Joint Venture
The average person may not realize this, but the most notable joint venture in existence today is the National Football League. It figuratively owns every Sunday in the fall of each year. It is an association of 32 clubs agreeing to compete with each other, i.e. engage in athletic entertainment. Each venturer is its own business entity; the league generates its own revenue stream (mostly TV rights) and shares these profits with its members equally.
“[T]here is a great deal of economic interdependence among the clubs comprising a league. They jointly produce a product which no one of them is capable of providing alone. In addition, the success of the venture depends upon the financial stability of each club.” J. Weistart & C. Lowell, The Law of Sports §5.1L (1979).
Based on the above, it would appear that a joint venture is merely a partnership. With the NFL, it is 32 partners working together because the whole is greater than the sum of its parts. What exactly separates a joint venture from a partnership?
Black’s Law Dictionary defines a joint venture as:
” A business undertaking by two or more persons engaged in a single defined project. The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member’s equal voice in controlling the project. – Also termed joint adventure; joint enterprise”.
A partnership’s definition is very similar – two or more persons who jointly own and carry on a business for profit. The key difference is the business. With a joint venture, it is a single defined project. In a partnership, the business enterprise is broader in scope and generally embodied with an indefinite life (although partnership agreements do set a definitive time period, usually 50 to 60 years).
The Law Dictionary – ®2002 Anderson Publishing defines joint venture and joint adventure, considered to be synonymous, as an association to carry out a single business enterprise for profit, for which they combine their property, money and effects.
The primary difference between partnership and a joint venture is its purpose. In general, joint ventures exist for a limited reason such as completing a special project or highly focused long-term goal. Going back to the NFL, a long-term single goal of athletic entertainment.
What is interesting is that partnerships are generally universally accepted by all states and governed by the Uniform Partnership Act. However, when it comes to joint ventures, the states take a more simplistic approach and set forth anywhere from generally two to five criteria to identify a joint venture. A state may however establish more than five criteria as it deems appropriate.
Four states keep it very simple, a joint venture is a partnership. New Jersey Statues Ann. §42:1-6(1) treats a joint venture no differently than a partnership. Under Scully Signal Co. v. Joyal, 881 F. Supp. 727, 740, (District Court Rhode Island) states that Rhode Island treats joint ventures as partnerships by law. Furthermore, partnership law protects partners by not allowing “entry of a personal judgement against a unnamed and unserved partner in an action against a partnership”, Nisenzon v. Sadowski, 689 A. 2d 1037, 1049 (R.I. 1997). Hawaii and Louisiana are the other two states recognizing joint ventures as in effect a form of partnership.
The most comprehensive definition of a joint venture exists under Massachusetts law which lays out eight distinct factors. These factors are known as the Shain Criteria from Shain Inv. Co. v. Cohen, 15 Massachusetts Appeals Court 4, 443 N.E. 2d 126, 130 (1982) ((citing 2 Samuel Williston, Contracts §318, at 555-56, §318A, at 563-65, 579 (3rd ed. 1959)). These factors include:
(1) An agreement by the parties manifesting their intention to associate for joint profit not amounting to a partnership or a corporation;
(2) A contribution of money, property, effect, knowledge, skill, or other assets to a common undertaking;
(3) A joint property interest in all or parts of the subject matter of the venture;
(4) A right to participate in the control or management of the enterprise;
(5) An expectation of profit;
(6) A right to share in profits;
(7) An express or implied duty to share in losses; AND
(8) A limitation to a single undertaking (or possibly a small number of enterprises).
As will be illustrated many times throughout this white paper, the courts look to the establishment of a joint venture to then apply appropriate law. Determining the establishment of a joint venture is entirely dependent upon the parties intent. Here is an example.
Petricca Development Limited Partnership and Berkshire Concrete Corporation v. Pioneer Development Company, Tamarack Investing Co. Inc. and Pioneer Bershire Crossing Company, 214 F. 3d 216; 2000 U.S. Circuit Court of Appeals, June 9, 2000
Petricca Development owned land and Pioneer Development desired to develop the land for a Wal-Mart shopping center. The two parties entered into a two phase agreement whereby Pioneer paid an option fee during phase one to seek zoning changes. Phase two would create a joint venture to develop the property. During phase one, Pioneer had the sole right to terminate the joint venture. The option to purchase the land and begin the enterprise was a phase two issue and would commence the joint venture. When zoning was denied, Pioneer terminated the venture. Petricca claims the joint venture commenced during phase one and the court ruled as follows:
A) Petricca had no meaningful control over the venture in phase one as a right to control is an “essential element” of a joint venture. See Judge v. Gallagher, 17 Massachusetts Appeals Court 636, 461 N.E. 2d 261.
B) Pioneer did not exercise its option to purchase the land and therefore Petricca failed to contribute money, property, effort, knowledge, skill or other assets as identified in Shain v. Cohen.
C) No joint property interest existed in the venture; only a potential (option) exists which is analogous to a contractual right.
The U.S. Court of Appeals affirmed the ruling of the District Court holding that no joint venture existed and therefore Pioneer had no duty to Petricca.
