What is a joint venture?
A joint venture is generally referred to as a business arrangement between two or more parties that have come together to pursue a common business goal. It can be a great way of combining business strengths, pooling resources and sharing responsibility for the associated profits, losses and costs. Well-known examples of joint ventures include Google and NASA’s geobrowser, “Google Earth”, and NBC and Disney’s streaming platform, “Hulu”.
How do you structure a joint venture?
As joint ventures are not recognised under English law as distinct legal concepts, they can take many forms, including:
- Corporate joint ventures using a private limited company;
- Partnerships (general, limited or limited liability); and
- Contractual joint ventures using an unincorporated contractual arrangement.
The choice of structure will often depend upon the circumstances of the parties. Private limited companies and limited liability partnerships are popular choices for those wishing to limit their liability exposure. Purely contractual joint ventures may be cheaper and easier to establish than a separate company, but they are not governed by statutory framework. Alternatively, general and limited partnerships tend to sit halfway between them.
How do you establish a joint venture partnership?
If a partnership exists, the Partnership Act 1890 (the “Act”) will apply to the business arrangement. This, in turn, will mean that the parties will each have statutory obligations deriving from the Act. Unless agreed otherwise, certain statutory assumptions will apply by default, such as that the parties are to share profits and losses equally and have an equal say in management.
Whether or not the business arrangement constitutes a legal partnership is a question of both law and fact.
Under section 1 of the Act, a partnership is defined as the “relationship which subsists between persons carrying on a business in common with a view of profit”. This definition can be broken down into three key elements, namely:
- the carrying on of a business,
- in common,
- with a view to profit.
Section 2 of the Act then sets out various rules for determining the existence of a partnership.
The courts will also look at all the facts relevant to the proposed joint venture (including the intention of the parties) and will determine the real basis of the parties’ business relationship.
Does a joint venture agreement need to be in writing?
There are no laws requiring joint ventures to be formalised by way of a written agreement. However, it is always sensible to set out the parties’ rights and obligations towards one another in writing. This is to ensure the enforceability of those terms should a party act in breach of contract. The agreement could cover the nature of the project, the business relationship between the parties, the business’ objectives, funding arrangements, day-to-day management and so on. This will minimise the risk of litigation should a dispute between the parties arise over an ambiguity as to what has been agreed.
How do you enforce a verbal agreement to form a joint venture?
Disputes over the existence of an undocumented joint venture may arise when parties enter into business arrangements without a written agreement. Few cases in England and Wales have dealt with this specific issue, but the courts may approach this by determining whether the test for a valid oral contract has been met.
To do this, the courts look for the following key elements:
- offer and acceptance;
- consideration (unless the contract is one executed by deed);
- an intention to create legal relations (i.e. an intention to be legally bound); and
In the words of Lord Clarke in the 2010 Supreme Court decision in RTS Flexible Systems v Molkerei Alois Müller, whether there is a binding contract between the parties will depend not upon the parties’ subjective state of mind but upon what was communicated between them by words or conduct. The courts will look objectively at whether the necessary elements for an enforceable contract have been established.
When does a constructive trust arise in the context of a property joint venture?
Parties often use the 1953 case of Pallant v Morgan in undocumented joint ventures to claim they have a constructive trust interest in a property, where one party has reneged on the alleged agreement. If their claim is successful, the reneging party is deemed to hold the property on constructive trust for both parties rather than for their own benefit.
A Pallant v Morgan equity is said to arise when:
- A and B agree that A will acquire some specific property for the joint benefit of A and B; and
- B, in reliance on A’s agreement, refrains from attempting to acquire the property.
This equity is in the nature of a constructive trust which means that, in these circumstances, it would be inequitable for A to retain the property for themselves.
Importantly, for the equity to arise, the business arrangement between the parties does not need to be contractually enforceable. Otherwise, it is unlikely there will be any need to argue that a constructive trust has arisen.
How do you establish a beneficial property interest by proprietary estoppel?
In the alternative, it could be argued that an equity has arisen by proprietary estoppel if the following elements are present in the case:
- A made B an assurance of sufficient clarity;
- B relied on that assurance; and
- B acted to their detriment in consequence of their reasonable reliance on that assurance.
The question is whether it would be unjust or inequitable to allow A to go back on their assurance. If an equity has arisen, B will be deemed to have a beneficial interest in the property. As a result, A must honour their original agreement.
If you need assistance with forming a joint venture, please contact our Corporate Partner, Iwan Emanuel on 01494 893570. If you would like to find out more about enforcing joint ventures, or if you have any other queries regarding dispute resolution, please contact our Dispute Resolution Partner, Toby Walker on 01494 893512.