Joint Venture Agreements: For Better or For Worse; In Profit or In Loss
November 04, 2021
Just like a bride and groom vow to join together for better or for worse, commercial parties joining together through a joint venture must make a similar promise to share in profits andlosses. In a recent decision from the Suffolk County Commercial Division, Justice Elizabeth H. Emerson took a close look at the parties’ “vows” and determined that no joint venture agreement existed where one party did not truly agree to share in the venture’s losses.
In JRAP Enters., Inc. v Zuacro Constr., LLC, Plaintiffs JRAP Enterprises, Inc. and principal Joseph Rapaport alleged they entered into a joint venture agreement with Defendants Zucaro Construction, LLC and Zucaro House Lifters, Inc. to lift houses after Hurricane Sandy. Plaintiffs allege in their Complaint that Defendants engaged Plaintiffs to provide their expertise, time and skill to assist with preparing bids for contracts to lift homes under Long Island’s New York Rising and Recovery and “Build it Back” programs.
According to Plaintiffs, Defendants entered into several subcontracts with general contractors to perform work on lifted homes and agreed to pay Plaintiffs 10% of the gross payments received by Defendants for each subcontract. After not being compensated on more than 40 subcontracts, Plaintiffs commenced an action 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. Defendants moved to dismiss the causes of action for breach of fiduciary duty, an accounting, and breach of the implied covenant of good faith and fair dealing. Plaintiffs opposed and cross moved to amend the Complaint.
The Court first addressed Plaintiffs’ second cause of action for breach of fiduciary duty which alleged that the Defendants’ failure to pay the agreed compensation to Plaintiffs was a breach of their fiduciary duty to Plaintiff. Recognizing that the cause of action was based on the alleged joint venture agreement, the Court looked to see if the essential elements of a joint venture had been properly alleged.
When seeking to establish a joint venture agreement, allegations of mere joint ownership, community of interest, joint interest in profitability, and acting in concert to achieve some stated economic objective are all insufficient. More than a simple contractual relationship is required. As the Court instructed,
“[a]n 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.”
Here, the Court found Plaintiffs failed to allege a mutual promise to share in the “burden of the losses.” Plaintiffs alleged that the parties 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.” In other words, Plaintiffs only agreed to risk losing their own expenses and the value of their own services, not the losses incurred by the venture, which was insufficient to establish a joint venture agreement.
What Plaintiffs actually alleged was a basic contractual relationship. Because it is well settled that parties engaged in an arms-length business transaction are not fiduciaries, and a breach of fiduciary duty cannot be based on the same facts and theories as a breach of contract claim, the Court dismissed the second cause of action for breach of fiduciary duty.
The Court went on to dismiss Plaintiffs’ third cause of action for an accounting because a cause of action for accounting cannot stand in the absence of a fiduciary relationship; the fourth cause of action for breach of the implied covenant of good faith and fair dealing as unopposed; and Plaintiffs’ cross-motion to amend the Complaint because Plaintiffs’ proposed amended complaint did not cure the pleading deficiencies of the original Complaint.
When alleging the existence of a joint venture agreement, it is crucial to allege a mutual promise or undertaking of the parties to share not only in the profits but also the losses of the joint venture. A party’s agreement to bear their own individual losses are insufficient.