While most common in construction projects, the business structure termed a “joint venture” is a creation which is actually nothing more than a partnership created for a single project or undertaking which normally lasts only so long as the project lasts. Typical partnerships usually engage in continuous business and comprise two or more persons or entities combining to engage in that business. If the business is directed at and limited to a particular finite task, however, that same partnership is considered a “joint venture” and is the topic of this article.
The reader should first review the contents of our articles on Limited Liability Entities and Contracts before reading further.
A constant theme in business ventures is the effort to limit the risk. See our article on Business Start Ups While Protecting Your Assets. Note that partnerships and this variation of a partnership, a joint venture, do not necessarily have limited liability. However, limited liability entities can be members of a joint venture, thus allowing some form of limited liability. This fact makes such a structure appropriate in various types of business ventures.
If one needs to team up with another person or entity but only for a particular task or project, and one already has a limited liability entity to be one of the “joint venturers,” then it may make sense to create a joint venture agreement which describes the rights and duties of the parties. Too often parties seek to rely on verbal understandings or slide into a joint venture due to circumstances without realizing the significant risks involved…such as the unlimited liability that may arise from acts of the joint venture that are not even approved by all joint venturers!
It is therefore vital for any person considering a joint venture to study the various aspects of this unique approach to business.
The Basic Definitions:
A joint venture is an association of two or more persons based on written or oral contract who combine their assets, property, knowledge, skills, experience, time or other resources in pursuit of a particular project or undertaking, usually agreeing to share the profits and the losses and each having some degree of control over the venture.
Due to the wide variety of projects that a joint venture can be created to accomplish, a constant issue is whether a venture is a joint venture, a full partnership, or some other type of business. Whether a joint venture exists is a question of fact to be decided according to the facts and circumstances of each case. In that respect, the intentions of the parties and the terms of the understanding are what determine the decision as to whether the joint venture exists, hence the need for a clear and concise written agreement for any parties seeking to engage in this type of business.
In most jurisdictions, the critical elements of a joint venture normally are:
- a community of interest in the purpose of the joint association;
- a right of each member to direct and govern the policy of conduct of the other members;
- a right to joint control and management of the assets used in the enterprise; and
- a sharing in both profit and losses.
Usually, only one of these elements alone will not result in a judicially recognized joint venture.
A contract (understanding) between the parties is necessary for a joint venture but need not be reduced to a formal written or even oral formal agreement; it might be inferred from the facts, circumstances, and conduct of the parties. Pittman v. Weber Energy Corp., 790 So. 2d 823 (Miss. 2001). However, it cannot be emphasized too strongly that a written agreement is far safer and more efficient.
There must be a contribution by the parties to a common undertaking to constitute a joint venture as well as a community of interest and some control over the subject matter or property right of the contract. The contributions of the respective parties need not be equal or of the same character, but there must be some contribution by each co-adventurer of something promotive of the business enterprise.
It is vital to note that merely sharing an economic interest is not sufficient to form a joint venture. There must be some evidence of the parties participating and having control over the enterprise. The role of a passive investor may create an investment co ownership or lender relationship-it does not create a joint venture.
Whether the parties to a particular contract have thereby created, as between themselves, the relation of joint venturers or some other relation depends upon their actual intention, and such relationship arises only when they intend to associate themselves as such. This intention is determined by the courts in accordance with the ordinary rules governing the interpretation and construction of contracts.
The requisite criteria for the existence of a joint venture in general usually are categorized as follows:
- A contract between two or more persons;
- An entity or person is established;
- Contribution by all parties of either efforts or resources;
- The contribution must be in determinate proportions;
- There must be joint effort;
- There must be a mutual risk vis-a-vis losses;
- There must be a sharing of profits.
Relationship of the Parties; Comparison to Partnership:
The joint adventure relationship is a fiduciary one in which the members owe each other the highest degree of good faith and fair dealing. Each member of a joint venture acts for him or herself both as principal and as an agent for the other members within the general scope of the enterprise.