Of the eight Shain criteria, four dominate in law. Many of the states define a joint venture based on similar criteria. This paper is divided into four distinct sections. The first section will focus and elaborate on the four essential elements required to have a joint venture. One, and by far the most essential, is the right to share in profits. This relates to the basic premise of business, generate a profit. Two, and somewhat similar’ is the responsibility of the partners in a joint venture to share in the losses. What is interesting is how losses are defined. A third essential element is control. Control is not universally defined in business and therefore there is latitude in its meaning as that section will explain. Finally, and to a lesser degree than the others is this issue of an agreement. An agreement can be express or implied and therefore unwritten. Thus business savvy individuals need to be aware of the general guidelines.
The second section covers the guidelines or laws of 26 states in alphabetical order.
The third section of this paper will compare and contrast a joint venture with contrasting but similar contractual business arrangements. These business arrangements may have one or two of the elements of a joint venture. But without all four essential elements, the arrangement will not qualify as a joint venture. Examples of these arrangements include:
1) Dual Listed Companies
2) Debtor/Lease Agreement & Equitable Mortgage
3) Franchise Agreement
4) Agency
5) Co-Op
The fourth section will elaborate on some insights related to joint ventures. This includes proper documentation of establishment and rules as promulgated by the Internal Revenue Service. In addition, there are slight yet specific distinctions between a joint venture and a partnership; throughout this paper, these distinctions will be noted to assist the reader in understanding the nuances of joint venture.
As a reader, understanding the differences between a joint venture and a partnership is essential as the joint venture does fit as a unique option, like a piece in a puzzle, when developing solutions to business situations. Of course the first question in all business scenarios is ‘Who makes the profit?’
Four Essential Elements of a Joint Venture
There are four essential elements in all business entity relationships. Remember, there are many different entity formats including:
Corporations
Sole Proprietorship
Partnerships
Non-Profits
Limited Liability Corporation
Limited Partnerships
Trusts
The four essential elements in a business entity relationship include profit, losses, control and an agreement. For example, corporations share profits via dividends; losses are absorbed by the entity and not the shareholders; control is conducted by an annual election of a board of directors and the arrangement is customarily ruled by a set of by-laws. A joint venture must have all four elements to qualify as an entity in the eyes of most state governments and their courts. Of course, the most common element addresses profit.
Profits
In business, profit is defined as the excess of the selling price over the cost of goods sold. In reality, profit has a broader definition that includes gains and benefits derived by business activity. For example, if two drug companies agree to join forces in developing a new cancer drug, the profit may not actually be any sale of the new drug but having access to the respective formula. By combining resources, one company supplying the formula and the other producing the drug, the two companies are able to succeed whereas alone neither is capable of solving the problem. Notice how similar this is to the NFL as a joint venture. One team by itself can’t possibly generate enthusiasm, but together the league has broad appeal and the ability to generate profit.
Don’t restrict the term profit to the form of just direct dollar remuneration; it can mean achieving a goal. This invariably, will equate to increased dollars.
In Underground Vaults & Storage Inc. v. Cintas Corp., No.11-1067-MLB, 2014 U.S. District Court of Kansas September 8, 2014, Lexis 124830 both Underground and Cintas agreed to join forces and bid on an engineering imaging and storage project for Boeing Inc. Underground had the storage facilities and Cintas brought to the table the imaging capacity. Boeing awarded the contract to Cintas as the primary contractor. Boeing based their decision in awarding the contract on the abilities and capacities of both Underground and Cintas. No formal agreement or acknowledgement was signed. Cintas decided to store the documents on their own after being awarded the contract from Boeing. Cintas did not subcontract the storage component to Underground.
A jury trial returned a verdict that found (A) Underground and Cintas formed a joint venture and (B) Cintas breached their fiduciary duty to Underground. The jury awarded Underground $2,892,053 in compensatory damages. Cintas appealed the verdict on the ground that Underground Vaults & Storage failed to substantiate the existence of a joint venture under the laws of Kansas, specifically an agreement to share profits.
Cintas used Modern Air Conditioning Inc. v. Cinderella Homes Inc., 226 Kansas 70, 596 P. 2d 816, 821 (1979) stating that sharing is required and that there was no agreement to share profits. Both parties stated that a lucrative contract with Boeing would result in profits for both of them. The Appeals Court interpreted Modern Air Conditioning as not requiring ‘shared’ or ‘apportioned’ profit but simply the “anticipation” of profit as meeting the test for the profit element of a joint venture. Cintas relied on the storage capabilities of Underground to satisfy the capability for Cintas to fulfill the contract and thereby qualify for the contract. Neither company “shared” per se in each other’s profits.
The Appeals Court qualified this to mean “… an express or implied agreement to share in profits and losses”, citing Yeager v. Graham, 150 Kansas 411, 94 P. 2d 317 (1939). The Appeals Court affirmed the damages for compensatory purposes.
The concept of sharing profits goes beyond “shared” dollars and includes other benefits too. In LeFlore, 1985 Oklahoma 72, 708 P. 2d 1068 the winner of a “Miss Legs of Tulsa” contest sued a joint venture for using her name without permission in a “I Love You, Tulsa” party at a partner’s restaurant. The restaurant owner denied a joint venture and points to the radio station that advertised and sponsored the event along with a clothing store that presented a fashion show. The event was held at the restaurant which provided the food, drinks and staff. The three agreed to share profits from the event and the restaurant acquired an additional benefit via the sales of club memberships. The Oklahoma Supreme Court upheld the finding of a joint venture and therefore the restaurant was held liable for damages.
