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Protect Yourself with a Joint Venture Agreement

two businessmen having discussion in office“You’ve got the brains…I’ve got the connections and money…Let’s make lots of money!”  That’s the spirit of a joint venture–two or more entrepreneurs pooling their expertise and capital to profit from a business opportunity.  And if everyone has agreed to split the profits equally, what else is there to do except get to work?  Just one thing─draft a written joint venture agreement (JVA) with the help of a business lawyer.

An extremely large number of joint ventures end in a legal battle usually because the parties didn’t take the time to anticipate potential problems at the beginning and to account for such issues in a written JVA.

Take this one case  in the South Florida Business Journal for example:  three very close friends entered into a series of real estate joint ventures beginning in 2004, none of which involved a JVA.  In 2008, one of the partners sued the other two over the troubled projects.  After five years of expensive litigation, the plaintiff won a $21.5 million judgment against one of the partners (the other partner settled before trial).

The court found that the defendant-partner had engaged in self-dealing and fraud to cheat the plaintiff out of millions in profits. The defendant-partner’s illegal activities included:

  • Failing to disclose to the plaintiff that the partner’s company had taken commissions and fees for services that were not even performed to facilitate the first joint venture;
  • Duping the plaintiff into selling a one-sixth interest in the first joint venture and ultimately cheating him out of more than $10 million in profits;
  • Hiding material information from the plaintiff in the second joint venture that cost him more than $550,000 in profits;
  • Falsely informing the plaintiff that no profits were made in a third joint venture and excluding him from his one-third share of more than $7.5 million in profits from that joint venture.

The court noted that the plaintiff could have done more due diligence, but that “a partner who misrepresents material facts to gain an unfair advantage over his joint venture partner is not entitled to defend upon the ground that his partner could have done more to avoid being cheated.”  Consequently, the court awarded the plaintiff one-third of the total profits from the three joint ventures.

The Moral of the Story

Under Florida law, each partner in a joint venture owes a fiduciary duty of the “finest and highest loyalty” to every other partner.  Don’t assume that because your business partner is a close friend or relative that he or she understands and respects the duty of loyalty.  A comprehensive JVA can help partners understand what the duty of loyalty means as it relates to their joint venture and possibly deter them from doing anything that would breach that duty.  In the event a partner acts illegally or unethically, the parties should be able to refer to the JVA to determine how to resolve the matter.  A JVA prepared with the assistance of legal counsel at the inception of a joint venture can help prevent lengthy and expensive litigation in the future.

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