The law of partnership and of principal and agent underlies the conduct of a co-adventurer and governs the rights and liabilities of co-adventurers and the degree of exposure to liability from third parties as well. King v. Modern Music Co., 2001 OK CIV APP 126 (Okla. Ct. App. 2001).
However, a joint venture differs from a general partnership since it is related to a single transaction, while a partnership usually is related to a general and continuing business. Also a joint venture is usually of a shorter duration and the agreement may be less complex.
In general and in most states, the following are the differences between a joint venture and a true partnership:
- A joint venture involves two or more persons or entities joining together in particular project, whereas in a partnership, it is individuals who join together for a combined business.
- A joint venture can be described as a contractual arrangement between two or more entities that aims to undertake a specific task. A partnership involves an agreement between two or more parties wherein they agree to share the profits as well as any loss incurred in a single venture.
- Typically, in a partnership, persons involved are co-owners of a business venture and their aim is making a profit. But in a joint venture, it is not necessarily just profit that binds the parties together. Joint ventures can be formed for specific purposes. As an example the companies engage in joint ventures for undertaking certain ventures such as research and development which will be expensive in nature and impossible to undertake the same individually.
- A partnership will usually last for many years unless the parties involved have differences. A joint venture company will last for only a limited period until the goal is achieved.
- The members in a partnership can claim a capital cost allowance as per the partnership rules. The joint ventures can use as much or as little of the capital cost allowance as they agree.
- Although a joint venture is very similar to a partnership, a joint venture is generally more limited in scope and duration. A joint venture is generally considered to be a partnership for a single transaction. The rights and liabilities of joint venturers are governed by the principles applicable to partnerships.
It is vital to note that in both a joint venture or partnership, if a criminal act is committed through the structure, the culpable members of the partnership are held criminally responsible, rather than the partnership or joint venture itself, but third parties may look to all of the members in seeking civil relief.
Contract Requirement for Joint Ventures:
A contract, express or implied, between the parties, is required to create the relation of joint ventures. However, little formality is legally necessary to the establishment of a joint venture and an joint venture is not necessarily invalid because of indefiniteness with respect to specific terms. The contract need not particularly specify or define the rights and duties of the parties. The relationship can be formed by parol (oral) agreement. Moreover, the existence of the joint venture can be inferred from the conduct of the parties, or from the facts and circumstances which make it appear that a relationship was in fact entered into. Arnold v. Humphreys, 138 Cal. App. 637 (Cal. App. 1934).
It is highly recommended, however, that a complete written agreement is created to avoid confusion and dispute at a later time. See our article on Oral or Written Contracts.
The agreement entered into between the parties must evidence the intent of the parties to enter into a joint venture. Usually a joint venture is formed for a specific purpose and for a specific limited duration. The essential test in determining the existence of a joint venture is whether the parties intended to establish such a relation. In the absence of an express agreement setting forth the relationship, the status can be inferred from the conduct of the parties in relation to themselves and to third parties.
Note that to establish a valid joint venture, it must be more than a contractual relationship. Certain contributions are made to a newly formed business enterprise. Each member in a joint venture normally contributes property, asset, capital, skill, knowledge or effort for a common and specific business purpose.
Parties in a joint venture share a common expectation regarding the nature and amount of the expected financial and intangible goals and objectives of the joint venture. Usually goals and objectives are narrowly focused. Assets deployed by each participant represent only a portion of the overall resource. Each member enjoys the right of control over the other, absent restricting specifically agreed in the joint venture contract.
The contract must contain a provision regarding the sharing of profit and loss. The joint venture parties share in the specific and identifiable financial and intangible profits and losses. Additionally, the members share certain elements of the management and control of the joint venture.
However, the five elements above mentioned need not be all present in a joint venture. “Simply stated, a joint venture depends upon three elements: joint ownership, joint operation, and an express or implied agreement”. Woolsey v. Petroleum Production Management Inc.,1990 U.S. Dist. LEXIS 6071 (D. Kan. Apr. 4, 1990).
