Fiduciary Responsibility and Joint Ventures
Learn the different duties of trust and good faith that co-venturers owe to each other and their joint venture.
Parties to a joint venture owe duties of trust or fiduciary responsibilities to their co-venturers. Two or more individuals or businesses may enter into a contract to form a joint venture. Typically joint ventures are temporary partnerships aimed at achieving a certain business purpose or set of goals. Joint ventures do not need to be formed to make profits, but may seek to achieve important business objectives, such as the construction of a real estate project or research and development of new products. The life of a joint venture may be further limited by an established termination date or the completion of a certain event, such as the end of a construction endeavor or the introduction of a new product to the marketplace.
Here are some key points on fiduciary responsibility and joint ventures.
General Partner Rules Apply
Partnership law governs most joint ventures. Co-venturers share joint and individual liability for each other’s actions, similar to general partners. Fiduciary duties that attach to general partners also apply to co-venturers in joint ventures. State partnership laws, judicial decisions, and the provisions of your joint venture agreement may further determine your fiduciary responsibilities to your co-venturers.
Duty of Good Faith and Fair Dealing
This duty of trust requires co-venturers to display honesty and to act in good faith when participating in the management and operation of their joint venture. This obligation is a continuing one that begins at the joint venture’s formation and continues through the daily operations of the entity until the business purpose is achieved or the joint venture relationship is concluded. The duty of good faith and fair dealing provides a basic foundation for all of the fiduciary duties of co-venturers.
Fiduciary Duty of Loyalty
Under the duty of loyalty, co-venturers must put the achievement of the shared goals of their joint venture above their individual or business interests. Co-venturers need to avoid conflicts of interest between their personal or business objectives and the joint venture’s commercial concerns. This duty may be especially challenging in instances when parties in a joint venture possess a wide range of commercial interests outside of their joint enterprise. It may be permissible to obtain an individual or commercial advantage from a joint venture opportunity after fully disclosing and obtaining the prior approval of your co-venturers.
Fiduciary Duty of Care
The fiduciary duty of care focusses on business conduct that exhibits reasonably prudent judgment in carrying out joint venture duties and pursuing proper business objectives. For example, if a joint venture is focussed on new product development, it would be reasonably prudent to assess other competitive products in the marketplace and to complete adequate safety testing of product prototypes. Failure to do so may be viewed as violating this duty and could result in unlimited personal liability for harm to your co-venturers or other third parties. However, co-venturers, like general partners, are not expected to be perfect. Applying the business judgment rule, a co-venturer normally is not liable for unsuccessful business decisions which were made in good faith and with the exercise of reasonable care and judgment.
Fiduciary Duty of Disclosure
To make informed decisions, co-venturers need to be able to speak with candor about the daily activities and direction of their joint venture. Appropriate disclosures amongst co-venturers are essential to assess potential pitfalls, opportunities, and courses of action related to attaining your joint venture’s goals. As stated earlier, the duty of disclosure is also closely intertwined with revealing potential conflicts of interest that impact the commercial interests of your joint venture.
Altering Fiduciary Duties
The overall scope of your fiduciary duties may be more limited than a general partnership due to its short-term nature and the focussed business goal of a joint venture. Since most joint ventures are creatures of contract law, co-venturers may have an option to restrict, broaden, or eliminate fiduciary duties by agreement, Such alterations may be permissible if reasonable in your situation and in compliance with applicable law. Consider consulting a business lawyer to determine if you may expand, limit, or eliminate certain fiduciary duties in your joint venture agreement.