Be Wary of Joint Ventures

There are various types of partnerships that exist, all of which place obligations and responsibilities on the respective partners. Some of these duties may be contracted away while others cannot.

A joint venture is a related business association that may be also entered into through verbal or written agreements. However, this type of structure may unintentionally arise as a result of many situations. It has become increasingly common for individuals and companies to establish a joint venture relationship by inference.

A court may find that a joint venture exists when the parties act in a manner that the conduct, facts and circumstances surrounding the activities warrant such an interpretation. For example, separate entities that share employees, office space, bank accounts or have other commonalities may be deemed "co-adventurers" without ever having entered into a formal business arrangement.

It is common practice for entrepreneurs, real estate professionals, architects and many other professionals to form joint ventures to assist in reducing overhead costs, burdens and stresses of entering into a new business for a particular purpose or specific project. Generally, these parties have an expertise in a particular field and for a host of reasons evaluate joining forces with other individuals, service providers or businesses to capitalize on an opportunity and create synergy. Additionally, real estate professionals and entrepreneurs may form joint ventures to raise capital or leverage the other parties' capabilities.

Simply stated, there are countless reasons for entering into a joint venture. However, there are two common problems worth noting: the parties often start working together to create some competitive advantage and do not realize they have formed a joint venture. And even if they are aware of their association, they do not understand the oppressive fiduciary obligations that fall upon them to ensure their joint-adventurer is successful.

The legal basis for joint ventures rests squarely on the shoulders of partnership law. In fact, courts often expressly state that a joint venture is subject to the exact same rules as a partnership. Florida law generally identifies as a partnership the association of two or more people that conduct a business for profit as co-owners, regardless of whether the parties intended to form a partnership.

What is important to note is the broad encompassing language. It is for that reason that so many professionals find themselves in joint ventures without ever realizing it.

Consequently, the fiduciary duties of these business associations are often discovered through litigation. In 2004, discussing fiduciary duties between co-adventurers, Florida's Third District Court of Appeals held that both joint ventures and partnerships are governed by Florida's Revised Uniform Partnership Act. Under this act, a partner owes a duty of loyalty, a duty of care and must always demonstrate good faith and fair dealing.

The statutory duties should be considered a superficial overview of the duties owed to a partner or co-adventurer. Embedded within these duties are deeper obligations to disclose material terms, avoid self-dealing transactions, refrain from competing directly with a partner and always act in good faith. As long as co-adventurers uphold their fiduciary obligations to each other and their business, they are generally protected.

Because there is no written requirement to form a joint venture, many fail to understand the everlasting effects and duties that may result from "joining forces." To avoid creating a joint venture and being held accountable in ways that were unintended, always draft an agreement that expressly states the business parties' intentions.

The views expressed here are those of the author and not of Incisive Media or its publications.

Michael Schimmel is a real estate development attorney with Gunster in Fort Lauderdale. He can be reached at mschimmel@gunster.com.