Moreover, the elements required to establish a joint venture are essentially the same as that for a partnership. They include: agreement; sharing profits and losses; ownership and control of the partnerships property and business; community of power; rights upon dissolution; and the conduct of the parties towards third persons. Kozlowski v. Kozlowski, 164 N.J. Super. 162, 171 (Ch.Div. 1978).
Remember the key difference between a standard partnership and a joint venture: Although very similar to a partnership, a joint venture is more limited in scope and duration.
The existence or non-existence of a joint venture depends on the facts and circumstances of each particular case. Generally, no fixed and fast rule can be applied to all situations. Liona Corp. v. PCH Assocs. (In re PCH Assocs.), 949 F.2d 585, 599 (2d Cir. N.Y. 1991).
Particular agreements and relationships may also be classified as joint ventures. The following are but a few examples:
- Purchase and sale of personal/real property: Generally, agreements by which two or more persons join in purchasing property for resale with a provision for sharing the resulting profits or losses are in the nature of joint ventures, if they are not sufficiently broad in scope to amount to partnerships. Here the parties should have the requisite intent to form a joint venture. Also, they should make a joint effort to combine their money or property for a common goal.
- Securities: Agreements to buy and sell stock or bonds are deemed to be joint ventures where it appears that the transactions are to be joint and that there is to be a sharing of profits or losses. However, for considering it as a joint venture, there should be a specific understanding that the transaction is to be joint, with a division of profits from the sale and that the duration and extent of the venture will be limited.
- Use or rental of personal property: The use of property may be placed in a joint venture. Thus, the owner of construction equipment and a company which rented out such equipment to third parties in return for a share of the profits are joint ventures if related to a single project.
- A contract for the subdivision and improvement of real property, and for the sharing of the resulting profits, may be in the nature of a joint venture if the venture is restricted to a single project.
- Oil and gas operations: A projects conducted for the development of a particular oil and gas well may be deemed to be a joint venture. Also, an agreement between adjoining landowners, as lessees and royalty owners, for the recovery of secondary gas and oil which was to be shared, regardless of where it was produced, in amounts proportionate to the parties’ holdings in the pooled land constitutes a joint venture.
- Exploitation of intellectual property; patent or patented article: A written agreement between an inventor and another party for the production of the invented article for commercial purposes, which provides that the other party should arrange for the payment of the necessary expenses for getting the article into production, including the expense of putting it on the market, amounts to a joint venture agreement but if the relationship is to involve longer periods of time or additional products, the Trier of fact will likely consider it a partnership.
- Copyright, literary property, or theatrical production: A person producing a play under a license and who divides the receipts with the licensor is subject to the fiduciary obligations of the character of those imposed on joint venturers. Underhill v. Schenck, 238 N.Y. 7 (N.Y. 1924). A joint venture also arises where one person loans money to another to finance a play and is to receive an undivided one-half interest in the proceeds derived from the play or where one party, for the purpose of producing a play, acquires financing supplied by other parties on the conventional basis of taking their pro rata shares of the profits to be earned from the play.
- Relationships between agents or brokers: Agents or brokers employed to effect a sale by their united efforts and who are to be compensated by the excess of the sale price over a stipulated sum, are deemed to be engaged as between themselves in a joint venture.
- Relationships between attorneys at law; fee-splitting agreements: Attorneys who do not have a general partnership relationship may be regarded as joint venturers where they jointly undertake to represent a client in a case. In order for a joint venture to exist between two attorneys working together to represent a client, all the elements of a joint venture must be present; thus, where both attorneys wrote the pleadings in the case, conducted discovery, paid the expenses, and agreed to the settlement that was reached, there is sufficient joint control.
A stated or unstated disinclination to assume the burdens of a joint venture does not necessarily preclude the creation of that relationship, since the substance of the legal intent rather than the actual intent may be controlling. The status may be inferred from the purpose of the enterprise and the acts and conduct of the parties in relation to the engagement, which in some cases may prevail over the expressed declarations Albina Engine & Machine Works, Inc. v. Abel, 305 F.2d 77 (10th Cir. Okla. 1962).
