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Joint Ventures

What Is a Joint Venture?

A joint venture refers to a type of informal business relationship in which two or more entities enter into an agreement to share resources, funds, and/or expertise in order to take on a specific mission or business project. In most instances, the business project or mission that is undertaken by the entities of a joint venture is normally not transferable to parties that exist outside of the business relationship.

It is important to note that the entities within a joint venture will each maintain their own separate identities throughout the duration of the project and even after the project is complete. Once the mission or business project has been achieved, however, the business relationship formed in accordance with the joint venture agreement will typically be dissolved.

The only situation wherein a joint venture will become a single entity is if the parties agree to merge to form a new company and file the corresponding paperwork with the appropriate agent. For example, two businesses that undertake a joint venture may agree to dissolve their separate businesses and become a new entity, such as a general partnership or a limited liability company (“LLC”).

To learn more about the rules that govern joint ventures and other types of business relationships or structures in your state, you should speak to a local business attorney for further legal advice. An attorney can assist you in navigating the laws and requirements for establishing a joint venture. They can also explain how to dissolve a joint venture that no longer serves a purpose or poses a threat to you and your company's best interests.

What Are the Characteristics of a Joint Venture?

A joint venture operates similarly to a business partnership. However, there is one key difference between a joint venture and a partnership. A partnership is considered a single entity that operates as a continuous business for as long as it is profitable or until the parties opt to dissolve the business.

In contrast, a joint venture only exists for as long as the shared business goal or project takes to complete. The entities in a joint venture also maintain their separate businesses. Some other common characteristics that joint ventures often share include:

  • Agreements: The parties to a joint venture typically enter into an oral or written contract. The contract serves as a guide for the parties by establishing the purposes of the joint venture, the duties of all interested parties, and the duration or estimated duration of the joint venture.
  • Control: Each entity within a joint venture will be granted the right to control and oversee the property or funds contributed towards accomplishing the primary aims of the joint venture.
  • Termination: Unlike a partnership, a joint venture does not automatically terminate in the event that a joint venturer becomes incapacitated or dies. In addition, a joint venturer has the power to dissolve or terminate the relationship between the entities at any point after the business transaction or project is complete.
  • Expenses and profits: In most instances, those involved in a joint venture will share all of the profits and expenses in equal measure. However, the parties may contract to divide the expenses and profits in accordance with a preferred ratio.

What Are Some Examples of a Joint Venture?

Generally speaking, a joint venture can be used to take on many different types of business projects in almost any industry. For instance, two independent contractors may enter into a joint venture to combine all of their resources, skills, and money for the purposes of obtaining a major construction contract like one to build a mall or a housing development.

Another example of a joint venture is when two large corporations undertake a business project to engage in a series of costly transactions, such as when two car companies combine their resources to manufacture motor vehicles. Although the car companies in this example would still conduct business as two separate entities, the manufacturing process would be considered a joint effort to make motor vehicles.

What Are the Duties of Joint Venturers?

There are three primary duties that entities in a joint venture owe to one another. These duties include:

Disclosure: Any information concerning the joint venture must be disclosed to all of the interested parties. This may include information that is both obvious when working within an informal business relationship as well as details that may not be so readily apparent, such as the information that is specified in a joint venture agreement. Thus, it is important that the parties provide clear instructions within this agreement. Otherwise, a dispute may arise over whether an entity had a duty to disclose their own trade secrets, a patent, or some other type of confidential data or sensitive knowledge.

Fiduciary duty: Each entity that is part of a joint venture has a duty to act in the best interests of all parties involved. In other words, an entity must take into account the best interests of all the other entities involved in a joint venture, not only themselves. If an entity only looks out for themselves and there is a contract, they may be in breach of its terms and can thus be sued in court by the other parties.

Liability: In the event that a third party is negatively affected by a joint venture, the entities involved in the project can be held equally liable. For instance, if a joint venture is formed to build a mansion and a brick falls on a passerby during construction, then the passerby may hold all of the entities that are part of the joint venture liable for their injuries.

What Are the Rights of Joint Venturers?

The entities in a joint venture are afforded certain rights. Some rights of joint venturers may include:

  • Having equal ownership rights over a particular business project;
    Being granted equal influence, control, and decision-making powers over a business project or a transaction (note that a joint venture contract may assign only one party complete control over a project if the other entities involved agree to those terms);
  • Having the right to withdraw or terminate their interests in a business project or mission that is undertaken as a joint venture; and/or
  • Having the right to operate as a separate entity both during and after the joint venture project is complete.

What Are Joint Venture Contracts?

Joint venture contracts are agreements between two or more parties that are entered into in order to accomplish a specific business operation together. In a joint venture, the parties agree to share in the gains and losses of the business enterprise. An example of a joint venture is where to product manufacturers join efforts to sell their products together in a single package.

A contract is needed in order to create a joint venture, since joint ventures must be entered into voluntarily. All parties need to agree to the joint venture terms, and they must express their intent to enter into the specific business relationship.

What Is Usually Contained in a Joint Venture Contract?

In order for a joint venture to be valid, the following requirements must be addressed by the parties at the time that they are entering into the joint venture:

  • A common interest shared by all the parties
  • Rights of all members to govern and direct policies
  • Rights to control and manage property that will be used during the venture
  • Fiduciary duties between the parties, which usually includes the sharing of profits and losses by all parties

Typically, a joint venture contract will address the items listed above in detail. In addition, the joint venture contract should include the names and contact information of all the parties involved, so that it is clear as to who is a part of the joint venture.

