Joint Venturers Must Venture Carefully

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It is commonly accepted that teamwork has significant advantages, but in competitive industries the idea of partnering with a competitor can often seem counter-intuitive.  What benefits are there to gain from joining forces with a rival? 

As many contractors and designers are well aware, there can be numerous advantages to teaming up with a competitor.  By combining forces, adversaries can supplement their capacity and expertise to compete for projects that neither could accomplish on its own.  They may also be able to gain access to new geographic markets.  And, in government contracting, they may be able to gain advantages in the procurement process – especially when minority and women-owned businesses partner with a more experienced entity to compete for particular set-asides. 

To realize these benefits, it is important to carefully structure the relationship between the parties.  The parties must determine whether they intend their relationship to be ongoing, or whether they intend to partner for a more limited purpose.  If the parties intend their relationship to be ongoing, then a more formal entity may be the right fit.  If, as is more common, the parties intend their relationship to be limited to a particular purpose or project, a joint venture is likely to be more appropriate. 

A joint venture allows the parties to enter into a relationship to carry out a specific business venture and share the profits.  The simplicity of a joint venture is particularly appealing.  The joint venture need not hire employees or comply with any particular formalities.  During the existence of the joint venture, the co-venturers are free to carry on their own business as usual, unless agreed otherwise, and once the objective of the joint venture is achieved, the joint venture is dissolved. 

Despite the ease of formation, there can be significant consequences associated with an entity’s participation in a joint venture.  The joint venture is not a separate legal entity, and the partners can be held jointly liable for the joint venture’s obligations unless they form a separate legal entity.  There can also be problems in the joint venture itself.  The potential for conflicts and disputes is obvious.  The possibility of conflicts can be heightened when the venturers have different levels of expertise or contribute different amounts or types of resources to the joint venture. 

To avoid disputes, the parties should anticipate and address potential sources of disagreement.  They should clearly define: (1) the objective of the joint venture, (2) their respective roles and contributions, and (3) the allocation of the responsibilities and rewards associated with the targeted business venture.  Most importantly, these terms should be set forth in a written agreement.  Finally, if the venturers want to limit their potential liability, they should consider whether the joint venture should be formed as a separate legal entity. 

Even if the parties have clearly defined their shared objective, their roles and contributions, and the allocation of the responsibilities and rewards, there remain other potential pitfalls that must be anticipated and, if possible, avoided. 

First, depending on their objective, the venturers should be mindful of the potential public contracting implications of their joint venture.  Venturers who might otherwise qualify as a Minority, Women, and Emerging Small Business may find their joint venture ineligible for such treatment if their combined gross receipts exceed the allowable thresholds.  The venturers should be careful to explore all options for formalizing their relationship while maintaining their access to these valuable set-asides. 

Second, the joint venture may be required to take additional steps to ensure that it is properly licensed to achieve its desired objective.  Although the licensing requirements vary from state to state, a joint venture that intends to perform construction work will likely need to submit a new license application and modify its existing insurance and bonds to reflect the identity of all of the entities participating in the joint venture. 

Finally, and particularly given the potential liability associated with participation in a joint venture, the entities participating in the joint venture should be careful to review their existing insurance coverage to make sure they have adequate liability protection.  Most importantly, a contractor participating in a joint venture must be careful to ensure that the joint venture is identified on all of its potentially applicable insurance policies – in other words, all insurance policies that might apply to liability arising out of the joint venture’s work.  As an alternative, a contractor participating in a joint venture may want to procure an endorsement that provides blanket joint venture coverage on an excess basis over policies written specifically for the joint venture. 

These potential disadvantages and pitfalls may seem intimidating, but they are by no means insurmountable.  With appropriate foresight and preparation, parties can minimize these risks while maximizing the advantages associated with acting through a joint venture. 

“Joint Venturers Must Venture Carefully” was originally published by the Daily Journal of Commerce on December 16, 2016.

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