The Dotted Line: What to consider before entering a JV
The Dotted Line: What to consider before entering a JV
No joint venture agreement is the same, but there are general guidelines that contractors can follow to help ensure the best deal.
Published Feb. 23, 2021
By
Danielle Ternes/Construction Dive
This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
Contractors team up with other contractors for a variety of reasons. One might be able to fill in any cash or bonding capacity gaps. Another contractor might bring special expertise, wield local influence that will make finding enough labor or negotiating government approvals easier or help the project meet minority or disadvantaged business participation goals.
Regardless, contractors should do their homework on potential partners and take the time to make sure their legal agreements are fair and protect all parties.
It’s important to remember, however, that each joint venture situation is different and there is no one-size-fits-all solution, said attorney Lisa Colon, partner in the Fort Lauderdale, Florida, office of Smith Currie & Hancock. But there are some general guidelines any construction company thinking about tackling a project as a joint venture should consider.
Joint goals
The first thing, Colon said, is to determine what each party will bring to the joint venture.
A smaller contractor might need a larger contractor’s financial capacity, she said, but the smaller contractor might have some sort of certification — like minority or woman-owned — or specific qualification that the project needs, like a background in a certain type of project.
A rail project that includes the rail, perhaps a tunnel and stations built along the way might have experts in each aspect of the project.
One thing to remember, said Colon, is that joint venture agreements should be for a specific project, not a vehicle to pursue unidentified work together. “[Companies] should be entering into the joint venture because they are going after a specific client or specific project or specific bid," she said.
Whatever the reasons for forming a joint venture, said attorney Carl Lothman in Sandberg Phoenix & von Gontard's Clayton, Missouri office, it’s a “blend of skillsets.”
“I would analogize it a little bit to getting married,” he said.
If one partner is brought on to boost the joint venture’s financial picture, whether it’s through bonding or working capital, said, Felix Rodriguez, partner in the construction law group at Bilzin Sumberg Baena Price & Axelrod in Miami, it needs to understand the potential ramifications, such as how it could affect its existing relationship with its surety and its individual bonding capacity.
Entering into the right joint venture, Rodriguez said, can also result in more accurate bidding if one of the partners understands the local market.
Legal requirements
Legal requirements and options for joint ventures vary from state to state, largely dependent on contractor licensing regulations from jurisdiction to jurisdiction.
In Florida, for example, state licensing laws require that even if the contractors involved in the joint venture are fully licensed, the joint venture must be licensed independently when it comes to most types of projects. And breaches of those regulations can have serious consequences.
On the defunct $1 billion Oceanwide Plaza project in Los Angeles, owner China Oceanwide Holdings has asked a federal court to declare the contract between it and Lendlease US Construction invalid because it alleges that Lendlease did not have a license qualifier, as required by California law, for a brief period of time while performing work. Therefore, China Oceanwide maintains it does not owe the general contractor the $38.4 million awarded by an arbitrator.
Lendlease denies it did not hold a valid license at any time on the project. The court has yet to rule on the matter.
Agreement considerations
The larger and more complex the project, Lothman said, the more resources contractors should invest in putting together a comprehensive joint venture agreement.
But, he added, “If you have a small job, you’re not going to want to spend the attorney’s fees to go full bore on a big contract.”
There are some joint venture contract templates, Lothman said, that can form the basis of an agreement for less complex projects as well. Then the process becomes more of a review with a critical eye toward determining if there are any objectionable terms.
No matter the size, the lawyer said, there are some constants. “In these agreements, it becomes very important to identify the potential liability areas, to allocate the risk and then to indemnify in order to match that risk allocation,” Lothman said.
For example, the provisions of the joint venture agreement must be integrated to each contractor’s insurance coverage, he said.
In general, Colon said, the joint venture agreement should be as specific as possible, down to where the office space will be, which partner will keep the records and how the joint venture will wind up its affairs after the project is over.
Keep in mind, she said, that the owner or lenders might want to see a copy of the joint venture agreement, even though that document is typically not shared with outside parties.
“Construction lenders often want to know the financial wherewithal and the capacity of the contractor and who’s doing the work,” she added. This is especially true if one contractor was brought on specifically because of its financial resources or bonding capacity.
Balance of power
Other important provisions, Colon said, relate to how much responsibility each party has for equity contributions, how the profits will be split or how much each party must contribute in the event of a loss. Usually, the decision-making power is closely aligned with that financial split.
The provisions around decision-making power and process, said attorney Daniel Reisman of Eckert Seamans Cherin & Mellott in Philadelphia, are often significant to joint venture partners, particularly if this is the first time the parties are working together.
“There’s an inherent tension in these joint venture agreements on decision-making issues,” he said.
If one party has more decision-making power than the other, Reisman said, then it’s a question of protecting the partner that does not have as much say.
Ideally, he said, he would want his client to have joint decision-making power. Barring that, he would at least want his client to have some control over major decisions.
But evenly divided decision-making power can lead to problems, Reisman said, which is why dispute resolution provisions are important.
Colon said that making those dispute resolution clauses as detailed as possible is critical to resolving issues that come up during the project. Ideally, she said, she would like to see written into joint venture agreements a procedure that identifies the type of disputes that could arise and very specific steps that will be taken to resolve each one. This not only reduces what is left to interpretation but addresses the differences in how each partner normally approaches its affairs.
“You have two companies that could have completely different cultures, completely different ways of how they do business, coming together to try and work on a project,” she said. “Disputes are going to arise.”
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