A joint venture describes a relationship with another person concerning the pooling of their skills, resources, knowledge or money to obtain a clearly specified business purpose.
It is not necessary for the parties involved to form a separate entity to carry out the business purpose between the parties, though there are important considerations why doing so might make sense.
Joint ventures may be established a number of ways, including contractually, through legal proceedings, creating a memorandum of understanding, or by obtaining regulatory approval.
- What are Common Contractual Terms of a Joint Venture?
- How Do You Terminate a Joint Venture?
- What are My Duties to My Co-Venturer?
- What is the Liability For Each Party to a Joint Venture?
- How Does a Joint Venture Differ from Other Identities?
- Should I Consult a Lawyer for Issues with My Joint Venture?
In establishing your joint venture relationship, determine whether you want to form a new entity or remain separate entities governed by a contractual agreement. Several factors that may influence your choice of one over the other include:
- Managing liability;
- Sharing profits and losses;
- Allocation of property, resources and money;
- Clarifying the duties and responsibilities of each party;
- Structuring of governance;
- Termination of the joint venture; and/or
- Sharing of confidential and trade information.
The failure to address factors such as these before you enter into a joint venture can raise complex problems for the parties involved. For example, even if one of the party to the joint venture dies, the rights of the other party do not automatically terminate.
Moreover, unless otherwise laid out, each party to the joint venture will share the profits and losses equally. Unless otherwise specified in a contract, each co-venturer has equal ownership and control over the project.
Although the death of one party to the joint venture will not automatically terminate the venture, you can certainly contractually agree for that to be the case. You can also agree to terminate the relationship when certain specific conditions are present, such as:
- The attainment of the business goal;
- Legal or financial loss;
- Disagreement between the parties as to how to accomplish the goal; or
- Other factors that impact the completion of the stated purpose.
The joint venture also may be terminated by court order or at the will of the joint venturers. Learn more about How to Terminate a Joint Venture.
As with any legal arrangement, there are certain duties that the parties owe each other. There is a disclosure obligation, which means that information regarding the joint venture is to be shared between the parties.
Each party owes a fiduciary duty to the other. This means that you each have the responsibility to act in the best interest of all involved and cannot act only for your personal interest. As well, the consequences for breaching a fiduciary duty can be quite severe, even if there is no criminal or fraudulent intent.
In granting relief to the injured party, the court may order an accounting of profits, compensation of losses, freezing of any asset gained as a result of the breach of the fiduciary duty or recession of the contract.
Injury may occur in any situation despite the utmost of care of the parties involved. If a third party is injured while the co-venturers are carrying out the activities of the joint venture, each party may be held equally liable.
Principles of joint liability apply, whereby the law considers each co-venturer liable for the injury and each co-venturer is fully liable for the amount of damages. Joint liability means that more than one defendant is liable for the plaintiff’s injury.
In some business scenarios–usually involving the formation of a new entity–limited liability may be applicable. Limited liability in which a new entity is formed means that the parties may bargain for in a contract for the responsibility for liability.
As such, contractually, parties may shift or avoid liability entirely. Co-venturers, however, may find themselves shouldering the entire liability for the whole venture.
A joint venture is often used interchangeably with joint enterprise. Like a joint venture, a joint enterprise involves a relationship between two or more persons pooling skills, resources, property and the like aimed at achieving a common goal.
Both are centered around a limited transaction or project. However, a joint enterprise is not usually governed by a written contractual agreement and is not limited to business law. For example, joint enterprise is used in criminal law as well to describe an illegal activity.
Like a joint venture, a partnership is an arrangement with one or more persons to conduct business activities. However, a joint venture is usually governed by contract and is not required to be a separate entity.
The co-venturers may seek to form a separate partnership in order to carry out the objects of the co-venturers, or the co-venturers may each operate a partnership which have agreed to engage in a joint venture.
Joint ventures can be quite involved and the laws governing the actions of the co-venturers can be quite complicated. The issue of liability is an especially difficult one and a business attorney should be consulted before you undertaken a joint venture.