Three Considerations for Joint Venture Construction Projects
Construction industry participants seeking to diversify their projects or secure greater insulation from uncertain market conditions frequently search out risk mitigation opportunities. One common way to achieve these goals is to work with another entity pursuant to a joint venture (JV) agreement. JV agreements are common in construction contracting because they allow entities with varying specialties, experiences and financial resources to come together as JV partners to meet the specific demands of a construction project. An additional benefit is that taxation generally flows through to the member level for domestic JV entities, limiting the tax responsibility for each member to the profit it actually receives. But before entering into a JV agreement for a construction project, several important considerations should be made.
- Pick the Right Partner
First, a JV partner can make or break the project. Picking the right partner involves evaluating the candidate’s financial strengths, examining safety records and ensuring a history of successful projects. Further, confirming a general ability to work well together is key because extremely different JV members require special care when forming and fostering the JV relationship. Additional considerations include whether the JV will have sufficient capitalization and whether the joinder may create antitrust issues.
After the correct partner has been identified, the JV may be formed in a variety of ways. While a detailed written agreement is highly recommended, most jurisdictions allow the partner selection process to proceed relatively informally and do not require a written agreement. In fact, many jurisdictions will allow JV formation pursuant to oral agreements or even through conduct alone.
- Evaluate Potential Liability
Because JV’s are easy to form, parties must take special care to ensure that they do not inadvertently take on unwanted liability through their conduct. Specifically, it’s important to note that JVs are treated as partnerships for most liability issues, meaning that the act or omission of a JV member may be attributable to other members. This is true even if members of professional and nonprofessional trades join forces — creating potential liability for the nonprofessional based on the professional’s errors.
Potential shared liability in construction project JVs extends well beyond traditionally contemplated liability channels. For instance, in the case where one JV member is bonded while the other is not, if a supplier were to bring an action against the payment bond seeking compensation, a surety may be able to recover the cost from the unnamed JV member since they are jointly and severally liable. Another consideration is that insurance policies typically exclude liability arising from the conduct of any partnership or JV of which the insured is a party or member, creating a need to consider whether the JV itself should seek out insurance.
Finally, liability for lost profits may also extend from one JV member to the other if one member breaks from the JV and bids on and receives a project in its own name.
- Define the Dispute Resolution Process
Lastly, a well-executed JV requires a clear process for dispute resolution. The best first step to preventing disputes is to execute a comprehensive, written JV agreement. The agreement should contemplate the management of funds and clearly outline duties for everything from supply management to day-to-day operations. However, should dispute avoidance be unsuccessful, the JV members should clearly spell out the dispute resolution process, including potential arbitration or mediation.
Keeping these considerations in mind will help ensure your JV’s success.
For an in-depth discussion of joint venture projects, see Section § 7.58 of Bruner & O'Connor on Construction Law.