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.
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by Mark A. Cobb
Wow, what a wonderful conference! How often can you say that you have heard that? Last week, I had the privilege of attending the American Bar Association (ABA) Forum on Construction Law Mid-Winter meeting in Naples, Florida. The Forum meetings always exceed my expectations, the continuing legal education hours enrich my practice, and there are many opportunities to meet with construction attorneys from all 50 states.
This year’s conference was entitled “Making Dollars and Sense of Construction Damages”, and, needless to say, the seminars and panel discussions were largely disscussions and presentations about construction damages. We explored current trends in drafting damage provisions in construction contracts, what construction professions can do to minimize their exposure after damages occur, how to calculate damages from the perspectives of the owner/project developer, the prime contractor, the subcontractor and the material suppliers. In addition, there were presentations on how to present damages to arbitration and mediation panels, judges and juries as well as innovative technological aids that make these complex numbers more easily digestible. Other topics which we tackled included the following:
- When to use Total Cost Claims calculation
- When to use Modified Total Cost Claims calculation
- Cumulative Impact Claims
- Change Orders and their impact
- Liquidated Damages and whether or not they are enforceable
- Diminished Bonding Capacity and whether or not these damages are recoverable
- Home Office Expenses and whether or not they are recoverable
- Field Office Expenses and whether or not they are recoverable
- Leased construction equipment vs. owned construction equipment
- Waivers and limitations of construction damages
- Limitation of Liability
- Direct Damages
- Consequential Damages
- No Damages for Delay provisions
- Expert Witness testimony (for proving damages)
- Demonstrative evidence, source data, input date, reliability of hardware, the process and reliability of the method used to calculate construction damages
- Termination for Convenience contract terms (and how they vary between the AIA, EJCDC and ConsensusDOCS)
- Damages resulting from Termination for Convenience
- Demobilization costs
- Insurance premiums rebates and surety bond rebates (after contract is terminated)
These topics (and many more!) help the Cobb Law Group to build an arsenal of knowledge that benefits all of our clients whether they are project owners, developers, general contractors, specialty trade subcontractors, or material suppliers. In particular, our statewide practice of filing Georgia Materialmen’s Liens inevitably requires proving of damages whether they be based upon invoices, contract costs, changes orders, or something else.
In addition to the formal presentations, a Construction Law Forum luncheon included a talk on the Federal Miller Act and various states’ Little Miller Acts. It is easy to forget that meeting the requirements to file a payment bond claim vary on federal projects and state projects, and this was an excellent reminder of some of the differences between the different types of public construction projects as well as an opportunity to learn from my colleagues how their states handle specific issues (differently than we do in Georgia!) In Georgia, for example, state construction projects and muncipal construction projects are subject to different state statutes.
Despite a very busy schedule, we managed to mingle with construction industry consultants and colleagues during the breaks and during the organized social events. One such event was a dinner hosted by a mediation group who shared with us stories about their successful mediation of construction disputes and how we can maximize our clients’ litigation dollar through mediation and arbitration.
For our clients, these ABA’s Forum on Construction Law provide us the a national network of experienced construction attorneys and consultants through out the country; for us, the seminars provide great education benefits and interaction among colleagues as well as a look into current construction law, lien law and surety bond law trends throughout the country. In case you can’t tell, I look forward to our next meeting!
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.
By: Mark A. Cobb
This economy has forced many Georgia businesses to review their practices and make adjustments for the economic realities associated with today’s market place. Clients frequently contact us about collecting a debt they are owed for services, labor or material which they have provided. In these instances, one of the first documents we want to review is the contract. I am constantly amazed how many businesses, contractors, and suppliers fail to use written contracts!
There is some good news, Georgia law does allow some oral contracts to be binding. Simply stated, this means that if you sold some supplies or if you provided labor or services to another and you haven’t been paid, you may be able to recoup your damages. Without a contract, however, you may face greater difficulty in proving the terms of your transaction, the costs of collection may be higher or more time-consuming, and you may prevent you from collecting interest and attorneys’ fees.
Not just any oral contract is binding, however. Georgia’s Statute of Frauds requires that certain contracts be in writing in order to be enforceable. Specifically, O.C.G.A. § 13-5-30 states the following contract must be reduced to writing:
(1) A promise by an executor, administrator, guardian, or trustee to answer damages out of his own estate;
(2) A promise to answer for the debt, default, or miscarriage of another;
(3) Any agreement made upon consideration of marriage, except marriage articles as provided in Article 3 of Chapter 3 of Title 19;
(4) Any contract for sale of lands, or any interest in, or concerning lands;
(5) Any agreement that is not to be performed within one year from the making thereof;
(6) Any promise to revive a debt barred by a statute of limitation; and
(7) Any commitment to lend money.
Georgia’s Statute of Frauds applies to many types of contacts in several areas of law; however, our business law clients and construction law clients probably recognize that many (and maybe all) of their contracts need to be in writing in order to not violate the Statute of Frauds.
PRACTICAL BUSINESS TIP # 1: With the assistance of a Georgia contract lawyer, develop a standardized business contract relevant to your industry, your customers, and your needs.
PRACTICAL BUSINESS TIP # 2: Review your existing contracts periodically (every year or so) and ask a Georgia contract lawyer to review it as well. Occasionally, there are changes in the law, judicial holdings, as well as changes in business practices which need to be incorporated into your existing contracts.
PRACTICAL BUSINESS TIP # 3: Repeat certain contract terms in the “small print” on your invoices including such items as (i) your payment terms, (ii) interests, (iii) collection costs, (iv) waivers and warranties–if you do this, however, make sure they are consistent with your contract as inconsistent terms may result in your inability to enforce the terms of your contract.
If you have any questions, please feel free to contact any of us at the Cobb Law Group. And, please share with us your stories or comments regarding any successes or failures you have had with your own contracts.