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Rights and Liabilities of Joint Venturers as to Third Parties

A joint venture is defined as an association of two or more persons formed to carry out a single business enterprise for profit in which they combine their property, money, efforts, skill, and knowledge[i].  In order to create a joint venture, the parties must have an agreement under which they have a joint interest in a common business undertaking, an understanding as to the sharing of profits and losses, and a right of joint control.[ii]

The existence of a joint venture depends on the intent of the parties.  Elements common to a joint venture which afford objective evidence of the parties’ intent are:

  • A single enterprise;
  • A community of interest;
  • Sharing of both profits and losses;
  • The right of joint participation in the management and control of the business.

The rights and liabilities of joint venturers are governed by the principles applicable to partnerships.  In contracts with third persons, the law imposes liability upon one who either represents himself/herself or consents to another representing him/her as a partner in an actual or apparent partnership[iii].  If one of two innocent persons suffers by the act of a third person, s/he by whose negligence it happened must be the sufferer[iv].

Generally, each member of a joint venture is deemed to be the agent of the other when acting in furtherance of the common objective.  It is to be noted that the same rules with respect to a principal and an agent applicable to members of a partnership apply to members of a joint adventure with respect to contracts with third persons within the scope of the joint enterprise[v].

The essential test in determining the existence of a joint venture is whether the parties intended to establish such a relation.  In the absence of an express agreement setting forth the relationship, the status may be inferred from the conduct of the parties in relation to themselves and to third parties.  As to third parties, it is the legal intent which controls.  The parties may be estopped in favor of third persons from denying that they are joint venturers, even though they never intended to become such[vi].  Regarding third parties, it is the intent to do those things which constitutes a joint venture that usually determines whether any relation exists[vii].

It is to be noted that when third parties deal with a co-venturer in good faith and without knowledge of any limitation upon his/her authority, the law presumes him/her to have the power to bind his/her associates by such contracts that is reasonably necessary to carry on the business in which the joint venturers are engaged[viii].

If joint adventurers perform work for a third person who pays either or one of them, then such payment is considered a discharge of the obligation as to both or all.  Similarly, if a joint venture has incurred obligations within the scope of the business enterprise, then the payment by a third person to one co-venturer is considered as the payment to all[ix].

However, a joint adventurer will not discharge his/her liability for the purchase price of a commodity purchased from a third person by payments made to the associate of such joint adventure[x].

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

[ii] In re Jones, 72 B.R. 25 (Bankr. C.D. Cal. 1987).

[iii] Id.

[iv] Blaisdell v. Leach, 101 Cal. 405 (Cal. 1894).

[v] Lindner v. Friednash, 160 Cal. App. 2d 511 (Cal. App. 2d Dist. 1958).

[vi] Dubach, Inc. v. Lucky Ace Petroleum, L.L.C., 2006 U.S. Dist. LEXIS 47399 (E.D. Okla. July 11, 2006).

[vii] Martin v. Chapel, Wilkinson, Riggs, & Abney, 1981 OK 134 (Okla. 1981).

[viii] Id.

[ix] Lentz v. United States, 171 Ct. Cl. 537 (Ct. Cl. 1965).

[x] Lindner v. Friednash, 160 Cal. App. 2d 511 (Cal. App. 2d Dist. 1958).

Inside Rights and Liabilities of Joint Venturers as to Third Parties