Dangerous Alliances: Is Peter Druker right about Joint Ventures?

Statistics tell us that more than 25% of project/construction Joint Ventures (JVs) end in internecine dispute. So, was Peter Druker right when he said they are growing in use, dangerous in nature and fundamentally misunderstood?

Joint ventures (JVs), are almost as old as the law itself. The mechanism of sharing profit and risk has been deployed in a range of industries and circumstances throughout history. There is no doubt, however, that its prevalence and sophistication is on the rise.

Peter Druker, one of the founders of modern management, is quoted as saying:

"Businesses once grew by one of two ways; grass roots up, or by acquisition... Today businesses grow through alliances - all kinds of dangerous alliances. Joint ventures and customer partnering which, by the way, very few people understand."1

In our experience, Druker's primary observation on JV's is accurate. We see the JV structure deployed in all manner of projects, as parties seek to defray their risk, bring scale to a project, or access skills and capabilities that reside in another organisation.

Ordinarily, as the usage of a business structuring model increases and becomes mainstream, we would expect less friction and fewer disputes and issues to arise, as parties become more familiar and better at deploying the model.

However, contrary to expectations, this theory doesn't always run true. According to Mike Allen (Global Leader - Contract Solutions - Arcadis), in his 2016 report "Global Construction Disputes Report"2:

25.5% of joint ventures ended in some form of dispute; and 41.4% of all disputes in Asia are JV related. These numbers appear to support Druker's second observation. There appears to be an inherent danger in these alliances.

So, it is to Druker's third observation we turn - that very few people understand the structures: but is it a lack of understanding regarding the legal implications of JVs that is driving the increasing wave of internecine fights between JV parties or is something else at play?

Irrespective of the cause, with the apparent risk of dispute between JV parties being demonstrably high, parties need to carefully consider whether the JV structure is in fact the most appropriate, and if so:

which mitigation strategies should be deployed? how can these minimise the possibility of disputes derailing the relationship? JVS: LEGAL AND OTHER ISSUES The JV structure is both simple and complicated at the same time.

From the simple perspective, as Mason J said in United Dominion Corporation Ltd v Brian3:

"it connotes an association of persons for the purposes of particular trading, commercial, mining or financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill."

However, there is complexity as well. In this respect, in the same case as is referred to above, Mason J further said:

"it is generally considered that the borderline between what can properly be described as a Joint Venture and what can properly be seen as no more than a simple contractual relationship can on occasion be blurred"4.

The term "joint venture" does not have a simple settled meaning in Australian common law. The JV can be incorporated, unincorporated or managed via a trust structure. The JV agreement itself can delimit the rights and...