In a case decided on November 17, Inland Atlantic Old National Phase I, LLC et. al. v. 6425 Old National, LLC, the Fourth Division Court of Appeals of Georgia ruled on fiduciary duties owed under joint venture agreements, applied rules of contract construction, and briefly addressed substantial versus strict compliance.
Background: The parties – Inland Atlantic and Old National – entered a joint venture LLC and made other necessary agreements to develop a shopping center. During Phase I (of II), issues arose with the quality of an on-site contractor, which Old National failed to properly supervise. Due to complications in Phase I, Inland Atlantic did not hire Old National for Phase II. Old National brought suit and Inland Atlantic counterclaimed. After the trial court ruling granting and denying various parts of motions of summary judgment, both parties cross-appealed. In this consolidated appeal, the Court of Appeals addresses these claims and the trial court’s treatment of summary judgment.
A court may grant summary judgment, alleviating the need for a full trial, for the party requesting it – the movant – if there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law.
Fiduciary Duty as Managing Member of LLC:
According to Georgia statutes (OCGA § 23), a fiduciary duty exists “where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith.” Breach of such a fiduciary duty requires (1) the existence of a fiduciary duty, (2) the breach of which (3) proximately causes damage.
Additionally, a member of a limited liability company only owes statutory duties to that LLC if the member is managing an aspect of the LLC’s business affairs. That duty owed is one of good faith and the care an ordinarily prudent person. (OCGA § 14-11-305) If a member of an LLC is not managing as aspect of LLC business, this duty does not apply (unless otherwise provided for by agreement). Therefore, a member of an LLC without managerial responsibilities has no duty to the company by just performing its duties as a member.
In this week’s Inland Atlantic decision, a joint venture agreement between Inland Atlantic and Old National delegated some managerial duties to Old National. Inland Atlantic argued that that the trial court should not have granted summary judgment to Old National on Inland Atlantic’s breach of fiduciary duty claim with regard to the parties’ joint venture agreement. The appellate court agreed, ruling that Old National might have had a fiduciary duty to Inland Atlantic under their joint venture agreement. This is a remaining question of fact as to whether Old National was managing some of the LLC’s affairs; therefore, summary judgment was inappropriate.
Fraud and Fiduciary Duty to Disclose Material Facts:
A fiduciary relationship includes the duty to disclose material facts. Therefore, suppression of a material fact by a fiduciary party constitutes fraud.
Fraud requires the defendant, having both (1) scienter (knowledge of one’s wrongdoing) and (2) the intention to induce the plaintiff to act (or refrain from acting), to (3) make a false representation to the plaintiff, (4) on which the plaintiff justifiably relies and which (5) causes damage to plaintiff.
Here, Inland Atlantic claimed Old National committed fraud and negligently misrepresented the abilities of site-work contractor “Lewis,” whom Old National insisted on hiring and who was having “financial difficulties” before being retained. Old National insisted on using Lewis and may have known of their financial trouble, but represented that Lewis would be able to finish the project.
Inland Atlantic contended that granting summary judgment to Old National on Inland Atlantic’s claims for fraud and misrepresentation was inappropriate. The appellate court agreed, as there was a material question of fact as to whether Old National was managing some of the LLC’s business affairs (as examined above) and therefore owed a fiduciary duty to Inland Atlantic under their joint venture agreement. If such a fiduciary duty existed, then Old National had the duty to disclose material information regarding Lewis’s ability to complete the project. Since a question of fact remains, this court reversed the grant of summary judgment on the fraud and negligent misrepresentation claims.
Rules of Contract Construction – Examining Breach of Contract and Indemnification Claims:
When a court evaluates a contract claim, the court looks at the plain meaning of the contract terms. If these terms are ambiguous, making the contract unclear, the court must apply rules of contract construction. First, the court will ascertain the intent of the parties at the time the contract was executed. If the intent cannot be determined, then the terms of the contract are material questions of fact for a jury to answer.
The rules of contract construction also provide that indemnification terms should be construed strictly against the indemnitee. Furthermore, ambiguity should be construed against the drafter.
In Inland Atlantic, Old National argues that the trial court erred in not granting them summary judgment on Inland Atlantic’s breach of contract claim. However, the plain and unambiguous terms of the contract provide that Inland Atlantic’s actions do not waive their right to a breach of contract claim. Furthermore, there were two remaining questions of fact based on the evidence of record: (1) Did Inland Atlantic waive their right to a breach of contract claim by making final payment without notifying Old National of its deficiencies? And (2) Did Old National breach the contract by failing to properly supervise and manage the project? With these questions of fact unanswered, summary judgment on the breach of contract claim was appropriately denied.
