Defaults and Remedies in Joint Venture Agreements in Georgia (Part V in a Series)

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.