Law SPELLING IT OUT – Joint Venture Agreements

If there are two parties to an agreement, whether or not they have equal interests, decisions will either be unilateral or they will be unanimous. There is no in-between. So in these circumstances, why have a management committee in a joint- venture agreement? Call a spade a spade and set out in the agreement which it is to be: unilateral or unanimous decision-making. The mining industry has long accepted the “fact” that the majority interest-holder makes the decisions, but with flow- through funds and large amounts being spent to earn minority interests, the minority interest-holder is becoming very concerned with protecting its position and ensuring that the project is properly and fairly managed. In circumstances where a committee is to be used, the joint-venture agreement must set out in some detail the mechanical provisions that will prevail. These must be in the agreement, as there is no other place where they can be found. These provisions are much the same as the general bylaw of a corporation and will cover such things as the calling and venue of meetings; quorum; voting procedures; whether or not the chairman has a casting vote; and so on. These provisions should be thought through and not just accepted as “boilerplate.” Your particular deal may call for some special considerations because of its circumstances. For example, it may be considered necessary that one or more named parties must be present in order for there to be a quorum present or that there be a higher-than- ordinary percentage interest in favor of certain matters, such as a production decision or the suspension of operations.

If there are more than three interest- holders in a joint venture, each holding their own interest and acting independently, then a management committee is probably a satisfactory way to run the project. The more parties there are, the better. The opinions offered will be diverse and, theoretically, the decisions reached will be sound and represent a conservative middle ground. On the other hand, beware of using a committee where there are only three parties and one of these has the “swing vote” — in these circumstances a ten-percenter (or less) can enjoy a powerful (and lucrative) advantage. It should also be remembered that one or more of the parties may cease to participate and, through dilution procedures, one party may end up with absolute control of the committee and the project. This will not be of concern to the non-participating parties as they have presumably lost interest in the project and its management, and they will be happy if they see any return from it. In reality, they have probably “written it off.” However, it may be of concern to an active minority participant who may expect some form of protection similar to that expected by the non-operator in a 2-party agreement.

The problem arises where there are only two parties. Here a committee will not work for reaching decision — in a 2-party agreement, decisions will be either unilateral or unanimous. Most explorationists agree that unanimous decisions are undesirable, because it is impractical to try to carry out a work program when it is necessary to “go to the other party” for every decision, in extreme cases, right down to spotting holes] So we are left with unilateral decisions, usually by the operator, but that leaves the non- operator without “protection.” Probably the solution lies in a modified unilateral decision arrangement. This will have to involve a scheme whereby the non-operator can challenge the operator’s decisions and, if the dispute cannot be resolved, then referral to a third party is necessary. Here are some things to think about if this type of scheme is to be used:

* There is still a good use for the committee. It can be a forum for discussion and a means to force the parties to sit down together and discuss their problems. In these circumstances few mechanical provisions are required, really only a notice clause to indicate how and by whom a meeting may be called, where it may be held and, possibly, a limit on the number of meetings that may be held in a year.

* There has to be some means established to protect the non-operator from the operator going off on an uncontrolled frolic. There is no sure- fire solution to this, but there are some things to consider.

First, a cooling-off period can be provided such that everything comes to a halt for a specified number of days while the parties contemplate their respective positions. In theory, this may sound fine; in practice, it often does little more than waste time and entrench positions. In addition, at some stages of work no delay can be tolerated. At best it could be very costly, and at worst it could endanger a project.

As well, a third party mediator can be called on to settle the dispute. It is strongly suggested that full-scale arbitration be avoided and that the third party not, under any circumstances, be empowered to decide the nature or extent of a work program. If he does so, in all likelihood the result will be unsatisfactory to all participants. It is possible to limit the third party’s duties to considering the dispute and rendering an opinion as to whether the operator’s proposal is reasonable and in keeping with good mining practice. If it is, then it prevails. If it is not, then the third party can go through the same deliberations with respect to a counter-proposal. If the counter- proposal is considered reasonable and in keeping with good mining practice, then it prevails. If neither proposal nor counter-proposal receives the third party’s blessing, then the operator must go back to the drawing board. This is certainly not a foolproof scheme, but it has worked in practice; and sometimes the mere threat of calling on a third party will “assist” a party to compromise. If the scheme is to be adopted, consideration has to be given to the type of disputes to which it will apply (everything or only major items such as a feasibility study) and who will pay the costs (if the loser pays all, it may discourage frivolous disputes).

Many considerations can arise regarding the question of the use of a committee and its composition and powers. I’ve mentioned only a few of the most common. In addressing the whole question of management committees, it may help to recall that at times committees can be cumbersome and their decisions highly suspect. Karl J. C. Harries is a graduate mining engineer and a partner with the Toronto law firm of Fasken & Calvin. The information in this article is summary and general in nature and is not intended to be taken or acted upon as legal advice.