However, some states will reject auxiliary benefits as similar to profits. The Arizona Supreme Court held in Estrella v. Suarez, 60 Arizona 187, 134 P. 2d 167 (1943) that a joint venture did not exist merely because three trucking companies aligned together to deal with Mexican unions and obtain an exclusive shipping license from the Arizona Corporation Commission. Their agreement specifically stated that each party would “… receive as his share of the profits the amount made by him in the operation of his own trucks”. Thus, no sharing of profits exists.
The sharing of profits is almost always the number one element the courts look for in determining the existence of a joint venture. It is a de facto requirement in all states to establish the existence of a joint venture. Some states will include benefits in the definition of profits whereas other states restrict this to financial gain. Invariable, profits mean ‘anticipated’ and not actual. Many joint ventures are similar to most business endeavors and may actually lose money.
Losses
Just like profits, the adventurers must agree to share in the losses of the venture. Inability to identify this element is most often the biggest hang-up in the formation of a joint venture. Often it is inadvertently left out of the agreement which creates a legal issue. All states require a mutual understanding of the sharing of losses. The questions are ‘What is a loss?’ and ‘What does sharing mean?’
Financial losses are easily measured. If all partners (members, adventurers, parties) to a venture contribute cash as the initial contribution of ‘money, property, effect, knowledge, skill or other assets to a common undertaking’, measurement of a loss is easily quantifiable. However, often cash is not the sole form of initial contribution. Just like partnerships, the adventurers contribute time, knowledge, and sweat equity to the endeavor. The courts hold this form of contribution as equivalent of losses when a joint venture fails.
In Lightsey v. Marshall, 990 P. 2d 822, 1999-N MCA-147, 1999 WL 1103254 (N.M. App., Oct. 5, 1999), the New Mexico Court of Appeals held that a joint venturer shared in losses because he had “contributed significant time, effort, and materials” to property that was not sold at a profit.
The key is that the contributor must sustain an actual loss. In Bates & Springer of Arizona Inc. v. Friermood, 16 Arizona Appeals Court 309, 492 P.2d 1247 (1972) an owner of several television sets agreed to sell them at a consignment shop. The Arizona Supreme Court stated there is no joint venture between the shop and the contributor of the sets as the contributor could not lose. He either gains net proceeds from a sale or gets his TV back.
In some situations businesses try to generate a joint venture out of thin air to prevent or shift liability to another party. A prima facie defense is the lack of sharing of losses. In Payton v. Aetna Life and Casualty Co., 299 So. 2d 489 (La. App. 4th Cir.), Writ. Denied, 302 So. 2d 617 (La. 1974), an employee of a roofing contractor was injured at a job site whereby the roofing contracting company jointly bid with a sheet metal contractor for the respective job. The insurance company sought avoidance of worker’s compensation payment by implying a joint venture existed and not an employee/sub-contract relationship. The Louisiana Fourth Circuit held:
Nevertheless, we cannot conclude that the relationship between [the sheet metal contractor] and [the roofing contractor] constituted a partnership or joint venture. They did not agree to share profits or losses, but simply agreed that each would perform a specific portion of the contract at a fixed remuneration to each party. Apparently, if [the roofing contractor’s] cost of roofing materials increased, this cost would come out of his portion of the calculated contract price; and if [the sheet metal contractor’s] cost of sheet metal decreased, he would receive the entire windfall. Thus, it was possible that [the roofing contractor] could lose money on the venture, while [the sheet metal contractor] made a profit. This is contrary to the essence of a partnership which contemplates that all partners will lose or all partners will profit …
What the Louisiana Fourth Circuit highlights is the fact that there must be a combining of revenues and expenses and a shared result from this venture. In effect, it must act in a similar fashion as a distinct entity to solidify the existence of a joint venture. The California Supreme Court states the agreement must show an “understanding as to the sharing of profits and losses” and this requires pooling of profits and losses to substantiate the existence of a joint venture.
As an example, the court used Connor v. Great Western Savings and Loan Association, 73 California Reporter at 375 explaining that two parties combined their property and skills (required for a joint venture) to develop a tract of land. Each demonstrated control (another requirement of a joint venture) and each anticipated profits.
“Although the profits of each were dependent on the overall success of the development, neither was to share in the profits or the losses that the other might realize or suffer. Although each received substantial payments as seller, lender, or borrower, neither had an interest in the payments received by the other.”
By far the best supporting evidence of the sharing of profits and losses is reporting financial information via Form 1065, the partnership tax return. In addition, the filing of Form K-1 assigns profits and losses to the respective parties.
As touched upon in the above examples, a third essential element is control.
Control
Control means having the power to direct or regulate the endeavor. This third essential element must be mutual in that all parties in the joint venture must have a say in how the endeavor is managed. Notice that control does not have to be equal, but must exist. In Shell Oil Company v. Prestidge, 249 F. 2d 413 (Ninth Circuit Court 1957), stated that control need not be equal but may be delegated to one of the members of the joint venture.
Some courts hold that the definition of control is no different than how a joint adventure acts in their private business affairs. The key is that one member is not subservient to another. However, one member may grant his power to another.
Reimer v. City of Crookston, 421 F.3d 673; 2005 U.S. Court of Appeals for the Eighth Circuit
Mr. Reimber sued the City of Crookston and its school board for injuries sustained from a boiler accident. In Minnesota, governmental entities are limited in damages. The school district had already yielded its culpability. The case stems from a joint enterprise to operate a school’s boiler. The city never operated the boiler, but owned and funded the operation. The question at hand is whether granting of control to a coventurer absolves the grantor of the right to control and therefore dissolving the joint venture.
