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Mutual Rights, Duties, and Liabilities of Parties

A joint venture is a contractual agreement that joins two or more parties for the purpose of executing a particular business undertaking.  In a joint venture business, all parties agree to share in the profits and losses of the enterprise[i].  The risk and expertise is also shared in a joint venture business.

The relations of parties to a joint venture and their association are similar to that of a partnership.  Therefore, the rights, duties, and liabilities are similar to that of a partnership[ii].

Members of a joint venture act as agents of each other for achieving the common objective of a joint venture[iii].  Every member is a principal for himself and an agent for other members in a joint venture enterprise[iv].  The principles of agency law only apply to a joint venture when parties are in a joint venture[v].  However, when one joint venturer commits an intentional fraud against third parties without the knowledge of other joint venturers, the other joint venturers need not indemnify the party committing the fraud when the third parties recover damages.

A member of a joint venture enterprise is only entitled to a share of profits.  Members are not entitled to any remuneration for any services done to promote and carry on the enterprise unless a contract provides a provision for remuneration[vi].  Pursuant to the Uniform Partnership Act[vii], a joint venturer cannot recover damages also for services done.  However, when a business is wound up a joint venturer can claim reasonable compensation for services in winding up affairs[viii].  When a work does not form part of the business of a joint venture, a co-venturer can be entitled for compensation.

The rights, duties, and obligations of joint venturers, as between themselves, depend primarily upon the terms of the contract by which they assume that relationship.  Every co-venturer should contribute a share to the joint venture to promote a common purpose.  When a joint venture is dissolved, a co-venturer gets the advanced capital returned[ix].  This is returned before a division of income or profits.  Such returns can only happen when parties equally contribute to capital.  When one party contributes to services and another to property, the party who contributed to services cannot claim any compensation over property on dissolution.  If the person has contributed to the capital, s/he would bear his/her own loss if the assets are insufficient to return his/her investment in full.

A co-venturer can only obtain reimbursement from other co-venturers with their consent for expenses incurred in the ordinary course of an enterprise[x].  When a co-venturer withdraws from the enterprise, no profits can be distributed if at the time of withdrawal there are no profits.

If a joint venturer has not contributed to the required capital, the contributing co-venturers can buy out the interests of the non contributing venturer.  When a co-venturer has made no contribution and has abandoned the venture, the non-contributing party cannot claim interest in the venture[xi].

Even if co-venturers share profits from a property owned by a joint venture, it does not make the co-venturers joint owners of the property.  It would depend on the agreement made by the venturers.  If the property is purchased with the funds of the joint venture or with profits derived from those funds, the property belongs to all the co-venturers for the purposes of the enterprise so long as it exists[xii].  When the title of the property is in the name of a co-venturer and the property is under the ownership of the joint venture, the rights of other venturers will not be impaired.  The title holder will act as a trustee of the property.  Between the parties to a joint venture, one who makes advances for the promotion of the venture can claim the property of the joint venture.

Generally, profits are distributed equally among the co-venturers irrespective of the capital advanced.  However, the sharing equally of profits can be changed by contracts created between co-venturers[xiii].  Parties to a joint venture that has been mutually abandoned are not bound to account to each other for profits made subsequently.  Generally, regarding the sharing of losses, an agreement to share the losses in the same proportion as sharing in the profits can be implied.  However, if there is a provision in the contract as to the proportion in which they are to be shared, the provision is to be complied with[xiv].  When either an express loss-sharing provision, an allocation according to profit sharing, or a division of ownership into fractional interests, is absent, the joint venture losses will be divided equally among the venturers.

Generally, a joint venturer is not liable to his/her associates for damages resulting from mistakes in business judgment.  However, a joint venturer can be held liable for negligence if the task necessitated exercise of a particular or extraordinary degree of diligence and skill[xv].  A joint venturer can withdraw from the venture with the consent of the co-venturers and a venture creditor[xvi].

Co-venturers share more than a mere contractual relationship.  The relationship between joint venturers is fiduciary in character.  Co-venturers owe each other fiduciary duties concerning matters within the scope of the joint venture[xvii].  Co-venturers have a duty to engage in a full, fair, open, and honest disclosure of everything affecting the business relationship.  The participants in a joint venture also share an agency relationship.  They share a duty of disclosure to one another[xviii].

[i] Simpson v. Richmond Worsted Spinning Co., 128 Me. 22 (Me. 1929).

[ii] Taylor v. Brindley, 164 F.2d 235 (10th Cir. Okla. 1947).

[iii] Eastern Iron & Metal Co. v. Patterson, 39 Haw. 346 (Haw. 1952).

[iv] Handgards, Inc. v. Ethicon, Inc., 1986 U.S. Dist. LEXIS 18607 (N.D. Cal. Oct. 23, 1986).

[v] County of Monroe v. Raytheon Co., 156 Misc. 2d 445 (N.Y. Sup. Ct. 1991).

[vi] Rohda v. Boen, 45 Wn.2d 553 (Wash. 1954).

[vii] D.C. Code § 41-101.

[viii] Jacobson v. Wikholm, 29 Cal. 2d 24 (Cal. 1946).

[ix] Reed & Noyce, Inc. v. Municipal Contractors, Inc., 106 Mich. App. 113 (Mich. Ct. App. 1981).

[x] In re Estate of Kruse, 19 Wn. App. 242 (Wash. Ct. App. 1978).

[xi] Goldstein v. Burstein, 185 Cal. App. 2d 725 (Cal. App. 2d Dist. 1960).

[xii] Martin v. Morrison, 260 S.W. 893 (Tex. Civ. App. 1924).

[xiii] Shore Parkway Assocs. v. United Artists Theater Circuit, Inc., 1993 U.S. Dist. LEXIS 12663 (S.D.N.Y. Aug. 31, 1993).

[xiv] Ellsworth Paulsen Constr. Co. v. 51-SPR-L.L.C., 2008 UT 28 (Utah 2008).

[xv] Hults v. Tillman, 480 So. 2d 1134 (Miss. 1985).

[xvi] Lauth Ind. Resort & Casino, LLC v. Lost River Dev., LLC, 889 N.E.2d 915 (Ind. Ct. App. 2008).

[xvii] Galardi v. State Bar, 43 Cal. 3d 683 (Cal. 1987).

[xviii] Wah Chang Smelting & Ref. Co. of Am. v. Cleveland Tungsten, 1996 Del. Ch. LEXIS 102 (Del. Ch. Aug. 19, 1996).

Inside Mutual Rights, Duties, and Liabilities of Parties