Introduction to Minnesota’s Joint Venture Law
A joint venture is an association of two or more parties to pursue a certain business purpose. These parties can be individuals or entities such as partnerships, businesses, or corporations. The joint venture, once formed, belongs to one of three classes: partnership, contractual, or corporate. Corporate joint ventures arise when the parties choose to actually create a new corporate entity. This entity would be governed by corporate law. Contractual joint ventures are defined by the terms of the joint venture agreement, and are governed by the laws of whatever business form the agreement chooses. Forming an LLC is a popular choice; in Minnesota, the laws governing LLC’s mirrors those that govern corporations. If no business form election is made, the default business form for Minnesota is the general partnership (or a sole proprietorship if there is only one owner). As such, this overview will focus on partnership joint ventures, including contractual joint ventures which have not designated a different business form.
Partnership Join Ventures
Partnership joint ventures are governed by Minnesota Partnership Law, codified in Minnesota Statute 323A.
Comparing Joint Ventures to Partnerships
A joint venture and a partnership are very similar, but have a few differences. First, a joint venture can be formed by people or businesses, whereas a partnership is sometimes limited to natural persons. In Minnesota, however, “person” is statutorily defined to include any legal or business entity, such as a corporation, partnership, or trust. Second, a joint venture is formed to bring about a single business objective, not necessarily tied to profit. For example, two companies might pool resources to develop a new technology that each will then use separately. Partnerships, alternatively, are more profit driven; they exist to make money, not to help other entities make money. Third, because of the goal-oriented nature of joint ventures, they are narrower in scope and more temporary than partnerships. Parties retain more of their own identities, and once the goal has been accomplished, a joint partnership can terminate. A partnership, on the other hand, continues until it is dissolved by the parties, and arguably creates a stronger relationship between the parties. This last difference may have relevance in determining the level of fiduciary duties owed by co-venturers to each other.
There are many business reasons to form a joint venture, such as matching money with labor or intellectual property, spreading risk, accessing new markets, and aiding in the acquisition of funding. This entity can also be advantageous relative to partnerships in that there is somewhat less of a commitment. The venture is limited in scope and time, and consequently the co-ventures are not as tied to each other as might be the case in a partnership.
According to the statute, two or more persons carrying on as co-owners a business for profit have formed a partnership. A partnership (or a partnership joint venture) can be formed with or without the intent of the parties involved.
The first issue raised by this language is determining whether a partnership has been formed. Because no intent is required, two people can easily create a partnership without knowing. All that is necessary is that the business is carried on for profit, with the two partners acting as owners. Similarly, a joint venture can be started by the actions of the two parties—it is not necessary that the parties use the title “joint venture” or file any documents.
The second issue is whether or not someone is a partner, or co-venturer. The statute provides that “a person who receives a share of the profits of a business is presumed to be a partner”, unless received as one of the following types of payment: payment of a debt, payment for services (or wages), payment of rent, payment of an annuity or other retirement benefit, payment of interest on a loan, or payment for the sale of goodwill or other property. Again, there is no requirement that the person be formally titled “partner”; the actions of the parties can determine the person’s role. As such, an important factor in making this determination is whether an alleged partner was paid some sort of lump sum or wage (indicative of a debt collector or an employee) or received payment tied to the success of the business (indicative of a partner/owner). Another important factor is the amount of control an alleged partner has within the partnership. If he or she can vote on important matters or has veto power, this cuts in favor of that person being a partner. This determination is important because of its implications regarding potential liability.
Liability to Third Parties
The action of any partner apparently carrying on in the ordinary course of business binds the partnership. The statute makes a point to include the word “apparently”, removing any question of a distinction between apparent and actual authority. So, even if a partner has not been given authority to act for the partnership in a certain matter, the partnership would be liable to the third party for that partner’s commitments (though in this instance, the partner would likely be individually liable to the partnership). This includes liability for both contract obligations and torts committed, so long as they arose while the partner was acting in the ordinary course of business. Even if acting outside the ordinary course of business, there is liability for the partnership if the other partners authorized the act.
There is no liability, however, if the third party had notice that the partner did not have authority. Also, if the partner’s actions are outside of the ordinary course of business, the partnership is not liable. It is unclear from the statute from whose perspective these actions are viewed, though, which could arguably make a difference in how broadly “ordinary course of business” is interpreted.