The court quoted Stelling v. Hanson Silo, Co., 563 N.W. 2d 286, 290 (Minnesota Court of Appeals 1997) stating that the justice system can apply the joint venture doctrine “when necessary to impute negligence between two parties that otherwise have no legal relationship”. Under Krengel v. Midwest Auto. Photo, Inc., 295 Minn. 200, 203 N.W. 2d 841, 846-47 (Minn. 1973):
In a joint venture, the individual defendants are jointly liable as a unit because of their mutual undertaking for a common purpose and their right of direction and control over the enterprise. Even though there is no actual physical control or such control was never exercised.
The court observed that dividing responsibility of operating the boiler did not ‘negate’ the joint venture. It is the ‘right of mutual control’ that governs and not actual control. The court also used Walton v. Fujita Tourist Enterprises, 380 N.W. 2d (Minn. Ct. App. 1986) whereby this Court of Appeal stated:
For the same reasons that led them to become joint venturers, Pacific Delight and Northwest [through their agent, Fujita Tourist Enterprises] delegated control of specific aspects of the tours to each other. This division of responsibilities does not operate to negate the existence of a joint venture.
… This does not mean that Northwest was expected to inspect every hotel and tourist attraction that tour members would visit; that duty was primarily delegated to Pacific Delight and its agent, Fujita Tourist Enterprises. When a coventurer breaches its delegated duty, however, liability incurred by the breach is the joint responsibility of all the coventurers.
For the layman, this issue begs the question, ‘What exactly is control’? The answer is found in a maritime case out the Fifth Circuit, Sasportes v. M/V SOL DE COPACABANA, 581 F. 2d 1204 (5th Cir. 1978). Here the court intimated at several indicators:
(1) Hiring of Managers – In this case, procuring ship captains.
(2) Active Involvement in Operations – In Sasportes, Fulcher (a coventurer) supplied repairs, ice and fuel to the boats.
(3) Directing Production – In Sasportes this was demonstrated by directing the kind of fishing, type of catch and methods to use in procuring fish. In addition, Fulcher oversaw the captains to ensure non misappropriation of a catch.
(4) Dictating Territory – In Sasportes, Fulcher directed where the boats were to fish.
(5) Controlling or Dictating Customer Payments – Payments from other canneries were sent to Fulcher.
(6) Other Indicia Include Typical Business Operations:
– Purchasing Insurance – Signing of Checks
– Use of Marketing/Advertising – Controlling Human Resources
– Office Operations – Conducting Payroll
No one single criteria can indicate control; it is the preponderance of the evidence that weighs the scale towards identify control. It is more likely than not that the elements of control were jointly contemplated and then individually assumed by the co-venturing parties.
The court in Sasportes states it succinctly:
The parties’ intentions are important, joint ventures involve joint control or the joint right of control, and joint proprietary interests in the subject matter of the venture … These elements cannot be applied mechanically. No one aspect of the relationship is decisive.
Agreement
The fourth essential element addresses agreement. Obviously, a written agreement is best drafted by a knowledgeable business attorney, even better. More importantly, any joint venture involving real estate must be in writing as all states require/written agreements relating to real estate pursuant to the statue of frauds that expressly requires that may thereby render the agreement unenforceable too. Unfortunately, any novice business individuals still resort to an gal, expressed or implied agreement, for a joint venture.
In Turner v. Temptu Inc., 586 Second Circuit Court of Appeals the court held that there was no joint venture because the agreement was yet to be finalized. Several of the contractual terms were not agreed to, specifically how losses are shared which is a required element of a joint venture. The agreement was incomplete and thereby rendering the agreement unenforceable.
This is often the case with many joint ventures. Most oral arrangements fail to address the critical issue of losses. However, just as profits may be implied, so to can to also losses. The elements as to losses can be implied by the way adventurers behave. Go back to Modern Air Conditioning, Inc. as identified above in the profits subsection. Here the courts stated that “an agreement may be found in their mutual acts and conduct”, (Id. at 822).
Agreements are contracts and therefore it is best to have them in writing.
In Autotech Technology Limited Partnership v. Automationdirect.com, Koyo ElectronicsIndustry Company Limited, 471 F. 3d 745; 2006 U.S. Court of Appeals, 7th Circuit, Judge Bauer referring to the non lawyer drafted joint venture agreement state, “This usually sets the stage for a lovely lawsuit”.
Respective State Guidance
Each state identifies the elements necessary to establish a joint venture. The following a model state guideline implemented by 26 states researched comprising their respective elements and applicable law.
Arkansas
Arkansas requires the registration of a joint venture as a separate entity with the secretary of state. In effect a joint venture is a partnership in Arkansas and therefore must follow the criteria as laid out in the Uniform Partnership Act in that state. However, the state will accept joint ventures but there are notable differences as stated in Slaton v. Jones, 88 Arkansas Appeals Court 140, 195 S.W. 3d 392, 397 (2004):
“… the ad hoc nature of joint ventures, or their concern with a single transaction or isolated enterprise, plus the fact that loss-sharing is not as essential to joint ventures as it may be for partnerships.”
Take note that losses are not a requirement, but a contract is required. In Gammill v. Gammill, 256 Arkansas 671, 510 S.W. 2d 66, 68 (1924); the joint venture must have an existing contract, “That document will be controlling”; Slaton, 195 S.W. 3d at 397.