Old National also contends that the lower court erred in denying their motion for summary judgment on Inland Atlantic’s indemnification claim. The indemnification provisions say that both parties indemnify each other, making both parties indemnitees and indemnitors. This is an ambiguous term. So, who is the proper indemnitee is a remaining question of fact for the jury to answer since the rules of contract construction fail to solve the issue here.
Substantial Compliance Required:
A party to a contract must only substantially comply with the contract termination clause. Strict compliance is not required. (See Rome Healthcare LLC v. Peach Healthcare System, 264 Ga. App. 265, 272 (5) (590 SE2d 235) (2003).)
Here, Old National contends that the trial court erred in not finding that a contract was not terminated. Inland Atlantic was not required to strictly comply with the contract term stating that either party could terminate with 30 days written notice. Inland Atlantic’s repeated notifications to Old National regarding Old National’s deficiencies may be considered substantial compliance. Again, this is question of material fact for a jury to decide.
Conclusion: This case is another reminder of the importance of contract drafting on construction projects; specifically, here are some practical tips which we can take away from this decision:
1. Joint Ventures between contractors may include fiduciary responsibilities between the parties.
2. Fiduciary relationship includes the duty to disclose material facts. Therefore, suppression of a material fact–such as the possibly inability of a subcontractor to fully perform its contract– by a fiduciary party constitutes fraud.
3. Construction contract terms need to be unambiguous.
4. Read your contract to understand (and follow) the termination provisions.
The Georgia construction law firm of the Cobb Law Group is pleased to provide you with our final installment on some of the issues to consider before entering into a joint venture contract with another participant. If you are interest in our previous entries, please click on the links below to learn more:
Advantages / Disadvantages of Contractors Using Joint Venture Agreements (Part I)
Important Operational Issues of Joint Ventures (Part II)
Joint Venture Internal Management (Part III)
Risk Allocation in a Joint Venture (Part IV)
As we discussed in Part I of this series, there are some distinct advantages to utilizing a joint venture arrangement in the construction industry; among other things, it allows competitors and colleagues to bring together their assets in their quest to appeal to larger construction projects (ones in which they might not be able to handle by themselves). This allocation of resources can bring better and more lucrative work to your firm, and this method of joint venturing can be used at virtually any level of the construction industry–general contractors, specialty subcontractors and suppliers may all utilize the unique features of this type of business arrangement.
If a joint venturer has partnered with another quality firm, if the parties have negotiated and executed a mutually beneficial joint venture contract, if there are no unforeseen Acts of God, supply shortages or intervening issues, then the joint venture will be a success! However, the possibility always remains that a problem will occur between the parties to the joint venture arrangement. It is vital that your contract affirmatively address what happens with a default of your agreement occurs and offers solutions to manage the problem to prevent a breach of the construction contract with the builder, developer or owner.
Step One–Define an Event of Default: The joint venture agreement should enumerate what constitutes an “Event of Default” of the contract (actually, this statement is applicable to virtually all types of contracts in any area of law). Some potential defaults are easy to identify such as a material breach of the contract or the insolvency (or bankruptcy) of one of the parties to the joint venture agreement; other issues to consider regarding defaults may be less obvious and include the misuse or misappropriation of shared trade secrets or failures of management such as attrition, competency, or availability. You contract should be specific. Remember, two parties may typically operate as competitors have joined forces to work together and management styles and personalities could become an issue.
Step Two: Cure & Remedies for Default:It is essential that every joint venture agreement addresses the series of events which happen after a default of the agreement has been identified. Most contracts (not just joint venture agreements) require some sort of notice of the default as well as an opportunity to “cure” the default within a set time period. For example, if a party fails to provide adequate labor to complete the project, then written notice may be required to be given via electronic means or overnight delivery and if the construction labor issue isn’t satisfactorily resolved within 3 business days, then the breaching party will be solely responsible for fines incurred due to the delay in construction. Although this “default and cure” period is standard in most types of contracts, joint venture agreements may include the following unique remedies for default:
- The defaulting joint participant shall lose its vote or voice in decision making/management of the joint venture;
- The defaulting joint venturer might forfeit its interest in the assets it brought to the joint venture (at least until the joint venture’s contract with the project owner is completed);
- Similarly, the defaulting party may lose it rights to any shared profits resulting from the joint venture; and
- The non-defaulting joint venturer may have an option to terminate the joint venture agreement (and dissolve the JV entirely).