Duration of Joint Ventures:
The duration of a joint venture depends on the terms of the contract between the parties. The venture will continue until the time stipulated in a contract. But where an agreement lacked a definite term of duration, courts have found it may be terminated at will by either part LoGerfo v. Trustees of Columbia Univ. in City of New York, 2006 NY Slip Op 9188, 2 (N.Y. App. Div. 2d Dep’t 2006).
When there is no express contractual term fixing the duration of the agreement, some proof establishing the intention of the parties on the duration can be produced. When there is nothing to show the intention of the parties regarding duration of the joint venture, the objective of the joint venture will be considered. The objective of a joint venture can be the completion of a specified piece of work or attaining a specific result. It will be presumed that the parties intended the relation to continue until the object has been accomplished. Whether a venture is at will, for a fixed term, or until the accomplishment of a particular undertaking is a question of fact. Thus, when there is no express term in a contract fixing duration, courts may inquire into the intent of the parties.
Under certain state laws, the duration of a joint venture is subject to the same rules as a partnership. The reason behind joint ventures being governed by the same legal rules as partnerships is that a joint venture is in essence a partnership for a limited purpose. However, certain statutes providing for the continuation of a partnership as a separate legal entity after dissociation of a partner has no application to a joint venture. A joint venture cannot continue in business as a separate legal entity after one joint venturer withdraws from the venture since a joint venture is not an entity separate from the parties composing it and a co-venturer is not entitled to have the partner dissociated from the joint venture and have it continue in business. Thus any person wishing a association to continue despite the withdrawal of one of the persons must create a formal partnership. Realistically, this also means that in a joint venture any party can end it at will simply by withdrawing, though whether this would create an action for damages would depend on the circumstances of the business relationship.
The courts do not look kindly on game playing or minor events ending joint ventures since the fiduciary duty applies to the members of the venture. It has been held that the duration of a joint venture will not be affected by trifling matters or temporary grievances which cause no permanent mischief. Tiger, Inc. v. Fisher Agro, Inc., 301 S.C. 229 (S.C. 1989).
And note that the venture continues until not only its underlying purpose is completed, but all the requirements to pay creditors, taxes, etc. are completed. For example, when the purpose of a joint venture is to purchase a land, build a house in the land, and sell the house, the venture will not be over when the parties receive the profit. It will be over only when the venture is properly wound up by settling all the dues the joint venture holds and issuing a proper accounting to each party in a joint venture. See Tiger case, above.
Of critical import is the unlimited liability that attaches to joint ventures and the continued liability that may exist even after the venture is terminated. A joint venture continues to exist legally in the matter of tort responsibility as it may be found liable for damages arising from joint venture activities. Its members may be sued individually and found liable for damages caused by the joint venture. Thus, wise use of insurance and limited liability entities is strongly recommended. Casual creation of a joint venture can be a very dangerous thing.
Note also that a joint venture may continue even if a member of a joint venture conveys his/her interest to a third person. It may continue when the parties to the joint venture continue to act and deal together on the basis of continuance of the joint venture. The intention of the parties will be looked into to determine whether a joint venture is continuing and not dissolved or terminated. Thus, a transfer of interest may not put a stop to the duration of a joint venture.
As for formal ending of the joint venture, usually dissolution and termination of a joint venture are governed by partnership law relating to dissolution and termination. In areas where the Uniform Partnership Act (Act) is applicable, dissolution and termination of a joint venture is governed by relevant provisions contained in Act. However if there is any written agreement made by joint venture parties to the contrary, then such written agreement would normally determine a joint venture’s dissolution.
Broadly speaking a joint venture can be terminated in the following situations:
- if there is an agreement between joint venture parties to terminate a joint venture;
- if it is apparent that a joint venture is not profitable and activities are abandoned;
- on death or withdrawal of a joint venture member if a replacement joint venturer was not obtained before death or withdrawal.
