Joint-venture disputes; Part One of Two; The first and foremost

There is no such thing as a simple legal dispute. Once legal begins or is seriously considered, a dispute over one matter spawns other matters until there is a whole school of disputes. As well, the relationship between the disputants changes, and each tries to “get the other s.o.b.” any way possible. All formerly friendly relations and good-faith dealings fall by the wayside. Past dealings are remembered in the now unfriendly atmosphere and may come back to haunt the parties — especially the party that may have bent some rules to be the “good guy.”

As an example, consider a hypothetical mining joint venture. The operator has control of the day-to-day operations under the general direction of a management committee. This committee has decision-making powers and must approve all programs. Suppose the joint venture has five venturers, including the operator, and decisions of the committee require a vote of at least 51% — there are four venturers each with 23% interests and one with 8%. The operator has entered into a major agreement with consultants to prepare a feasibility study, which the operator alleges was part of an approved program. The other venturers claim that the operator exceeded its authority and that they should not be bound by the agreement. Lawyers have been consulted and a lawsuit is to be commenced. The basic issue in the lawsuit will be whether the operator did or did not have the authority to act as it did in contracting for the feasibility study on behalf of the venturers. In order to determine this, we must ask:

* Did the committee authorize the operator to enter into this agreement or this type of agreement? This is a question of fact that will have to be addressed by the evidence at trial.

* If the agreement or this kind of agreement was authorized, are there any other matters that need to be addressed? The parties have had a falling out, so relationships will be strained. The venturers will be upset with the operator regardless of whether its actions were right or wrong. Thus, even if the court finds that the feasibility study was authorized, the venturers may look carefully at the operator’s obligations under the agreement (such as the obligation to act reasonably and in accordance with good mining practice) and commence an attack against the operator on this front — and so we would have a new battle shaping up.

Since there is a dispute, obviously, one or more of the venturers is claiming that the agreement was not authorized and that the operator acted improperly. What are some of the implications for the venturers, the operator and the consultants?

Scenario

In our action, the mining joint-venturers would attempt to convince the court that:

(a) the operator exceeded its authority in contracting with the consultants to produce a feasibility study; and

(b) since they are involved in the mining industry, the consultants are, or should be, aware of the custom of the trade (see Law column entitled “Confidentially…” in the February, 1990, issue) and, accordingly, should have inquired into the operator’s authority to enter into this contract.

There are, however, other matters that the parties might consider raising. These include:

If the court rules in favor of the venturers, who is going to pay the consultants? If the court rules that the feasibility study was not properly authorized, presumably the operator will have to pay. On the other hand, the court might find grounds for ruling that the operator has the right to pass on the costs to the venturers or to the consultants themselves. For example, from discussions between consultants and the operator and/or the venturers, could it be shown that the consultants were fully aware of the fact that the operator was acting in a representative capacity and should have checked; or, that the operator had the apparent authority to deal and that the consultants relied upon such apparent authority; or, that subsequent events or conduct constructively ratified the contracting or the feasibility study,or… (Think about it!) For our hypothesized chain of events, presume the operator is liable.

If the operator pays for the study, what rights do the venturers have to it? Presumably, if the operator paid for it, the study is his, but not to do with as he wishes. The operator will still be bound by the provisions of the agreement and will presumably not be able to dispose of the study outside of the venture. But this also may be open to argument, depending on the wording of the confidentiality clause of the joint-venture agreement.

If the venturers want the study and the operator wants to sell it to them, what is it worth? Depending on the circumstances, the study might be worth more or less than the cost to prepare it. The price will have to be negotiated outside the provisions of the joint-venture agreement. A prudent operator would be happy to be paid costs and, so, break even.

If the venturers want the study and the operator does not want to sell, can the venturers force the sale? Probably not in the absence of some helpful wording in the agreement. In any event, they can always commission a new study; but how much of the information that they gained during the preparation of the consultants’ feasibility study can they use? What new information (if any) did the venturers acquire from the preparation of the feasibility study by the consultants?

If the venturers do not want the study, what can the operator do with it? Probably very little. The common law imposes duties of confidentiality on the operator and on the consultants (as will, no doubt, the consultants’ own code of professional ethics) in circumstances such as this.

In addition, as far as the operator is concerned, the agreement will no doubt have provisions relating to confidential information and, of course, the operator will be bound by the confidentiality requirments of the common law. In all probability, if the operator tried to dispose of the study or use it for the operator’s own purposes outside of the joint venture, it would find itself sued again.

On the other hand, if the venturers tried to use the recommendations contained in the study, the operator might try to obtain an injunction to prevent them from doing so. This certainly would be far from an easy application though, because the operator would have to prove that, in fact, the venturers were using the actual recommendations of the study.

If the venturers were involved in the preparation of the study, the operator might be able to prove that they acquiesced in its preparation and are therefore estopped from claiming that they do not have to share in its costs (i.e., the court could hold that by their actions they authorized the study or acquiesced in its preparation). It is also possible that the agreement itself may be of help to the operator (for example, there may be provisions contemplating the preparation of and payment for a feasibility study that was not authorized by the committee).

Assuming that the consultants were discussing the study with the venturers during the course of its preparation, do the consultants have to be concerned that such discussions might have been in breach of a duty of confidentiality to the operator? Probably not, as long as the operator was aware that such discussions were taking place (as would be the usual circumstance). This could, however, be used by the operator to illustrate knowledge and acquiescence on the part of the venturers.

Can the venturers use this event to discharge the operator? The first place to look for the answer is in the joint-venture agreement, which should contain provisions relating to the operator’s tenure. If, as with some agreements, the operator has tenure as long as it maintains its interest, it may be necessary to convince the operator that it is in its own interests to resign. Failing that, a legal action might have to be brought against the operator to require it to step down.

This action could take the form of an action for material breach of contract by the operator, which could result in its agreement with the venturers to act as operator being terminated. Obviously, even the threat of such an action will cause any operator (especially a major corporation) to “sit up and take notice,” so the threat may be sufficient to encourage a resignation without the adverse publicity generated by such an action.

So much for the “protection” offered by customs of the trade, but, at least through the use of these customs, the court answered one question for the litigants.