If a practice is so common within an industry that it is expe and widely accepted, it can be recognized by the courts as a custom of the trade and, in appropriate circumstances, enforced by the courts. A number of practices have become part of most mining joint ventures. These may well be customs of the trade (it cannot be said that they definitely are, simply because the courts have never been asked to decide upon that point). These distinctive practices are important because they are directly contrary to the law of partnerships. Yes, “partnerships” — a mining joint venture is, at law, a partnership. In addition, the treatment of joint ventures by Revenue Canada also sets them apart from ordinary partnerships.
Before considering customs of the trade, we will first take a quick look at how the tax treatment of joint ventures makes them special. Partnerships are required to take certain Canadian tax deductions at the partnership level against partnership income, whereas these deductions for Canadian joint ventures “flow through” to the venturers directly. This is obviously more favorable to a taxpaying venture. In order to be able to take advantage of this special treatment, Revenue Canada will, however, have to be satisfied that a joint venture does in fact exist, or, in other words, that the project is in fact the joint acquisition, exploration, development or exploitation of co-owned property by the venturers. There is a rumor, however, that Revenue Canada is currently reviewing the whole question of what constitutes a joint venture and how deductions should be treated. It appears that Revenue Canada is of the view that some of the farm-in/joint-venture agreements have strayed too far afield from the traditional “work-in-the-ground-to-earn-an-interest” concept. Although it is unlikely the treatment of expenditures after acquisition of the interest would be adversely affected (but no promises), the concern is that the cost of work during the farm-in period could be treated as a “purchase price” for the interest, or, in other words, Canadian development expenditures to the acquiror and taxable income to the original property owner.
In addition, for many years, in order to establish arrangements as a joint venture for tax purposes, it was considered essential that venturers take the product produced under the joint venture arrangements in kind and pro rata to their respective interests in the project. In recent years, it appears that Revenue Canada has relaxed its views on the “essential” nature of this specific criterion and may be more inclined to review the arrangements as a whole and to treat this as just one of the criteria to be considered. In other words, it may be possible in Canada to have a joint venture that sells its product and distributes cash to the venturers. This matter has not been officially decided by the courts or by Revenue Canada, so prudence would dictate that venturers agree to take their product in kind and make whatever arrangements they consider appropriate for its disposition outside the joint venture (usually a separate product sales agency agreement). One of the principal criteria for a partnership is that the partnership carry on business with a view to making a profit, so, if product is not sold, but rather is distributed to the venturers in kind, it is difficult to see how the element of profit can be present at the joint-venture level.
Turning now to customs of the trade, joint ventures are not restricted to the mining industry. They are found throughout the business world, but in the mining industry they have become commonplace and are accepted “as a matter of course.” This widespread use has meant that mining joint ventures have developed some special characteristics that make them unlike other partnerships or joint ventures. In order to understand the special attributes of a mining joint venture, we must ask: What are the most common features that appear in virtually every joint-venture agreement? Obviously, the joint venture will relate to mining properties and activities. If it does not, or deals only in part with mining matters, then the arrangements may be a joint venture but not necessarily a mining joint venture. The following are some standard provisions or concepts:
* The arrangements do not, and are not to be construed to, create a partnership or other similar entity (i.e. a specific statement of intention is made); all property is owned by the venturers as tenants-in-common and not as joint tenants.
* A party is designated to be the “operator.”
* Liabilities are several and not joint and the liability of a venturer is limited to its obligations under the agreement.
* Product is to be taken in kind by the venturers pro rata to their respective interests in the venture (discussed above).
The common provision that liabilities are several and that a venturer’s individual liability is limited to its required contributions is directly contrary to the situation in a partnership. In a partnership, liabilities of the partnership are the liabilities of each of the partners and each partner has the power to bind the partnership. The concepts of 1) several liability and 2) limitation of the liability of a venturer in a mining joint venture have probably become customs of the trade within the mining industry, but the actual quantum of the limitation will vary from venture to venture and is not part of the custom.
(The joint-venture agreement must be looked to and there is no guarantee that the courts will accept the specified quantum even if a custom of the trade is found to exist).
In a joint venture, one of the venturers is invariably appointed as the operator and joint-venture agreements set forth quite extensively the powers, authority and duties of and limitations on the operator. In addition, the operator will usually be charged with the carrying out of the project and the other venturers will agree to be “passive” in the sense that they will let the operator do so, subject to the specified limitations. These concepts are, again, so common within the Canadian mining industry that they should be anticipated, and have probably become a custom of the trade within the industry. They, like the limitation on liability, are directly opposed to the usual situation in a partnership, where any partner can bind the partnership and the other partners with respect to the business of the partnership, and the partners cannot hide behind contractual limitations.
What does that mean on a practical basis? Briefly it means that if a person familiar with the mining industry is dealing with a mining joint venture, whether through the operator or otherwise, that person is considered to be aware of the applicable customs of the trade and should take appropriate steps to protect himself. For example, a mining contractor would be prudent to check that the operator of a joint venture has the authority to enter into a major contract, and a purchaser would be prudent to check that the operator has the authority to sell the property of a joint venture that the operator purports to offer. Conversely, if dealing with a venturer that is not the operator, it would be prudent to confirm that the venturer has the power to bind the other venturers.
The law, however, is rarely simple, so this is not as straightforward as it appears on paper. A court will not decide a matter involving a custom of the trade merely by looking to that custom. It will look to all the facts of the case as presented to it. A court may decide that, in the circumstances, the custom should not be enforced. For instance, a contract may be held to be valid and the venturers bound by it, even if the operator acted outside of its authority as set forth in the joint-venture agreement, because that is the equitable result in the circumstances. The venturers may have an action against the operator for exceeding its authority under the joint-venture agreement, but they better hope that their operator is a rich one! As a general rule, the courts will be most reluctant to invoke a custom of the trade unless the result is reasonable and equitable in the circumstances.
From the contracting party’s point-of-view, if a major agreement is involved, it may be advisable to require the best protection of all — the specific confirmation of the operator’s proposed actions by the venturers.
If, on the other hand, an operator is dealing with a party that is not regularly involved innthe mining industry, that party will not be expected to be aware of the customs of the trade. That is not to say that the venturers will always lose before the courts if the operator misbehaves with non-mining parties (and remember that they may well have a claim against the operator for its misbehavior regardless of the result of the action to enforce the agreement). For example, if it can be shown that a purchaser knew that the operator was not acting in the capacity of a principal and was representing other parties, the courts might well find that, in the circumstances, the purchaser should have enquired into the operator’s authority. If the purchaser did not, then the purchase contract may not be upheld against the other venturers and the other venturers will be “saved” from the frolic of their operator, but it will, no doubt, have cost them considerable time, effort and dollars to be saved. Or are they saved? — but that is for another time.
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