In most states, a joint venture can also be dissolved by judicial dissolution. Under the Act, a court can grant a judicial dissolution on the following ground:
- if a joint venture member is shown to be of unsound mind;
- if there is significant and continued dispute and dissension among parties to a joint venture;
- if a joint venture member becomes in any other way incapable of performing his/her part of a joint venture contract;
- if a joint venture member has been guilty of significant conduct that may in turn be prejudicial to a joint venture business in a material way;
- if a joint venture member willfully or persistently commits a breach of a joint venture agreement;
- if a joint venture business can only be carried on at a significant or prolonged loss; and
- on other circumstances that render a dissolution equitable in the opinion of the court.
However, courts have observed that judicial dissolution of a joint venture corporation having two 50% stockholders is discretionary and it is to be decided according to the circumstances arising in the particular case. Hopkins v. Hopkins, 1982 Del. Ch. LEXIS 476 (Del. Ch. Sept. 21, 1982).
It is far better to have a joint venture agreement that contains a date for its termination or specifies an event that would terminate the venture. Where a joint venture is established for a particular period, such joint venture would terminate by expiration of that period. But as noted above, actions relating to winding up all claims and obligations and accounting will continue even after such termination and until completed. It would be wise, for instance, to keep liability insurance in place until the relevant statute of limitations were completed.
Where parties to a joint venture do not enter into any agreement as to termination of that joint venture, a joint venture can be terminated at will. A joint venture can be dissolved by will, by conduct, or words of the parties to the joint venture agreement. If there is mutual consent, then a joint venture can be terminated at any time.
In the case where a joint venture is established for a particular purpose, then such joint venture will terminate on satisfaction of such objective. And if satisfaction of such objective is impracticable then a joint venture would terminate at the point of impracticability.
Usually, in order to terminate a joint venture, the following conditions must be satisfied:
- there must be an intention to dissolve the joint venture enterprise; and
- such intention must be communicated to all parties to a contract by unequivocal acts or
- if there is an agreement between parties as to termination, then notice must be served to all joint venture members according to the joint venture agreement.
Notice to third parties (and relevant taxing authorities and licensing authorities) is highly recommended to avoid the dangers of later claims of liability due to agency theories. However, some courts have observed that there is no requirement that notice of dissolution be communicated to each and every member of a joint venture. Thomas v. American Nat’l Bank, 704 S.W.2d 321 (Tex. 1986). In California, notice is critical for the safe termination of a joint venture.
Upon dissolution, a surviving joint venturer is entitled to the joint venture property’s possession and is also authorized to wind up its business. Where no one takes possession, a joint venture property will be sold.
Danger of Liability:
A joint venture will continue to exist even after its dissolution if a joint venture is liable to pay any damages for any joint venture activities. Thus, joint venture members are jointly liable for injuries to third parties due to negligence or contractual breach arising from their mutual undertaking. Joint venture members can be sued individually and found liable for damages caused by a joint venture and it should be recalled that a joint venture is, above all, a partnership type entity with unlimited liability imposed upon its members. See our article on limited liability entities.
As with any partnership creation, the advantage of a joint venture is ease of creation and the seeming simplicity of just “doing business together.” More often than not, the business is begun before the parties spend much time pondering structure or the problems that might arise.
And, as with partnerships, the detriments are significant: unlimited liability and the danger of broad agency are the most obvious, but lack of adequate tax structures, the danger of unplanned termination due to death or withdrawal (or, just as dangerous, unplanned continuation when a party engages in conduct that exposes the other joint venturers to continued liability.)
Certainly a well thought out written joint venture agreement should be created, even if created after the project has started, and the use of limited liability entities either owning the rights or being the operating entity should be considered. Adequate third party liability insurance is a necessity and, of course, the provisions for attorneys fees and arbitration that we normally recommend. See our article, “The Acid Test Clause.”
Joint ventures would not have existed for all these years if they were not useful and appropriate structures for certain types of business ventures…but as with any business structure, the key challenge is to create them correctly and understand their limitations.