What is a joint venture?

Firefly has a post up about joint ventures, and the City's relationship with SME. In her post she comments on the myriad statements that have been made about this relationship, and much of what she says I agree with or have said myself.

What I want to focus on, though, is the statement that the City of Great Falls has entered a "joint venture" with SME. She quotes the City's financial statements (p.2, para. 1(c)) to come up with this definition of a joint venture:

[A]n organization that results from a contractual arrangement and that is owned, operated or governed by two or more participants as a separate and specific activity subject to joint control in which the participants retain an ongoing financial intrest or responsibility.

I think this is a reasonable definition of a joint venture, but I am not sure it is the applicable standard.

A joint venture is a state law creation; thus, I think we need to look to our Montana Supreme Court to define what are the elements of a joint venture is in Montana:

1) an express or implied agreement or contract creating the joint venture; 2) a common purpose among the parties; 3) community of interest; and 4) an equal right of control of the venture.

(For those of you who care, this definition comes from Bender v. Bender, a 1965 decision that can be found at 144 Mont. 470, 397 P.2d 957.)

I think that, under those four elements, it could be fairly stated that the City and SME have formed a joint venture or, at a minimum, that such a path remains clear to them. I have questioned the lack of a written agreement. My issue, though, comes not from the lack of an agreement, but rather the lack of good practice.

The agreement required to form a joint venture can be, as stated above, express or implied. Depending on the resolution of the whole ownership issue, I think it can be fairly stated that there is at least an implied agreement that we (being the City of Great Falls and/or Electric City Power) will go forward to run the coal plant together with SME.

I think there are, too, common purpose with SME and community of interest.

While it might appear at first blush that there is not an equal right to control the venture, since we are only 25% owners, the Montana Supreme Court has held that the "parties can choose to delegate management duties to one venturer and still establish equal right of control." (Murphy v. Redland, 178 Mont. 296, 583 P.2d 1049(1978)).

Thus, conceptually, we can operate a joint venture with SME under the facts presented.

There are, however, significant problems with this conceptual analysis. First, there is the whole question about the basic structure of ownership. If two parties operate a joint venture together, that does not mean they own a part of each other. As has been noted elsewhere, there does not seem to be a record of the City's purported ownership interest in SME. So, what is the nature of the relationship, and why is it not documented? Are we owners of SME? When was that decided? Where is that noted? What documents control our relationship with other owners? If we're not owners of SME, why are we making capital contributions to that entity?

Which brings me to the second, larger issue here. While a joint venture arrangement can be created by an implied contract why, as a matter of good practice, would we allow our City staff to spend millions of dollars without an express, written agreement? Especially when such an agreement is clearly contemplated?

Look, this isn't rocket science. If you and the guy across the alley are going to open a business together, and you are going to take out a second mortgage on your house to do it, are you going to just hand him the money hoping he'll act in good faith? (If your answer is yes, you might want to check here.) Or, at a minimum, are you going to write down the basic terms of your deal and sign your names to it?

We need to insist that the relationship with SME be clarified and, more important, memorialized in writing, before another one of our dollars is spent.