California
California uses both ‘joint venture’ and ‘joint enterprise’ terms in their law. A joint venture refers to a commercial objective whereas joint enterprise defines a noncommercial activity. As illustrated above, both must have:
(1) An agreement;
(2) A joint interest in the undertaking;
(3) Sharing of profits and losses; AND
(4) A right of joint control.
See Connor v. Great Western Savings and Loan Association, 69 California 2d 850, 73 California Reporter 369, 375 447 P. 2d 609 (1969).
Colorado
Colorado requires three essential elements:
(1) A joint interest in property;
(2) An express or implied agreement to share in profits and losses of the venture; AND
(3) Conduct showing cooperation in the venture.
Notice that joint control is not required but cooperation is substituted for control.
Connecticut
Under Connecticut law a joint venture is a special combination of two or more persons who combine their property, money, effects, skill, and knowledge to seek a profit jointly in a single business enterprise without any actual partnership or corporate designation. While a joint venture need not be a separate legal entity, it requires more than a mere agreement to share profits.
Connecticut law requires five elements:
(1) Two or more persons must enter into a specific agreement to carry on an enterprise for profit;
(2) An agreement must evidence their intent to be joint venturers;
(3) Each must contribute property, financing, skill, knowledge or effect;
(4) Each must have some degree of joint control over the venture; AND
(5) There must be a provision for the sharing of both profits and losses.
See Rupe, Inc. v. APS Technology, Inc., (2012) Second Federal District Court of Appeals.
Florida
A joint venture is defined as “A special combination of two or more persons, who, some specific venture, seek a profit jointly without the existence between them of any actual partnership, corporation, or other business entity”, Fla. Trading & Inv. Co. v. River Constr. Servs., 537 So. 2d 600, 602 (Florida District Court of Appeals, 1988).
In addition, it is limited to a specific enterprise or object. Any indefinite duration elevates this to a partnership because a written agreement is required in Florida. Elements of joint venture include:
(1) A community of interest in the performance of the common purpose;
(2) Joint control or right of control;
(3) A joint proprietary interest in the subject matter;
(4) A right to share in the profits; AND
(5) A duty to share in any losses sustained.
Georgia
“A joint venture or joint enterprise exists when two or more combine their property or labor, or both, in a joint undertaking for profit with rights of mutual control, provided the arrangement does not establish a partnership”, Southern Pines, Inc. v. Wallen, 122 Ga. App. 288, 176 S.E. 2d 631 (1970).
See Fulcher’s Point Pride Seafood, Inc. v. M/V THEODORA MARIA, 935 F.2d 208; 1991 Lexis 13906 covering the subject of control under Georgia law in a joint venture.
Hawaii
Hawaii uses the law of partnership as joint ventures are included in the definition of partnerships, Hawaii Rev. Stat. §425-106. The courts look at indices of partnership with the sharing of profits and losses as a strong indicator of partnership.
Idaho
A joint venture exists if parties:
(1) Contribute money, knowledge, skill, or other assets to a common undertaking;
(2) Have a joint property interest in the subject matter of the venture;
(3) Have a right of mutual control;
(4) Have an expectation of profits and a right to participate therein; AND
(5) The objective is limited to a single undertaking.
See Rhodes v. Sunshine Mining Co., 113 Idaho 162, 742 P. 2d 420-421.
Illinois
Illinois requires:
(1) An express or implied agreement to carry on some enterprise;
(2) A manifestation of intent by the parties to be associated as joint venturers;
(3) A joint interest as shown by the contribution of property, financial resources, effort, skill, or knowledge;
(4) A degree of joint proprietorship or mutual right to the exercise of control over the enterprise; AND
(5) Provision for joint sharing of profits and losses.
Indiana
By law – “An association of two or more persons formed to carry out a single business enterprise for profit”, Boyer v. First Nat’l Bank of Kokomo, 476 N.E. 2d at 898, Indiana Court of Appeals, 1985.
A joint venture is bounded by an express or implied contract containing the following elements:
(1) A community of interests;
(2) Joint or mutual control, that is, an equal right to direct and govern the undertaking; AND
(3) Must provide for sharing of profits and losses.
Kansas
Kansas defines a joint venture as “An association of two or more persons or corporations to carry out a single business enterprise for profit”, Modern Air Conditioning Inc. from above in profits. The Kansas courts have identified five indices of joint venture:
(1) The joint ownership and control of property;
(2) The sharing of expenses, profits and losses, and having and exercising some voice in determining the division of the net earnings;
(3) A community of control over and active participation in the management and direction of the business enterprise;
(4) The intention of the parties, express or implied; AND
(5) The fixing of salaries by joint agreement.
Kentucky
Kentucky applies partnership law to joint ventures. Here, the courts distinguish a joint venture as “… a special or limited partnership or partnership for a special purpose. Ordinarily it is an association for a particular transaction, while a partnership contemplates a continuing business.” Refer to Jones v. Nickell, 297 Kentucky 81, 179 S.W. 2d 195, 196 (1944).
However, over time the two forms of joint venture and partnership are blending together as stated by Harold G. Reuschlein & Willam A. Gregory in their Handbook on the Law of Agency and Partnership §266 written in 1979:
If a present legal trend can be identified, it is undoubtedly in the direction of consolidating joint ventures and partnerships, the names themselves being retained more for convenience and ensuring statutory compliance than for identification of distinct business relations.