Although default provisions often appear harsh, they are intended to provide an offending party with an understanding of the consequences of its breach of the agreement; similarly, it offers the non-breaching party the ability to be made whole despite the default and complete the JV’s obligations to others.
Joint venture agreements are commonly used on Georgia construction projects; however, project in shich jiont ventures are utilized typically involve potentially larger profits and, correspondingly, larger damages for defaults. Thus, if you are considering participating in a joint venture arranges, you should consult with a Georgia construction attorney who has experience in drafting and enforcing joint venture agreements. If you have questions, please feel free to email us or call us toll-free at 1-866-960-9539 today!
If you have had any experiences with joint venture contracting, please tell us about them by leaving a comment below.
Risk Allocation in Joint Venture Agreement in Georgia is a significant component of the construction contract drafting process. Thus, part four of our series on Joint Construction Ventures in Georgia, focuses on this important area. If you missed our earlier installments of this five-part series, then please click the links below:
- Part I–Advantages and Disadvantages of Joint Venture Agreements in Georgia
- Part II–Key Operational Aspects of a good Joint Venture
- Part III–Internal Management of the Joint Venture
- Part V – Default and Remedies for Breach of JV Agreements
Risk Allocation on construction projects is one of the most important aspects of every joint venture agreement; basically, risk allocation divides the responsibilities of the joint venturers in the event that any problems occur or defects are claimed. In typical construction contracts, for example, a party who fails to perform the contract’s requirements is liable to the non-breaching party for the non-breaching party’s damages. In a joint venture situation, however, there are at least two parties who have come together to perform one contract; thus, if one of the two ventures breaches the terms of the contract, then both of the joint parties are usually jointly and severally liable to the owner of the project. Needless to say, participants in a joint venture need to address their ability to shift liability through the use of a properly negotiated joint venture agreement.
In Georgia, there are three vehicles which are commonly used to allocate risk on a construction project:
- Performance and Payment Bonds
Using Indemnities to Shift the Allocation of Risk: As mentioned above, the general rule is that parties in a joint venture share liability; so if one party breaches the contract–either due to mistake or negligence–both parties share the liability. Furthermore, this “default” risk allocation may be equal liability (both joint venturers share equally) or it may be limited to their pro rata share of interest in the joint venture. Using a properly negotiated contract, however, it is possible to (i) utilize line-item exceptions to this general rule, (ii) limit the liability to one party for the other party’s wrongful actions such as fraud, bad faith, willful misconduct (e.g., stealing).
Thus far in this article, we have implied that our discussion has referenced the JV’s liability to the project owner, but there are other types of liability which must be addressed. For example, employees of one of the joint venture participants may have claims against the JV; thus, it is wise for the parties to require mutual indemnifications to protect the joint venture and its participants from employee claims.
Using Insurance to Shift the Allocation of Risk: Owners, builders, and subcontractors generally understand and appreciate insurance as a means of limiting their exposure to risk. In joint venture agreements, when your company has joined with another company to complete a project which your company alone would have difficulty obtaining or performing by itself, insurance plays an even greater role. You may be wiling to assume a risk of which you, as owner, know about; however, are you willing to assume unknown risks deemed acceptable by your c0-joint venturer? Typical insurance needed by the JV or its participants include workers’ comp insurance, expanded CGL insurance to cover the Joint Venture and the joint venturers, Builder’s Risk Insurance, E&O , employer liability coverage, automobile liability insurance, as well as other pertinent coverages as may be determined by each unique construction project.
In addition to having the joint venture contract spell out the specific insurance, the parties need to make sure that all of the proper endorsements have been made. For example, each joint venturer should probably be named as an additional insured, and you may need waivers of subrogation against the joint venture and each participant to the JV.
Using Bonds to Shift the Allocation of Risk: Typically, joint venturers share their responsibility for bonding (in an amount equal to their percentage interests in the venture); sometimes, however, only one party has the credit to obtain the necessary bonding. If this is the case, it should be covered in the contract as, typically, each joint venturer is jointly and severally liable to the surety without limits to its percentage interests.
