Law and technology

“The road to hell is paved with good intentions”.

A software project that starts life as an informal “plan” between friends has the potential to become problematic, if essential terms are not decided at the beginning. Often, the informal and casual nature of a software project, which at first is an advantage, becomes the source of problems once money (income or expenditure) is involved.

When two people come together specifically to work on a software project, there is a good chance that they have created what the law terms a joint venture. People often think of a joint venture as a large project between big companies. But joint ventures can arise in many situations, from the very large to the very small.

A joint venture is not recognised as a separate legal entity such as a company or a partnership. But it is recognised by the law. The term “joint venture” describes a relationship between parties working together to achieve a common objective and may be as formal or informal as the participants want.

How is a joint venture established?

A joint venture can be formed by contract, but it can also be formed automatically when two (or more) people begin working together on a common project. There is no need for any written documentation between the parties. The key requirement is that the parties intended to form a joint venture:

“The essence of a joint venture which is not yet contractual is that it is an arrangement or understanding between two or more parties that they will work together towards achieving a common objective. … A joint venture will come into being once the parties have proceeded to the point where, pursuant to their arrangement or understanding, they are depending on each other to make progress towards the common objective.”

Chirnside v Fay (6 September 2006, NZ Supreme Court)

It does not matter how formal or informal the arrangement was. As long as the elements described above are present, the law may recognise that a joint venture exists.

So I’m in a joint venture – what difference does that make?

In general, joint ventures impose a relationship of trust and confidence on the parties to act in good faith towards the objectives of the venture.

“[Each] party is entitled to expect from the others loyalty to the joint cause, loose as the formalities of the joint venture may still be”.

Chirnside v Fay (above)

In practice, this means:

• A party must not compete against the joint venture;
• A party must not undermine the joint venture;
• A party must not exclude another party from the venture, act disloyally or misappropriate the work product that the parties had developed; and
• A party must keep the commitments they have promised to the venture (e.g. to spend a certain amount of time on the venture).

To put it bluntly: you can’t screw over your partner.

If you have been working with a friend on a software project joint venture, it may come as a surprise to find out that you are “bound” by legal duties, especially if you have not signed anything or put anything in writing. But it is a mistake to think that our legal system only operates on strict black-and-white lines.

Our Courts retain what is called an equitable jurisdiction which (as the name suggests) is founded on principles of equity. A primary objective of the law of equity is fairness. If you have put in a lot of time on a joint venture with a friend, how fair would it be for your “friend” to walk out at the last minute and set up a competing venture, using all of your commonly developed ideas and know-how?

This is what happened in the case of Chirnside v Fay (above).

Similarly, the law can prevent one party in a joint venture from free-loading off the work of the other. If you had committed to put a reasonable amount of time and effort into the venture and didn’t, then you probably cannot complain if your joint venture partner wants to continue the project by him or herself. This is an example of the law of equity’s “clean hands doctrine“. This says that “one who comes to equity must come with clean hands”. That is, you must have acted fairly yourself in order to obtain a remedy against the other person.

However, much depends upon what the parties are taken to have intended. If it is clear that the parties never intended to form a joint venture, or only intended a very limited co-operation, then the parties will have lesser duties to the joint venture.

Similarly, participating in a joint venture does not prevent the parties from have existing businesses or jobs. Indeed, many joint ventures are set up as “side projects” and are intended to be performed in the parties’ spare time. In such cases, there is likely to be only a low level of time and effort required by the parties to meet their commitments to the joint venture.

My next post will talk about how to avoid these risks at the outset.