A JV agreement can be a partnership in law
A joint venture arrangement made before any company exists is usually treated as just an agreement between the parties. If its substance meets the definition in section 1012, however, the consequences do not stop at the agreement, because a provision on liability follows behind it.
The section 1012 definition is wider than expected
Section 1012 of the Civil and Commercial Code provides that a contract to establish a partnership or company is a contract by which two or more persons agree to carry on a business together with a view to sharing the profits to be derived from it. The definition calls for no particular form of document, and for no particular name.
The three elements to look at
Broken out, the wording gives three elements: two or more persons; an agreement to carry on a business together; and an intention to share the profits derived from it. The third is what separates ordinary commercial co-operation from what the definition catches, since agreeing to share revenue, fees or a cut of output is not the same as agreeing to share the profits of a business carried on together.
The liability in section 1025
Section 1025 provides that an ordinary partnership is one in which all the partners are jointly liable, without limit, for all the obligations of the partnership. The words that matter are all the partners, all the obligations, and without limit. Liability is therefore not capped at the capital contribution set out in the joint venture agreement, which is what the parties commonly assume their exposure to be.
What the document is called does not decide it
Because section 1012 places the definition in the substance of the agreement, a document headed memorandum of understanding, co-operation agreement or joint venture agreement is judged by what was actually agreed rather than by its title. Equally, a clause stating that the arrangement creates no partnership is one element to weigh with the rest of the facts, not an answer on its own.
What to settle before signing
Two questions are therefore worth answering before signature. First, is this arrangement meant to fall within section 1012 — and if not, the mechanism for sharing returns has to be drafted so that it is plainly something other than sharing the profits of a joint business. Second, if a genuine venture is intended, should a juristic person be formed to carry it, since that moves the liability question away from section 1025 and into another framework.
PREPARE
What to bring
- The current draft venture agreement or memorandum
- How returns are actually to be divided
- The business to be carried on and each side's role
- What each party is contributing
- Whether a juristic person is to be formed to hold it
QUESTIONS
Questions this raises
Is a clause saying this is not a partnership enough?
Section 1012 locates the definition in the substance — agreeing to carry on a business together with a view to sharing the profits. A denial clause is therefore one fact to be weighed with what the parties actually do. The more effective course is to design the mechanism for sharing returns so that it is not a sharing of the profits of a joint business in the first place.
The venture lost money and the other side incurred debts.
If the arrangement meets section 1012 and is an ordinary partnership, section 1025 makes all the partners jointly liable without limit for all its obligations, which means the ceiling is not the agreed contribution. What has to be examined before anything else is therefore whether the arrangement falls within the definition, not what cap the agreement recites.
LAW
The legislation
- Civil and Commercial Code, section 1012
- Civil and Commercial Code, section 1025
ENQUIRIES
