Risks of Contractual Joint Ventures for Government Contracts

Parties pursuing government contracts or grants enter into joint ventures for many reasons. But joint venture participants often are unaware of the legal implications of operating as a contractual joint venture, as opposed to establishing a separate legal entity. In many states, a contractual joint venture is treated like a general partnership. Each partner is jointly and severally liable. Consequently, in the event that significant liabilities arise because of one party’s faulty performance, the government customer may be able to recover damages from the joint venture and each joint venture participant.

By contrast, a joint venture in the form of a limited liability entity provides a layer of protection for each party.

Despite the risks, sometimes organizations conclude that they prefer doing business as a contractual joint venture rather than forming a limited liability entity. In that case, they should take care to draft a joint venture agreement that minimizes the pitfalls of a contractual affiliation. Four of the most important contractual provisions to focus on are (1) choice of law, (2) waiver of fiduciary duties, (3) statement of purpose and (4) termination.

Government contractors and grant recipients should seek to avoid entering into contractual joint ventures under the laws of states that deem the joint venture participants to be general partners with joint and several liability. If there are compelling reasons to do so, however, participants should consult with counsel to prepare their joint venture agreement so it will not create unintended liabilities.