legislation, and as the relationship is ordinarily constructed by contract, the extent of the relationship is determined by the courts where parties fall into dispute. Joint venturers are not deemed to ‘carry on a business in common’, and while partnerships can be limited to a single venture, this is more typical of a joint venture, particularly where each party contributes special expertise or resources to the project.
A key advantage of a joint venture relative to a partnership is the exclusion of the fiduciary obligations between partners in a partnership, and accordingly, parties often go to great lengths to establish the relationship as a joint venture in the contracts underpinning the relationship. As the contribution and expected outcome of parties to a joint venture can vary substantially, a well drafted joint venture agreement will provide structure as to management, property ownership, dispute resolution and sharing of profits and losses, as well as an exit strategy.
As an unincorporated joint venture will still attract unlimited liability for joint venturers to third parties, parties can utilise the benefits of incorporation to limit the liability to the assets of the company by establishing a special-purpose company for the project. The incorporated joint venture will also be regulated by the Corporations Act 2001 (Cth), and in terms of defining the interests of the parties, providing access to capital, and tax treatment, may provide a more efficient means of structuring your agreement.
Our commercial law team is experienced in documenting these agreements, and providing advice as to the structure that suits your needs best. We can assist you in assessing your options, and minimising the risk to your project.