Article January 11, 2017

Joint Ventures: Risks and Benfits

Success in a joint venture often depends on thorough research and analysis of aims and objectives.

Joint Ventures Risks and Benefits

A joint venture is a type of partnership formed for a specific or common purpose. Individuals, partnerships, an LLC and corporations may form a joint venture to cooperate on a specific task. As opposed to many other types of partnerships the parties to a joint venture typically retain their rights to compete with each other in other business areas. A joint venture may have a limited time of existence.

Formation

A joint venture is not a statutory entity or form of doing business in Arizona, but a contractual arrangement. Two or more parties form a joint venture through an agreement. The agreement is usually, but not always, written. The more detailed the agreement the better.

Whether the parties were engaged in a joint adventure is a question of fact for the trial court to determine from the facts and circumstances in evidence. It is not necessary that they be shown by a specific, formal agreement, but may be shown by the parties’ conduct and other factors from which it is made to appear that the relationship was, in fact, entered into. And the acts and conduct of the parties in furtherance of their purposes may speak above their expressed declarations to the contrary.
Garrett v. Kimbrel, 151 Colo. 95, 376 P.2d 376 (1962)

Whether the parties were engaged in a joint adventure is a question of fact for the trial court to determine from the facts and circumstances in evidence. It is not necessary that they be shown by a specific, formal agreement, but may be shown by the parties’ conduct and other factors from which it is made to appear that the relationship was, in fact, entered into. And the acts and conduct of the parties in furtherance of their purposes may speak above their expressed declarations to the contrary. Garrett v. Kimbrel, 151 Colo. 95, 376 P.2d 376 (1962)

In Arizona a joint venture begins with an agreement, a common purpose, a community of interest, and an equal right of control. West v Soto, 85 Ariz. 255, 336 P.2d 153 (1959). Traditionally, a joint venture involves commercial or business pursuits. Arizona Public Service Co. v. Lamb, 84 Ariz. 314, 317, 327 P.2d 998, 1000 (1958); Ruby v. United Sugar Cos., S.A., 56 Ariz. 535, 546, 109 P.2d 845, 850 (1941)(a joint venture may exist in a combination of two or more persons where in some special venture a profit is jointly sought.). The elements of a business joint venture generally include: (1) an agreement, (2) a common purpose, (3) a community of interest, (4) an equal right of control, and (5) participation in profits and losses. Tanner Companies v Superior Court, 144 Ariz. 141, 143, 696 P.2d 693, 695 (1985)

Benefits

Businesses of any size can utilize joint ventures to develop and strengthen long-term relationships and to collaborate on short-term projects. In the right circumstances a joint venture can help your business grow faster, increase productivity and generate greater profits. A successful joint venture can offer:

  • Access to new markets and distribution networks increased capacity sharing of risks and costs with a partner access to greater resources, including specialized staff, technology and finance;

  • Growth without having to borrow funds or look for outside investors. You may be able to use your joint venture partner’s customer database to market your product, or offer your partner’s services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development;

  • Increased flexibility. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business’ exposure.

Risks of Operating As a Joint Venture

Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:

  • The objectives of the venture are not totally clear and communicated to everyone involved

  • The partners have different objectives for the joint venture;

  • There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners different cultures and management styles result in poor integration and cooperation;

  • The partners don’t provide sufficient leadership and support in the early stages.

Success in a joint venture often depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved.

Any business venture is a financial risk. You risk capital resources, including cash, to provide a product or service that the public wants to buy. You can lose money in a joint venture as with any other type of business entity, perhaps more quickly. Before committing to a joint venture you should plan ahead. As with any other business venture you should perform market research, find the right niche, plan for capitalization, and map out a feasible marketing plan.

In addition, and perhaps most importantly, you need to assess whether you can depend on and trust your other joint venturers. Vicarious liability for concerted action exists in Arizona when a tort-feasor has entered into a joint enterprise or joint venture. See Prosser, Law of Torts, 4th Ed. § 46 (1971). In a joint venture each of the parties is the agent of the others and each is likewise a principal so that the act of one is the act of all. West v Soto, supra; Conner v El Paso Natural Gas Co.,, 123 Ariz. 291, 599 P.2d 247 (App. 1979). In such a relationship, the partners or persons engaged in the common enterprise are subject to a common duty, the breach of which may subject those persons to liability for the entire harm resulting from the failure to perform the duty. See Restatement of Torts (Second) § 878 and comment a.

The joint venture is a common vehicle by which persons pool their resources and labor for both business and social purposes. By doing so, the participants enjoy the advantage of their combination, but they also acquire joint and several liability for the ventures liabilities. Joint ventures can be formed without the parties intending to do so and the possibility of a joint venture relationship should always be considered when there has been participation by others in the activity out of which the liability arises.

Key Drafting Provisions

The key provisions in any joint venture agreement include: (1) clearly defined business objectives; (2) the degree of participation and the management roles of each joint venturer in the business; (3) contribution of capital and ownership rights to property; (4) division of the profits and losses; (5) a dispute mechanism to avoid management impasses that may produce deadlock or litigation; (6) termination/liquidation of the JV and the buy-out provisions; (7) confidentiality; and (8) indemnification.

Participants need not create a separate entity as the vehicle for a joint venture. However, nonprofit corporations, for-profit corporations and LLCs can each function as the entity vehicle for joint ventures. The LLC is the preferred entity/vehicle for the joint venture because it offers liability protection and maximum flexibility.