Utilizing a well-drafted joint venture agreement is vital to a company’s success in the current construction market. Failure to address key issues such as liability and risk allocation can irreparably harm the participants due to foreseeable and unforeseeable risks. If you are considering joining with another entity to participate in any construction project in Georgia, please contact an experienced construction lawyer to help you navigate these difficult waters and draft a contract that will help your business goals to be met.
Please leave your comments below!
by Mark A. Cobb
In two previous blog installments (click here for Part I, click here for Part II, click here for Part IV, click here for Park V on remedies and defaults) we began a discussion on key issues in joint venture agreements. Although, our comments are not limited to construction contracting in Georgia, our construction attorneys are experienced in drafting and negotiating joint venue contracts and, now, we continue our series with a discussion on key issues related to the internal management of a joint venture.
There are, frequently, three components to the internal management of a joint venture:
1. the Executive Committee;
2. the Joint Venture Management Team; and/or
3. the Project Manager.
JV Executive Committee: Every joint venture agreement needs an Executive Committee which has the final word on management issues; typically, the Executive Committee is comprised of a set number of representatives appointed by each party to the joint venture agreement.
JV Executive Committee Voting: Although it may not always be possible, the goal of the Executive Committee should be to make all decisions unanimous. In the absence of unanimity, committee votes are usually weighted by the percentage interest of each participant. Thus, if there are two joint venturers each with a fifty percent interest in the joint venture, you need to make certain that a mechanism is built into your document to prevent deadlocks on issues. Many JV agreements wisely set forth a list of certain actions which require unanimous consent of the committee members.
Executive Committee Duties: Although their duties vary on each specific project, one essential aspect of the Executive Committee is the overseeing of the distribution of profits (or other assets upon termination); although the Executive Committee members are not typically involved in the day-to-day running of the venue, the must stay up-to-date on the project and its progress.
Joint Venture Management Team: The management team consists of specific individuals from each of the venture participants, and they are closer to the trenches than the Executive Committee. The Executive Committee has oversight of the management team, but the management team has direct charge and supervision of the performance (and the completion) of the project! They should periodically provide the Executive Committee with financial reporting and cost accounting and pertinent tax matters.
Project Manager: The project manager is usually identified in the joint venture agreement, but he or she is always subject to replacement by the Executive Committee; similarly, the project manager is usually an individual, but there are companies which specialize in project management, and they may be hired for this position. Needless to say, the Project Manager has the most hands-on duties as it related to the construction performance and issues; thus, his duties are frequently detailed in the joint venture agreement and may include the following:
- responsibility for carrying out the work
- budget preparation
- contact with the project owner; and
- some overlap with the management team duties.
Georgia contractors regularly utilize the benefits of joint ventures to meet the demands of specific projects; prior to entering into a joint venture, however, it is vital to consult an experience Georgia construction contracts attorney. If you have any questions about your next joint venture agreement, please do not hesitate to contact us!
Also, please leave us a comment about management issues you have encountered in your joint ventures with others!
by: Mark A. Cobb
In an earlier blog article entitled Joint Venture Contracting in Georgia (Part I), we discussed the advantages and disadvantages of entering into joint venture agreements on Georgia construction projects. In this article, we discuss some of the key issues involving operational aspects which every joint venturer should consider prior to putting together their JV Agreement.
Joint Venture Agreements Need to be in Writing:
We’ll start with the easiest issue; every joint venturer contract needs to be in writing and signed by the parties; both the AIA construction forms and ConsensusDocs offer agreements which can be used; in addition, construction lawyers and contract lawyers can also customize contract for your specific project or your specific industry.
Key Issue Regarding Operational Aspects:
Every contract to joint venture should include detailed and specific terms regarding the scope of the agreement, the division of labor and services on the project, and payment. The operational issues of the contract are vital and agreement will help make a project successful. Some of typical issues include the following:
- proper identification of all of the joint venturers (determine the number of joint ventures and their legal status)
- most parties to joint venture agreements focus on the construction stage; do not forget, however, that your agreement needs to address the bidding/proposal and the contract award stage as well;
- every agreement should be limited in its scope; for example, the agreement is likely limited to one particular project, and the agreement needs to specify this;
- typically, joint venturers are jointly responsible for the performance of the work; if there are exceptions to this, it needs to be addressed; similarly, if there are certain function which are allocated to particular member(s) of the agreement, then you should also address the related financial consequences of their performance;
- the joint venture agreement needs to specifically incorporate the written agreement between the JV and the project owner or developer;
- payment issues include how the parties will submit bills to the Joint Venture and how the Joint Venture will, in turn, submit bills to the Owner;
- The agreement should contemplate payments by the joint venture to third parties;
- Reimbursable costs to the parties to the joint venture need to be identified and addressed;
In future blog posts we plan to address other issues related to joint venture agreement including a discussion of internal management issues and risk allocation issues. In the meantime, if you have any questions regarding joint venture agreement in Georgia, Georgia lien or payment bond questions, construction contracting or any thing else related to construction law, please feel free to contact our Georgia construction law attorneys by clicking here.
