It is quite common for construction contractors to form joint ventures with other contractors. While there are many reasons this happens, the two most common are to enable a contractor to obtain additional resources to perform the project and to share in the project’s financial risk. In fact, as projects have become more complex and larger in dollar value, JVs are often the only way that contractors can participate in certain market sectors.
While JVs create opportunities for contractors to obtain new work, they also create challenges – particularly when the JV partners have not worked together before. Among other things, the JV partners need to determine: 1) which JV actions will require unanimous agreement vs. some form of majority agreement; 2) who can speak on behalf of the JV to the upstream customer and to the downstream subcontractor and supply chain; and 3) how to address situations where a JV partner does not perform its responsibilities. Each of these topics are addressed in a typical JV agreement. However, JV agreements are sometimes taken “off the shelf” to document the agreement, without the partners carefully thinking through how the agreement will work in reality.
Further reading:
- Expanding liability for design professionals: The hits just keep coming
- Avoiding litigation: Jobsite safety carries inherent risk for design pros
- The keys to interpreting contract language for claim reduction
There are lots of construction cases that discuss JV issues. However, we wanted to highlight a recent federal court decision that illuminates how easily a JV partnership can break down and the financial consequences that can result.
The case
Contrack Watts-Uejo Kogyo JV v. Secretary of Army, a case before the U.S. Court of Appeals for the Federal Circuit, provides an example of what can go wrong when JV partners have disagreements. The JV consisted of Contrack Watts Inc. and Uejo Kogyo. The JV was awarded a multiple award task order contract by the U.S. Army Corps of Engineers. One of the task orders issued under that contract was for the design and construction of a child development center in Yokosuka, Japan.
The JV agreement between CWI and UK contained a provision that all JV decisions had to be unanimous. It also had the following provision:
No Party shall have the authority to bind or to make any commitment on behalf of the JV or of any other Party unless such authority is expressed in writing by Parties jointly in regard to the JV or by a Party individually in regard to the other Party.
In accordance with these provisions, the CWI chief operating officer and the UK president signed a letter appointing six individuals as “authorized representatives” of the JV, and that letter was furnished to the Corps.
As the project progressed, it became increasingly evident that the JV was having internal challenges. Contract modifications and requests for equitable adjustment were being signed by individuals other than the original authorized representatives. When the Corps demanded that the JV rectify this and provide a list of new representatives, the JV did not respond. Instead, separate letters came from CWI and UK that were nonresponsive to what the Corps was seeking. UK eventually wrote a letter to the Corps, explaining that there were disputes within the JV and telling the Corps not to make payments to the JV until UK approved them. This prompted another slew of letters from CWI and UK to the Corps, advocating their respective positions.
CWI ultimately hired a law firm to represent the JV and process the JV’s claims. The Corps’ contracting officer did not recognize the authority of either CWI or the law firm to represent the JV, which prompted CWI to file an appeal to the Armed Services Board of Contract Appeals.
The board’s decision noted that when a JV contracts with the government, the JV is the party in privity of contract – and the partners in their own capacity cannot submit claims and bring appeals. If a person or entity purports to act on behalf of the JV, it must have authority to bind the JV to the claim. The board denied the appeal because it was filed by an individual not authorized to pursue the claim and was brought without the consent of UK.
The board also rejected the argument that the JV agreement designated CWI as the managing member of the JV, with authorization to hire counsel and prosecute claims. The board noted that the person who purported to represent the JV on the claim was not authorized by the JV agreement to unilaterally pursue a claim, retain counsel, and prosecute these appeals on behalf of the JV without the approval of the JV’s supervisory board.
This meant that CWI’s law firm could not be considered a “duly authorized representative” of the JV. Additionally, the board noted that the JV agreement barred either JV partner from making decisions without the other and reflected an intent by both parties “to ensure that any one of the board’s members cannot hijack the organization.”
CWI fared no better in its appeal, as the appellate court used the same grounds as the board to reject CWI’s attempt to speak on behalf of the JV. The court concluded that the JV agreement prohibited either partner from making agreements without the other party’s consent and required joint written assent of both parties to form binding JV commitments.
The court also noted that the JV agreement required unanimity in supervisory board decisions. Therefore, even though CWI was the lead party in the JV, it did not have the power to direct the JV’s affairs or make CWI a controlling party for decisions. As the court noted, the JV agreement did not give CWI the right to file a claim “unilaterally, much less over the written objections of UK.”
Takeaways
This case reinforces the principle that if you are interested in being in a JV, you need to pick your partners carefully. The partners decided to treat each other as equals and required that every decision be unanimous. From personal experience, we know that there are some very successful JVs that are founded on the principle of unanimous decisions. These involve companies that have worked together before and trust each other.
We have no idea how CWI and UK formed their relationship, but the relationship generates a strong impression that this was a one-off JV to get a contract with the Corps. If that was the case, it would have made much more sense to have someone identified in the JV agreement as a tiebreaker to deal with deadlocks between CWI and UK.