Louisiana
In Louisiana, joint ventures are treated the same as partnerships.
Maryland
In Brener v. Plitt, 182 Md. 348, 34 A. 2d 853, 857 (Md. 1943) the court stated that a joint venture is akin to a partnership for a single transaction. A joint venture must have the following elements:
(1) An operation of two or more persons; AND
(2) In a single transaction for mutual benefit to:
A) Share in profits and losses
B) Each has a voice in its management.
Massachusetts
Massachusetts uses the Shain criteria to establish a joint venture.
(1) An agreement by the parties manifesting their intention to associate for joint profit not amounting to a partnership or a corporation;
(2) A contribution of money, property, effort, knowledge, skill, or other assets to a common undertaking;
(3) A joint property interest in all or parts of the subject matter of the venture;
(4) A right to participate in the control or management of the enterprise;
(5) An expectation of profit;
(6) A right to share in profits;
(7) An express or implied duty to share in losses; AND
(8) A limitation to a single undertaking (or possibly a small number of enterprises).
Michigan
Michigan requires six elements:
(1) An agreement indicating an intention to undertake a joint venture;
(2) A joint undertaking of:
(3) A single project for profit;
(4) A sharing of profits as well as losses;
(5) Contribution of skills or property by the parties;
(6) Community interest and control over the subject matter of the enterprise.
New Jersey
New Jersey treats joint ventures as partnerships pursuant to N.J. Stat. Ann. §42:1-6(1).
New York
New York requires three elements:
(1) That the parties’ agreement “evidence their intent to be joint venturers”;
(2) That each party “have some degree of joint control over the joint venture”; AND
(3) That there be “a provision for the sharing of profits and losses”.
See Intel Containers Int’l Corp. v. Atlanttrafik Express Sew. Ltd., 909 F. 2d 698.
North Carolina
Joint ventures are governed by the law of partnership except it is a temporary association for the purpose of a single undertaking.
Ohio
There are five essential elements in Ohio to establish a joint venture:
(1) An agreement to engage in a specific business enterprise, either express or implied;
(2) An intent by the parties to associate themselves as joint adventurers, a determination governed by ordinary rules of contract interpretation and construction;
(3) A community of interest in the enterprise;
(4) Equal authority or right to direct movements and conduct of each other; AND
(5) Sharing of profits and losses.
See Silver Oil Co. v. Limbach, 44 Ohio St. 3d 120, 541 N.E. 2d 612, 615 (Ohio 1989), and Ford v. McCue, 163 Ohio St. 498, 127 N.E. 2d 209, 212-213 (Ohio 1955). A quote from Ford at 209 explaining a joint venture:
“… an association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business adventure for joint profit, for which purpose they combine their efforts, property, money, skill and knowledge, without creating a partnership, and agree that there shall be a community of interest among them as to the purpose of the undertaking, and each co-adventurer shall stand in the relation of principle, as well as agent, as to each of the other co-adventurers …”.
Oklahoma
Oklahoma requires three elements:
(1) Joint interest in property;
(2) An express or implied agreement to share profits and losses of the venture; AND
(3) Action or conduct showing cooperation in the project.
See Martin v. Chapel, Wilkinson, Riggs, & Abney, 1981 OK 134, 637 P. 1981).
Oregon
Oregon establishes three elements:
(1) Jointly share profits;
(2) Jointly share losses; AND
(3) Jointly share control over the business of the venture.
See Hayes v. Killinger, 235 Oregon, 465, 471, 385 P. 2d 747, 753 (1963).
Pennsylvania
Pennsylvania requires four elements for a joint venture:
(1) Each party to the venture must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, materials or money;
(2) Profits must be shared among the parties;
(3) There must be a “joint proprietary interest and a right of mutual control over the subject matter” of the enterprise; AND
(4) Usually, there is a single business transaction rather than a general and continuous transaction.
See Liona Corporation, Inc. v. PCH Associates, 949 F.2d 585; 1991 U.S. Court of Appeals for the Second Circuit. The court went on to state that the presence of a single factor in isolation ordinarily is not enough to support a joint venture finding, “A joint venture’s existence depends on the facts and circumstances”.
Note that the sharing of losses is not an essential element. However, even though Pennsylvania law doesn’t state a required element of sharing losses, it is believed by the courts that sharing of losses is an essential element of joint venture agreements and partnership agreements, Waldman v. Shoemaker, 367 Pa. 587, 591, 80 A.2d 776, 778 (1951). See also the Uniform Partnership Act 15 Pa. Cons. Stat. Ann. §8327 at 824 – “Partners are jointly and severally liable for all debts and obligations of the partnership”. In addition read 20 Pennsylvania Law Cyclopedia, Joint Ventures §2, at 137 (1990) – “A right to share in profits and a duty to share any losses”.
Rhode Island
Rhode Island treats joint ventures as partnerships.
Texas
Joint ventures are governed by rules of partnership. A distinction exists with the scope of the business; in effect, it is limited to one particular enterprise. Texas business Orgs. Code Ann. §152.051(b): An association of two or more persons to carry on a business for profit as owners create a partnership, regardless of whether:
(1) The persons intend to create a partnership; OR
(2) The association is called a partnership, joint venture, or other name.
Texas looks for four elements:
(1) A community of interest in the venture;
(2) An agreement to share profit;
(3) An agreement to share losses; AND
(4) A mutual right of control or management of the enterprise.
