By Steve Rizer
Joint-venture partnerships in construction can give rise to some very interesting legal questions. For example, if one of the joint-venture partners no longer is financially able to meet its obligations and goes under, what happens to the profits at the conclusion of the project? This is one of many questions that popped up during the “Q&A” segment of “The Fundamentals of Joint Ventures in Construction,” a 90-minute webinar that WPL Publishing hosted last week.
In answering this question, Trauner Consulting Services Inc. Director Richard Burnham said, “It depends.” Specifically, it depends on whether or not the partner that went under “did actually default on its obligations and what the consequences of the default are.”
To illustrate his point, Burnham described a hypothetical joint-venture partnership in which the parties put up a combined $100,000 in capital with $40,000 of it coming from the partner that went under and the remainder put up by the other partner. “They get halfway through the job, and they find that they need some more capital in the joint venture, so they come out with a cash call, and the joint-venture partner who’s in financial difficulty can’t come up with the money. Well, if he’s in default, that may be an event of default if he can’t meet cash call, but that does not mean that the $40,000 that he put up initially becomes worthless to him.” It also does not mean that the party going under would, if the job broke even, be returned the $40,000.
“It depends on what the terms are, what the consequences of default are, and whether the default has been properly declared,” Burnham told both the webinar attendee who asked the question and the rest of the program’s audience. “Was there a termination by the joint venture of one of the joint venture’s rights? If there is a termination, does the joint venture have the obligation to return the capital that was contributed in the first instance? There are a lot of variables that go into the answer of that question. So, I hope that suggests to you that it’s not a simple answer, but there is a reason why it’s not simple.”
Among the other questions that Burnham fielded during the program were the following:
- Why may it be less expensive to bid as a joint venture rather than as a prime and a sub?
- Why is the use of joint ventures to meet Small Business Enterprise and Disadvantaged Business Enterprise requirements declining?
- Are there standard forms for joint-venture agreements?
- When does distribution occur? At 50-percent completion?
- Can an entity be involved in more than one joint venture at the same time?
To purchase a recording of the webinar, visit http://constructionpronet.com/Products/Joint-Ventures-in-Construction.aspx.