Additional clauses and contract provisions may also be added depending on the needs of the parties. For example, the parties may wish to include a clause stating how legal disputes should be handled (i.e., whether the parties should undergo mediation or file a lawsuit). Legal liability for misconduct during the venture may also be addressed.

Do Joint Venture Contracts Need to Be in Writing?

By law, joint ventures must be formed by contract, but not all jurisdictions require the contract to be in writing. Some jurisdictions will find a joint venture even with implied contracts, either implied from oral agreements or by the actions of the parties.

However, since even small business ventures can be complicated, it is highly advisable that the parties use a written contract any time they wish to enter into a joint venture.  Having a written contract definitely has its advantages because it provides the parties involved with a written record of the contract terms, which makes the agreement much clearer for everyone involved.  Also, in the event of a lawsuit, the written contract can be used as evidence during the course of trial.

Lastly, like any other contract, joint venture contracts are subject to requirements of the statute of frauds (i.e., certain contracts need to be in writing, such as when the contract deals with the sale of land).

How Is a Joint Venture Different from a Partnership?

A joint venture is different from a general partnership in many respects. Joint ventures are usually entered into for one specific purpose, and will usually terminate once the project is completed. In contrast, a general partnership may be formed for several different projects or aims, and may continue indefinitely until one of the partners expresses a desire to dissolve the entity. However, the various business and fiduciary duties of the parties to a joint venture are to the same as those of a partnership.

What Are the Fiduciary Duties Owed in a Joint Venture?

Joint ventures may involve the cooperation of several different individuals, corporations, and business entities. Each of the partners in a joint venture owes the other partners a basic fiduciary duty to exercise reasonable care in all of the activities connected with the joint venture. The fiduciary duty requires the parties to:

  • Cooperate with the other parties in order to reach their stated business goals
  • Utilize the appropriate degree of skill and care when performing individual tasks
  • Avoid disrupting or thwarting the aims of the joint venture
  • Inform the parties of business opportunities and important decisions of interest to the joint venture
  • Exercise diligence and prudence when investing shared funds
  • Avoid actions which are motivated by personal gain and hurt the joint venture

When Do Fiduciary Duties in a Joint Venture Apply?

Fiduciary responsibility in a joint venture begins at the formation of the venture. At the very outset, each party has a duty to faithfully and fully disclose information that may be necessary for the project. The fiduciary duty continues to exist through completion of the joint venture. Fiduciary duties only terminate after the business venture has been completely terminated and “wound-up”.

What Are the Remedies for a Violation of Fiduciary Duties and Responsibilities?

Many of the breaches of the fiduciary duty involve the misappropriation of funds and assets that are dedicated solely for the joint venture. For example, one of the companies may withdraw funds from a shared account for the benefit of their own organization. Remedies for such violations may include: Reimbursing the joint venture organization for any funds that were obtained without authorization

  • Reimbursing the parties for any losses caused by violations. The joint venture may sometimes be reimbursed for future losses of profits or opportunities.
  • Paying for damages in connection with breach of contract or statutory violations
  • In some instances, criminal charges may be filed if the breach of fiduciary duty was motivated by illegal or criminal intent.

Additionally, the joint venture agreement between the parties may contain guidance on how to remedy violations.

How Is a Joint Venture Dissolved or Terminated?

The most common way that a joint venture is dissolved or terminated is by following the procedures outlined in the provisions of the contract that governs the joint venture relationship. These procedures are typically developed and negotiated by the entities to the joint venture before the final contract is signed.

Another common method that is used to dissolve or terminate a joint venture is by asking a court to issue an order that declares the joint venture has ended. One other way that a joint venture may be dissolved or terminated is if one or all of the entities to the joint venture no longer wants to continue working on the business project or mission with the other parties involved.

Some common reasons as to why an entity would want to dissolve or terminate a joint venture include the following:

  • The purpose for the joint venture has been accomplished or is complete;
  • It is not possible or it has become impossible to achieve the shared aims of the joint venture;
  • The general conditions of the marketplace have rendered the joint venture irrelevant, inappropriate, or unprofitable;
  • There has been a setback with the joint venture, such as a legal or financial hardship, that requires the dissolution or termination of the joint venture in order to resolve it; and/or
  • One or more of the entities involved in the joint venture disagrees with its purpose or has changed their position on it, which in turn, has resulted in them developing divergent business goals.

Should I Get a Lawyer for My Joint Venture?

A joint venture is generally formed when two or more entities enter into a contract to accomplish a specific business goal or task. This means that any issues or disputes involving a joint venture will typically be resolved by reviewing the terms of the parties' contract. Thus, you should strongly consider consulting with a local corporate attorney before agreeing to undertake a particular business project as part of a joint venture.

A qualified business attorney will be able to negotiate, draft, and modify any legal documents that are associated with your joint venture. If you have already started working on a particular business mission or project as part of a joint venture, your attorney will also be able to review your joint venture agreement and can make sure that you understand all of your legal obligations and rights pursuant to the contract.

In addition, your attorney will be able to assist you in resolving any issues or disputes that arise over an aspect of your joint venture. For instance, if you need to sue one of the entities within the joint venture for violating the terms of your agreement, your attorney will be able to help you file a lawsuit against that party and can provide legal representation on your behalf in civil court.

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