See the following cases for more information:
* Emmanuel A. Ballard v. United States, 17 F. 3d 116; the Fifth Circuit No. 93-8361
* Fagan v. Fahoum, 986 F.2d 1418, (1993)
Virginia
In 36 Virginia Law Review 425 on page 430 it states:
‘The joint venture, also known as joint adventure, joint enterprise, joint undertaking, joint speculation and syndicate, has been defined as a special combination of two or more persons who, in some specific venture, seek a profit jointly without any actual partnership or corporate designation. While this definition has achieved some acceptance, it should be repeated that the courts have not yet laid down any very definite boundaries for a joint venture. In view of the decisions, the term is one of variable meaning, and it is one that has evaded precise definition. Although the legal significance of joint adventure has come to be widely recognized, it was unknown to the common law, and does not readily admit of short and satisfactory definition. It is impossible to define the relationship of joint adventure with exactitude and precision.’
“A joint venture exists when two or more parties enter into a special combination for the purpose of a special business undertaking, jointly seeking a profit, gain, or other benefit, without any actual partnership or corporate designation.” “It is essential to a joint venture that the participants agree, expressly or impliedly, that they are to share in the profits or losses of the enterprise, and that each is to have a voice in its control and management.” See Roark v. Hicks, 234 Va. 470, 362 S.E.2d 711, 714, 4 Va. Law Rep. 1318 (Va. 1987).
Joint Venture or Contractual Agreement
A joint venture is one of many business contracts and in general is just shy of a partnership because of its limited purpose; i.e. a single business transaction. This doesn’t mean others haven’t tried to elevate a business agreement to the level of a joint venture. In most cases, obtaining status as a joint venture transfers or shares liability and fiduciary responsibility onto others. This section will explore how the courts distinguish the difference of a joint venture with that of:
* Vendor Relationship/Sponsorship * Equitable Mortgage
* Agency (Commission) * Dual Listed Company
* Co-Op * Franchise Agreement
* Lease Agreement
Vendor Relationship/Sponsorship
In a vendor relationship, the vendor charges his own contractual rate for services or products sold to another business. There is no mutual sharing of or co-mingling of funds. There may be joint interest in the success of the project like a subcontractor with a general contractor and even joint control; but profits and losses are definitely separate between the parties; thus there is no joint venture.
This goes further with the concept of sponsorships for an event; usually the public charity type. In these cases, the charity is the sole beneficiary of profits and not the sponsor even if the sponsor sells his/her wares at the event. The concept may pass several of the tests for joint venture but the profit motive is clearly oriented towards the charity. See McGee v. Alexander, 2001 OK 78, 37 P.3d 800, 806 (Oklahoma 2001).
Agency
With an agency relationship, the agent owes a duty to the property owner or employer. There is a similarity to mutual control and interest in the project; however, the proprietary interest (ownership) and control belongs to the property owner or employer. The agent merely shares in the profit from the venture.
“[A]n individual who has no proprietary interest in a business except to share profits as compensation for services is not a joint venturer”, DeVito v. Pokoik, 150 A.D.2d 331, 540 N.Y.S.2d 858, 859 (Appellate Division, Second Department 1989).
CO-OP
Co-op’s are common in the farming sector whereby independent farmers gather together and pool their resources and benefit from an economy of scale. Typically, the co-op becomes a legal entity and the independent farmers are members of the organization. There are several differences with a joint venture.
A) Joint ventures rarely take on a legal status greater than a partnership; co-op’s customarily are incorporated as a separate entity and the farmers own a mutual right to a percentage of the co-op and control over the officers.
B) Control is exercised via vote whereas in a joint venture, control is exercised via direct managerial activity.
C) Most co-op’s operate under a non-profit status and through cooperative effort occasion benefits to its members. In effect, there are no profits or losses to share.
Lease Agreement
Lease agreements may have some characteristics of a joint venture such as mutual interest in the property but economically they are substantially different. The tenant is a debtor to the landlord and pays rent no matter the cash flow generated from the occupancy of the space. Some commercial leases such as those found in malls require a percentage of sales as additional boot in the rent payment. However, these additional amounts are customarily tied to marketing/advertising conducted by the landlord to benefit all tenants as a group.
Another factor relates to control, the tenant traditionally has free and unencumbered use of the space, i.e. 100% control over the space rented. In addition, the tenant has exclusive possession of the land or space rented.
A lease “… gives to another the temporary possession and use of property… with an agreement that it shall be returned at a future time.” California Civil Code §1925.
In general, a lease grants rights to the lessee to the exclusion of the grantor therefore nullifying the mutual control element of joint venture.
Equitable Mortgage
Liona Corporation, Inc. v. PCH Associates, 949 F.2d 585; 1991 U.S. Court of Appeals for the Second Circuit
Liona provided $5 Million of financing to purchase and renovate the Philadelphia Centre Hotel to PCH Associates. Liona held title to the land and received a guaranteed 12% return with no management responsibilities. In addition, Liona was to receive a percentage of rents based on occupancy rates, a form of revenue sharing. Article 3, Section 3.10 of the ground lease stated:
Landlord [Liona] shall in no event be construed or held to be a partner or associate of tenant [PCH] in the conduct of its business, …
In 1984, PCH filed for bankruptcy, and claimed that the ground lease agreement was a joint venture and therefore shifting bankruptcy obligations to Liona. The bankruptcy court and the district court held that the agreement was indeed a joint venture. The Appeals Court vacated the decision and remanded.
