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When Is A Building Contract A Joint Venture?

A difficult issue that may arise between contractors and subcontractors is the nature of their contractual relationship.  Are they:  independent contractors; or partners; or joint venturers; or employees one of the other?

In WCI Waste Conversion Inc. v. ADI International Inc, The Prince Edward Island Court of Appeal recently considered whether a contractor and subcontractor were actually in a joint venture relationship.  The decision is an important one as the majority and minority of the court approached the issue in a different way.

The Court also considered questions relating to the obligations of good faith, fiduciary duty and repudiation on a construction project.  The decision provides a useful insight into those issues as they apply to a construction project.

Those issues will be addressed in my next blog, but for now, let’s consider the question of when parties to a construction project may be in a joint venture.

The Background

In June 2000, a PEI Crown Corporation, Island Waste Management Corporation (“IWMC”), issued a Request for Proposals for the design, construction and operation of a central composting facility to serve the province of Prince Edward Island.  WCI approached ADI about making a proposal together.  The two companies submitted a Pre-Qualification Submission which was expressly made by those companies “in association” and as a “team”.  The ultimate Proposal was submitted in March 2001 by ADI and it stated that it was prepared by both companies.  In July 2001, IWMC awarded the contract to ADI, with WCI shown as a sub-contractor.

In May 2001, ADI and WCI entered into a Memorandum of Understanding (“MOU”).  They entered into a further MOU in August 2001 after the contract had been awarded by IWMC to ADI.  The key provision of the August MOU stated as follows:

It is agreed that ADI will be the prime contracting party, with WCI engaged as a sub-contractor.  ADI will provide the bonding and insurances as stipulated by the RFP. However, it is agreed that the actual working relationship will be based on the general principles of a joint venture agreement as summarized below.

In their correspondence with each other, ACI and WCI frequently referred to the bid as being “joint” and to the relationship as being a “joint venture”, but ADI insisted throughout that it was the prime contractor and carried the associated rights and risks.

Construction of the project was substantially completed by October 2002.  During the construction, the relationship between ADI and WCI deteriorated and ADI terminated the contract with WCI.

The Sub-Contract or Joint Venture Issue

The trial judge found that the contract between the parties included the two MOUs and the correspondence between the parties, at least so far as determining the relationship between the parties.  He held that, for the purposes of the relationship with IWMC, the parties were in a contractor-sub-contractor relationship, but between themselves they were parties to a joint venture relationship.

The  majority of the PEI Court of Appeal affirmed this finding.  A number of features of its reasoning are important.

First, the majority held that ADI could not rely on evidence outside the MOU to contradict the statement in the MOU that the relationship between the parties was a joint venture.

Second, the majority held that it was not necessary that WCI have an expectation of profit from the prime contract with IWMC for there to be a joint venture between the parties.  Even though WCI was only entitled to a fixed payment from ADI, and ADI was entitled to all the upside and subject to the downside of that prime contract, the parties were still entitled to call their agreement a joint venture agreement and thereby impose duties upon themselves consistent with a joint venture.

Third, the majority held that contractors and subcontractors are entitled to contract between themselves as joint venturers, and to contract with the owner on the basis that only one of them is the contractor and the other is a subcontractor.  The majority distinguished the case of Design Services v. R, [2008] 1SCR 737 in which a subcontractor asserted that it was in a contractual relationship with the owner based upon it really being part of a joint venture with the contractor.  The majority of the PEI Court of Appeal said that, in Design Services, the owner had issued no contract at all to the contractor but had issued the contract to another bidder:

“Canada awarded no construction contract to the contractor, Olympic.  Olympic didn’t enter into a subcontract with Design Services.  In the present case, WCI’s claim is between the contracting parties, inter se, where terms have been agreed and expressed by the parties.”

The minority judge disagreed.  As to the clause in the MOU stating the parties’ relationship, the minority judge held that there was an inconsistency between the first and third sentences and that “the court was obligated to find an interpretation which would give meaning to both provisions that create the inconsistency.”

The minority judge then turned to the actual responsibilities and the actual entitlements to payment and profits to determine whether the relationship was really one of joint venture or one of contractor-subcontractor.  He found that ADI entered into a fixed price contract with IWMC in which WCI had no entitlement to profit, and that WCI entered into a fixed price contract for WCI to be paid a fixed price.  There was no sharing in profits under either arrangement.  ADI and WCI had separate activities for which they were responsible.  Each party entered into separate sub-contracts.  Neither party was vulnerable to the other.  In short, all the ingredients of the relationship indicated that there was no joint venture and that the parties were independent contractors.  According to the minority judge, the statement about a joint venture in the MOU:

“meant they would work in close cooperation with each other to carry out their specialized duties as contractor and subcontractor…. Reliance on joint venture was for purposes of facilitating the proper functioning of their working relationship as contractor and subcontractor…there is nothing in their contractual arrangements which would indicate they agreed to enter into a joint venture….The statement standing by itself in the contract did not make their legal relationship that of parties to a joint venture.”

This disagreement between the majority and minority reveals a fundamentally different approach to determining the legal relationship between the parties.

The majority held that, if the parties state in their agreement that they are joint venturers, then the court will hold them to that statement.

The minority held that the court may go behind that statement, at least if the parties also state that they have a contractor-subcontractor relationship so far as the owner is concerned; and the court may determine if the relationship between the parties is really one of joint venture and if it is not, then the parties’ statement about joint venture may be over-ridden.

This difference in opinion raises a number of questions:

First, if the parties wish to have a joint venture relationship between themselves, but also wish one of them to be the prime contractor and the other to be the subcontractor, can they legally do so?  If they can, how do they do so to ensure that the relationship is not disputed later?

The wording used by the parties in the key provision of the MOU seems as clear as possible, namely, that the parties wanted a joint venture arrangement between them, but recognized that one of them would be contractor and the other sub-contractor so far as the owner was concerned.  How could they have more clearly stated that intention?  Would it have been better to leave out reference to the “actual working relationship” being “based on” a joint venture agreement, and instead say that the “real legal relationship between the parties is that of joint venture”?   Or with this judicial precedent, can we now proceed on the basis that the words in this contract are sufficient in the future to create a joint venture between a contractor and subcontractor?

Second, which approach is better?  Should courts accept the parties’ statement as it is?  Or should they inquire into the actual relationship to see if it is one of joint venture?  In the employment setting, courts often determine whether the relationship is really one of employment or one of independent contractors, but there are real public policy reasons for doing so.  When the parties say that they are partners, should the court go behind that statement to see if they really are?  If they say that they have entered into a joint venture agreement, are there good public policy reasons for the court to go behind that statement?

These thoughts are enough for the moment.  In the next blog we will consider the approach of the PEI Court of Appeal to the following important issues:

…when do parties to a construction project owe duties of good faith or fiduciary duties to each other?

…and what misconduct on a construction project will be considered to be sufficiently serious that it amounts to repudiation entitling the other party to terminate the contract?

A very meaty decision indeed!

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed, Chapter 7, part 1.

WCI v. ADI, 2011 PECA 14 (CanLII)

 Construction Law   –   Contractors and Subcontractors   –   Joint Venture

Thomas G. Heintzman O.C., Q.C.                                                                  January 7, 2012