If addition to our previous installment on joint contracting in Georgia (see above for link), if you would like to read our latest installment of this important topic covering joint venture management issues, please click here. And, if you would like to read our installment discussing risk allocation in joint venture agreements in Georgia, please click here. Our final installmen on defaults to a joint venture agreement and the corresponding remedies may read if you click here.
If you have other terms or key operational issues which you would like to see discussed (or have any comments on this article), please leave a comment below:
by Mark Cobb
By statute and by discipline, every good lawyer must participate in continuing legal education. Recently, I participated in a very useful seminar which focused on joint venture contracting, and in the next few weeks, you can read about some of the great information we learned for those Georgia contractors who want to use joint venture contracts in Georgia.
What is a Joint Venture?
A Joint Venture (commonly referred to as a “JV”) is used to refer to two or more businesses which enter into a cooperative endeavor usually for a finite period or specific project (for example, to construct a particular building). It is possible for the parties in a joint venture to create a new, separate corporation, limited liability company, or partnership. But, it is also possible that the participants retain their individuality and operate collectively pursuant to a “joint venture agreement”. In either case, the parties in the JV share in the management, profits (and losses) and risks in accordance with the terms of their joint venture agreement or joint venture contract.
Why Georgia Contractors Should Consider Creating a Joint Venture:
There are many, many reasons why contractors may decide to join together in a short-term partnership in order to bid and build on Georgia construction projects. Some of the popular reasons for joint ventures include the following:
- The two business entities are in a better position to exploit potential opportunities under various federal set-aside programs;
- By themselves, a participant in a joint venture contract may lack the necessary resources to complete the project; however, by combining financial, physical and human resources in order to meet the challenges of a particular project, they may be able to successfully bid and perform under a construction contract;
- Joint Venture Agreements spread the associated risks between/among the JV participants; and
- Joint Ventures can be a useful vehicle for employing specific project delivery methods.
Naturally, there are advantages as well as disadvantages for creating joint venture contracting, such as:
Advantages of Joint Venture Contracting in Georgia:
- Joint Ventures are fairly easy and simple to implement; they are straightforward and a cost-effective means to combine resources;
- Because they are based upon Georgia partnership law principals, they are predictable;
- Joint Ventures and their governing documents allow a great deal of flexibility based upon the needs of the individual participants and the precise scope of the construction project;
- The limited scope–joint ventures are usually appropriate only on one construction project at a time; and
- Joint Ventures are a widely accepted vehicle on construction projects.
Disadvantages of Joint Venture Contracting in Georgia:
- Because Georgia partnership law applies, the participants have joint and several liability;
- Some participants are concerned about the sharing of trade secrets and processes;
- Joint Ventures add an additional layer of liability;
- Professional relationships with down-stream contractors as well as up-stream developers, architects and engineers must be managed; and
- There is a risk of potential philosophical differences or personality conflicts between the co-venturers.
Thankfully, a carefully crafted joint venture agreement can assuage many of these concerns; it is vital, however, that each of the parties to a JV Agreement and their attorney weigh all the risks and management issues in order to carefully draft the documents which will govern the joint venture during each phase of the project, from bidding to completion. In our next installment on Georgia joint venture contracting, we will stress the need for a quality, written contract between parties as well as the key issues that should be addressed in every joint venture agreement including the operational aspects, the internal management, risk allocation, and defaults and remedies available to the participants.
Please feel free to contact the construction lawyers at the Cobb Law Group if you are contemplating participating in a joint venture anywhere in the state of Georgia; we welcome comments from our readers regarding their experiences with joint venture projects.
To read Joint Venture Contracting in Georgia (Part II), click here.
To read Joint Venture Contracting in Georgia (Part III), click here.
To read Joint Venture Contracting in Georgia (Part IV), click here.
To read Joint Venture Contractingin Georgian (Part V), click here.