202001.22

Unity is strength, but under certain conditions

The imagination and dynamism of entrepreneurs often lead them to identify new business opportunities. And it may happen that these opportunities require the pooling of resources and know-how from several different companies. Rather than proceed with the acquisition of a complementary business in order to exploit a business opportunity, certain leaders prefer to negotiate strategic combinations with their suppliers, their customers or their competitors.

These connections can take on an informal look. They can also give rise to the conclusion of contracts or even to the creation of joint ventures.

The Supreme Court of Canada recently had the opportunity to rule on these business combinations and their legal consequences. Let’s see what lessons can be learned by SMEs (small and medium entreprises).

The Joint-Venture

According to the Supreme Court of Canada, the concept of a “Joint-Venture” entails that the businesses choose to associate and collaborate in the realization of a common project, each investing their own resources, and sharing the profits of the project. This has the effect of creating a joint venture in which the companies are partners.

The joint-venture is not a legal person in the eyes of the law. The participating companies retain ownership of the assets that constitute their contribution and are responsible for the debts of the company.

The joint venture does not have to be the subject of a written contract. In the event of a conflict, the courts may conclude that it exists by analyzing the behavior of the parties. However, the evidence must demonstrate that the companies were willing to partner with each other.

 

The Relational Contract

It is possible for companies to conclude a relational contract. These contracts are also known as framework agreements.

This type of contract aims to establish standards of close cooperation between the parties, with the collaboration expected to last a long time. There are often clauses which consist of affirming the existence of a relationship between the parties and their willingness to develop this relationship and to specify its content on an ongoing basis.

The courts recognize the validity of such agreements, despite the lack of detail on what each of the parties must do, or on what one or the other undertakes to pay.


Sharing the Risk

Care must be taken during the drafting process of such contracts. Indeed, the mere fact that the contract is long-term is not sufficient to conclude that the parties wanted to share the risks in equal parts. This is, moreover, a situation on which the Supreme Court has already ruled.

Churchill Falls (Labrador) Corp and Hydro-Québec had signed a commercial agreement during the sixties. This agreement concerned the development of energy potential in Labrador. The contract provided that Hydro-Québec had to assume the risks associated with the construction of the dams necessary for this operation. In return, Hydro-Québec would only have to pay a fixed price for the electricity thus produced.

What the parties did not foresee was that the evolution of the energy market would cause the profits that Hydro-Québec would thus realize to be increased tenfold. Churchill Falls therefore invoked the long duration of the contract and the unpredictable aspect of the market to ask the Court to authorize it to renegotiate the terms of the agreement binding it to Hydro-Québec. Churchill Falls claimed that Hydro-Québec had an obligation to consent to such renegotiation by virtue of its obligation in good faith.

When the Supreme Court found that the agreement did not constitute a joint-venture or relational contract, it dismissed Churchill Falls’ claim. The Court held that “the duty to cooperate with his contracting partner does not require sacrificing his own interests”. In short, the mere fact of sticking to the contract does not in itself constitute fault or abuse.

What should I take away from this?

The creativity of entrepreneurs gives birth to all kinds of agreements. By joining forces, SMEs can provide the means to open up new markets. However, time must be taken to clearly define the nature of the parties’ obligations. By working with your business lawyer, you will be able to better define everyone’s rights and obligations. You will also have the tools to deal with the uncertainty of a long-term agreement. This will give you the means to make your projects successful.

Photo Credit: Photo by Duy Pham on Unsplash

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[1] Churchill Falls (Labrador) Corp. C. Hydro-Québec [2018] 3 R.C.S. 101