The Appeals Court held that agreement resembled an equitable mortgage and therefore Liona was entitled to proceeds as a secured creditor. Pennsylvania law controls the respective issues.
The bankruptcy court and the district court held the agreement as a joint venture for the following reasons:
(1) Both parties contributed to the hotel project;
(2) Liona was to share in the cash flow of the hotel;
(3) Liona retained an active interest in and control over the hotel operation; AND
(4) The agreement between PCH and Liona was limited to the hotel operation.
The Appeals Court held that it was right for the bankruptcy and district court to look at the economic substance of the transactions. The court identified Pennsylvania law for defining a joint venture (see above for respective state guidance) and stated that joint ventures are similar to partnership agreements except they are arranged for a single transaction whereas partnerships are for continuing operations.
The Appeals Court believes there must be a sharing of losses as an essential element of joint venture along with joint and several liability for all debts and obligations which did not exist. Furthermore, the court held that the agreement was nothing more than a ‘sophisticated secured financing arrangement’. In addition, the element of sharing profits refers to net profits and not revenue (rents). Secondly the control features in the agreement are really asset risk reduction tools and not control features as customarily found in day-to-day operations. These control features are similar to those found in traditional secured creditor agreements.
Dual Listed Companies
A dual listed company is an international entity in scope and therefore not a joint venture as defined in U.S. law. A dual listed company (DLC) is a corporate structure that joins separate corporations in a common enterprise while allowing the corporations to maintain their individual legal identities. With a DLC, they share everything they own and join forces to go beyond a single project.
In reality a DLC reaches beyond one single or limited purpose and behaves more like a partnership with other members. Often these entities are formed to conduct business world wide thus the name ‘Dual Listed’. An example is a cruise line that must conduct business in several countries and therefore create partnerships with other entities in order to satisfy the business goal of obtaining port services in the various nations of call.
Franchise Agreements
A franchise agreement resembles a revenue sharing or royalty based agreement more than a joint venture. In the franchise agreement, the franchisor gets a percentage of the revenue stream and not a cut of the profits. Revenue sharing is not considered profit sharing. In Cislaw v. Southland Corporation, 6 California Reporter 2d at 395 the court stated that a “percentage of monthly sales did not create a joint venture because there was no agreement to share profits and losses”.
Sharing of profits and losses is a bottom line function and not a top line item as is customarily found in franchise, commission and royalty agreements.
Federal Definition of a Joint Venture
The federal government uses Section 7701(a)(2) of Chapter 26 of U.S. Code of Federal Regulations to define a joint venture. It is included in the definition of a partnership. To solidify the existence of a joint venture all parties should maintain one set of books for the particular venture. In addition, an SS-4 application is submitted to the IRS to obtain a Federal Identification Number unique to this venture. At year-end the venture files a Form 1065 along with K-1’s for each of the respective partners to the venture.
The tax court in Culbertson, 337 U.S. Tax Court determined the existence of a valid joint venture or partnership based on whether “The parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise”. The Tax Court in Luaa v. Commissioner, 42 T.C. 1067, 1077 -78 (1964) went on to identify eight factors in considering ‘intent’ as follows:
(1) The agreement of the parties and their conduct in executing the terms;
(2) The contributions, if any, which each party has made to the venture;
(3) The parties’ control over income and capital and the right of each to make withdrawals;
(4) Whether each party was a principle and co-proprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income;
(5) Whether business was conducted in the joint names of the parties;
(6) Whether the parties filed federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers;
(7) Whether separate books of account were maintained for the venture; AND
(8) Whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise.
It is important for the reader to understand, when it comes to partnership taxation, federal law applies under 26 U.S.C. §7701(a)(2) and treasury regulations §301.7701-3(a). State law determines liability for the respective obligations, see United States v. Hays, 877 F.2d 843, 844 n.3 (10 Circuit 1989).
Summary – Joint Venture
“The phrase ‘joint venture’ is often used to describe a venture that represents a collaborative effort between companies to achieve a particular end (e.g. joint research and development, production of an individual product, or efficient joint purchasing).” 46 Am. Jur. 2d Joint Ventures §12 (1969).
Joint ventures fall along the spectrum of business contracts and relationships. It is just shy of a full partnership because “joint ventures have notable differences from general partnerships. These differences include ‘the ad hoc nature of joint ventures, or their concern with a single transaction or isolated enterprise;” Slaton v. Jones, 88 Ark. App. 140,195 S.W.3d 392, 397 (Arkansas Appeals Court 2004) and Arkansas Code Annotated §4-46-202.
Almost all parties, state governments and the courts concur with a minimum of four essential elements to substantiate the presence of a joint venture:
(1) Sharing of profits;
(2) Sharing of losses;
(3) Mutual control by all adventurers; AND
(4) An agreement.
Each state has set their own interpretation of the respective elements and a user should look to the state’s justice system to understand the respective interpretations.
Finally, there are differences between joint ventures and standard business contracts and agreements. Typically, these types of arrangements fall short of a joint venture status due to the failure of ascertaining one of the four essential elements identified above. With this knowledge, this form of business arrangement has a specific function in business agreements and works well in only certain circumstances. When the conditions exist warranting a joint venture, keep in mind the four essential elements. Act on Knowledge.
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