Considerations in Joint Venture Formation and Litigation

Many government contractors are motivated to enter into joint venture (JV) agreements to capture business. They might do so because the cost of capture is too high for them to manage themselves, or because the contract requires past performance, licensure, or a skill set that they do not possess. As a result, they search for JV partners.
Unfortunately, these relationships of convenience are often strained to the point of failure as a result of the difficulties of managing difficult requirements and the frequent “finger pointing” between the JV members when the USG client raises performance concerns. This often devolves into litigation or arbitration.
Below are some of the issues government contractors should consider when entering into such agreements. This list is by no means exhaustive – it is only meant to serve as a “jumping off” point as one considers entering into a Joint Venture, or, if one is in a failing JV relationship, to identify some of the issues one should consider before going down the path towards litigation.

Due Diligence on potential JV Partner(s)

“We needed someone with an Iraq Security License.”
“We needed someone with past performance managing OCONUS performance involving 100+ contractors.”
“We needed someone with demonstrated financial strength.”
“We needed a partner with planes we can get in the air ASAP.”
These are all considerations we have seen and heard as attorneys to government contractors in failing JV relationships. Very rarely do we hear about any due diligence done on the potential JV partner. Yes, the potential partner may have something you need, but you would be well served to do a deep dive on the potential partner’s business practices, litigation history, proof of performance, and financial stability BEFORE you agree to enter into an agreement.

Division of Labor – how detailed should it be?

Many JV agreements fail because no one can agree on whose fault it is when certain metrics aren’t achieved or “balls are dropped.” The cliché “Success has many parents, but failure is an orphan” is instructive here. If taskings aren’t specifically delineated, expect conflict when there is some failure. While even the most clearly delineated taskings cannot prevent bad conduct, if there is a well defined “rule book” to cite to when things go sideways, you will be much better armed for what comes if litigation ensues (as long as you aren’t the one who dropped the ball).

Financial Responsibilities

One of the most significant responsibilities to be considered in any joint venture are financial responsibilities. Who is responsible for proposal costs? If I have a 25% responsibility, what is my recourse if my 75% JV partner is a profligate spender who is wasting money left and right before the contract is awarded? Are there requirements for capital contributions? Can I be diluted if I refuse to contribute in response to a capital call? What about “loans” from or services provided by an entity affiliated with a JV partner – are these self-interested transactions (they are) and how will they be treated? What if my partner is in financial distress, but not bankrupt? These few examples are not academic musings – we have seen them all in failed joint ventures or prime/sub relationships that ended in arbitration or litigation.

A good JV agreement needs to consider these potential pitfalls, have fair and equitable ways of dealing with them, and robust procedures short of full blown litigation (or arbitration) to try to smooth over any difficulties.

ADR, Arbitration, or Litigation? Or “all of the above”?

Arbitration was created to save litigants from the runaway costs of civil litigation. That may have been the concept, but it is rarely the reality. Other than the most simple of disputes, for which arbitration can actually be more efficient, one should consider whether (if the “correct” forum is chosen, see below) litigation might be a better option than arbitration. If a JV Agreement has a permissive (vs. mandatory) arbitration clause, consider the pros and cons of each venue.

While we may be a bit pessimistic about arbitration as an efficiency-creating time- and money-saver, having some form of mandatory non-binding alternate dispute resolution (ADR) process can often be valuable. Even if the ADR process is merely that the parties are forced to have a face-to-face meeting to discuss the disputed issues, and give the aggrieving party an opportunity to resolve whatever is aggrieving the other party, it can serve a number of valuable roles. First, and least likely, everyone could decide to put down their guns and work out their differences. It happens (rarely). Second, it allows the parties to get a broader understanding of the other side’s position – facts, emotion, strengths, and weaknesses. This is all valuable data if things move on to litigation or arbitration. Third, it allows the party to take a measure of the persons involved in the disputes. If my putative adversary’s “star witness” is e.g., nervous, arrogant, dishonest, etc. and I learn that during the ADR process, then it was time well spent.

Choice of Law, Choice of Forum

The JV agreement can (and most likely will) say where any dispute must be litigated (choice of forum) and what law will be applied to interpret the JV Agreement (choice of law). Both of these are crucial considerations.  Laws (even fundamentals of contract law) can vary broadly from state to state. And different courts (state and federal) have their own personalities – all of which must be considered when creating the JV Agreement.

Loser Pays
Loser pays is exactly what is sounds like – a provision in the JV Agreement that says if there is a dispute that results in arbitration or litigation, the loser shall pay the winners costs and attorneys fees. Such provisions serve as a disincentive against frivolous claims, and can level the playing field between JV members of unequal financial means. Any potential litigant must assume that, even with a “loser pays” provision, 100% of your legal spend will not be recouped, even in a decisive victory. The fee petition itself may be hotly litigated, with expert reports (and possibly testimony) on each side.

Conclusion

These are just a few of the many considerations a party should consider at the formation of a Joint Venture Agreement. For each of the examples listed above, the lawyers at Ward & Berry have a real-world example illustrating how important these factors can be. If you are considering entering into a Joint Venture Agreement, or find yourself in a decaying JV relationship, give us a call. We’d love to help.