What Constitutes a Joint Venture Under New York Law?

What Constitutes a Joint Venture Under New York Law?

A joint venture is different from many other types of arrangements in that the two businesses agree to operate a single enterprise together...

Businesses often enter into relationships with other businesses. A joint venture is different from many other types of arrangements in that the two businesses agree to operate a single enterprise together. It also creates a fiduciary relationship between the parties, not just a contractual relationship. 

As highlighted in a recent New York Supreme Court decision, in order for an enforceable joint venture to exist, the parties must not only agree to share in the profits of their joint enterprise but also the losses. Therefore, it is imperative that any joint venture agreement be carefully drafted to clearly state the obligations of both parties. 

Joint Venture 101

In basic terms, a joint venture is an association of two or more entities that combine their resources and expertise to operate a single business enterprise. Both parties generally have the right to control the operation of the enterprise and share in the profits and losses.

For instance, joint ventures can be advantageous when one company holds a patent that another seeks to commercialize, when one company holds a strong market share in a sector that another company wants to enter, and when two companies seek to share the cost of developing complementary products and services. Joint ventures have several other benefits; one of the most attractive is the ability to reduce the costs of failure should a new product, investment, or service fail to take off. 

Of course, joint enterprises also have risks, including battles over control between the two businesses. Unless both parties are willing to sacrifice at least some of their self-interest, the venture will likely be unsuccessful, costing both sides valuable time and money.

Joint Venture Agreements 

Before launching a joint venture, the parties should resolve a number of legal issues, including the structure and management of the joint venture, the financial contributions of each party, the mutual goals and objectives of the parties, the duration of the partnership, and the protection of intellectual property.

In JRAP Enterprises Inc. v. Zucaro Construction, the New York Supreme Court emphasized that in order for joint venture agreements to be enforceable, they must also include a provision for sharing profits and losses. Because the essential elements of a joint venture had not been properly alleged, the court dismissed the plaintiffs’ claim for breach of fiduciary duty. 

In the lawsuit, the plaintiffs alleged that they entered into a joint venture agreement with the defendants to perform house-lifting services after Hurricane Sandy. The plaintiffs allege that the defendants, who entered into subcontracts with general contractors to perform the work, agreed to pay the plaintiffs 10% of the gross payments received by the defendants for each subcontract. According to the plaintiffs, they have not been compensated for more than 40 subcontracts, although they have performed. Their lawsuit sought to recover damages for breach of contract, breach of fiduciary duty, an accounting, breach of the implied covenant of good faith and fair dealing, quantum meruit, and unjust enrichment. The defendants move to dismiss several causes of action, including breach of fiduciary duty. 

In granting dismissal, Justice Elizabeth Hazlitt Emerson noted that an indispensable essential of a contract of joint venture is a mutual promise or undertaking of the parties to share in the profits of the business and submit to the burden of making good the losses. She further emphasized that it is not enough that two parties have agreed to act in concert to achieve some stated economic objective. Rather, “a plaintiff seeking to establish a joint venture must prove more than a simple contractual relationship, and it is insufficient for a plaintiff to allege mere joint ownership, a community of interest, or a joint interest in profitability,” she wrote. “Intent to submit to the burden of making good the losses of the other is indispensable. Additionally, the value of services is not sufficient to satisfy the required sharing-of-losses element.”

Applying New York’s joint venture law to the facts of the case, Justice Emerson concluded that the plaintiffs failed to meet their burden to establish that a joint venture had been established. She wrote:

The plaintiffs allege that they agreed “to accept the loss of being denied any compensation for the multitude of hours of uncompensated time and expenses incurred by them in performing the work . . . if the subcontracts, or any of them, were not awarded to Defendants or if Defendants were not paid for their work through no fault of their own.” The plaintiffs have failed to allege a mutual promise or undertaking to share the burden of the losses of the alleged enterprise. The plaintiffs’ allegations amount to nothing more than an agreement to risk losing their own expenses and the value of their own services. The failure to allege an agreement to share losses precludes finding that there was a joint-venture agreement. 

Key Takeaway

For small businesses, joining forces with another business can speed up growth, increase productivity, and boost profits. However, when forming a joint venture, it is imperative to understand your legal rights and obligations. As highlighted by the New York Supreme Court’s recent decision, it is also imperative to make sure that your legal agreement actually establishes an enforceable joint venture.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Michael Sheppeard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.