In a general partnership (and so, in a joint venture), each partner is jointly and severally liable for the obligations of the partnership. This means that if the partnership is unable to pay its debts, each partner would have an obligation to repay the debt, and the private assets of each partner would be at risk. While this burden might sometimes be split between several partners, a partner would have to personally pay the full amount owed if the other partners were insolvent. Fortunately, this personal liability can be avoided by the creation of a limited liability entity such as an LLP or LLC, possibly the first task a business attorney should carry out for his or her client. Even with such a structure, however, each partner is individually liable for his or her own torts.
Liability to the Partnership…Fiduciary Duties
Each partner owes to the partnership the fiduciary duties of care, loyalty, and good faith. The duties of care and loyalty can be limited somewhat, as long as the limitation is not “unreasonable”. Still, fiduciary duties in the partnership context are stringent, placing the “highest obligation of good faith, loyalty, fidelity, fair dealing, and full disclosure” on the fiduciary (Commercial Assoc. v. Work Connection, Inc., Minn. Ct. App. 2006). It is important to note that full disclosure requires a fiduciary to make others aware of important information, even if not directly asked. Breach of fiduciary duties includes usurpation of a partnership opportunity (ex, Triple Five), where a partner takes for his own benefit an opportunity that arose out of the business of the partnership. Potentially, this duty is less broad in a joint venture, even though the statutory terms are the same, because the specific business objective of the joint venture is usually identified specifically in writing and features a termination date or event. As such, a joint venture may be less inclined to have interest in a loosely related opportunity than a partnership, which supports a lower standard of fiduciary duties. Still, courts have been very willing to relate an opportunity to both partnerships (ex, Miller v. Miller, Minn. 1974) and joint ventures (ex, Meinhard v. Salmon, N.Y. 1928), and it is not clear that any distinction exists. In Meinhard, a joint venture aimed at converting a hotel into shops and businesses included a set termination date; the parties had signed a 20 year lease on the hotel property, and the joint venture would expire at the end of that period. Near the end of the lease, a third party approached Salmon about extending the lease to undertake another project, and Salmon accepted in his individual capacity. Even though this new project would being after the first joint venture had ended, and such a continuance would thus be outside the objective of the venture, the court found still that Salmon had a fiduciary duty to disclose the opportunity to the joint venture. This case is widely known and cited, and shows that fiduciary duties are strictly enforced, even in joint ventures.
Joint Venture Agreement
Potential partners usually entrust an attorney to help them draft a joint venture agreement. Many future disputes must be addressed at the outset; it is helpful to have an experienced third party point out what these issues are. A joint venture agreement should address the following items: a business objective, the participation and management roles of the parties, the contribution of capital and ownership rights to property, division of profits and losses, a dispute mechanism that can resolve a deadlock, and termination provisions. Minnesota Statute 323A gives certain default provisions for these issues; however, nearly all of these provisions can be changed or contracted around if the parties so choose. There are limitations, though, and the parties must stay within the legal limitations placed on the entity they choose. For example, a partnership joint venture might include in its agreement that third parties cannot sue the venture for the damages caused by the actions of the co-venturers. However, such a clause would be invalid under Minnesota Partnership Law.
Summary of Minnesota’s Joint Venture Law
Partnership joint ventures differ from partnerships in that they focus on a particular goal, rather than just carrying out a profitable business, and because of this are often temporary. They can be created by any person or business entity, and can be formed by the actions of these parties—no intent is required. The benefits to forming a joint venture are many, and it’s a widely used business form. Partnership joint ventures are governed by Minnesota Partnership Law.
Clients planning to start a joint venture might need attorney assistance both in the choosing of a business form (establishing limited liability is critical) and in the drafting of the joint venture agreement. In doing so, the attorney should alert the co-venturers of potential pitfalls, and force them to address these difficult issues in the agreement.
Disputes regarding joint ventures will likely be contractual, involving either a disagreement in the interpretation or execution of the contract, or an issue involving the validity of clauses that may clash with governing law. Fiduciary duties provide another variety of dispute, since co-venturers owe the duty of care, loyalty, and good faith to the venture. Courts view these duties as very important, and have read them broadly and enforced them strictly. In particular, courts have regulated the usurpation of opportunities belonging to the joint venture, and co-venturers may need counsel in regard to fiduciary duties claims. Additionally, co-ventures are liable to third parties for the contractual and tort obligations of its co-venturers, as are the co-venturers absent limited liability. Representation may be needed in such disputes. Finally, there may be an issue as to whether a joint venture has been formed or whether a certain person should be considered a co-venturer, since either can be established by actions alone. This determination has importance because of its effect on liability.