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June 20, 2023 Construction

Ethical Issues Arising in Joint Venture Representation

Jeffrey R. Cruz, Harper Heckman and Denise C. Puente

I. Introduction

The joint venture (“JV”) is a well-established business structure for construction contracting.  A JV can avoid some of the formal trappings of a partnership or corporation, and is typically created to achieve a specific short-term goal. Joint venture “members,” “constituents” or “partners” combine their capital, resources, and attention in pursuit of a specific undertaking, and share responsibility for profits and losses. The parties can opt to have the joint venture exist as a separate legal entity or they can form the JV on a purely contractual basis. Joint ventures are generally limited-term endeavors, with an average length of three years; however, construction joint ventures are typically intended to last the duration of a specific project.  Due to the short-term nature of most JVs, and the presence of multiple partners with potentially conflicting interests, attorneys representing JVs and/or the JV members can face a myriad of ethical quandaries while performing their roles.

The joint venture arrangement allows two or more construction companies to share the risks presented by a large or mega project, but there are various other situations where a joint venture can make sense, including: formation of a design-build (D/B) or engineer/procure/construct (EPC) entity; marrying the resources of a building contractor and a heavy civil contractor, or a specialty contractor and a general contractor; and joining forces with a disadvantaged business enterprise.

As with any engagement involving the potential for divided loyalties, attorneys representing joint ventures and/or their constituents must remain mindful of the old adage that “a lawyer can serve only one master.”  This is particularly true when the attorney brings to the joint venture representation of a pre-existing relationship with one of its constituents.   In this excerpt from the paper presented at the Forum’s 2022 Annual Meeting, the authors explain the ethical considerations relating to client loyalty in JVs. 

II. Representing Joint Venturers in preparing their Joint Venture Agreement

When representing a joint venture, a lawyer’s first task is often to prepare the joint venture agreement itself.  The Agreement should properly identify and define the individuals empowered to make decisions on behalf of the Joint Venture and the method by which such decisions are to be made.  The Agreement should also anticipate future disputes, especially regarding unforeseen costs and expenses.   Examples of typical disputes arising among joint venturers include:

a.   Control – clearly identify which JV Partner has decision-making power in specific enumerated situations which the parties anticipate may arise over the course of the project;

b.   Capitalization, Costs, and Profit Sharing – specify in detail how the JV is funded and how profits are divided;

c.   Disputes/Liability – detail how liability is to be allocated for particular matters which may arise with respect to the project;

d.   Indemnity for Bonding – identify which parties are required to execute general indemnity agreements with the sureties and the amounts to be covered by each such agreement; and

e.   Proprietary Information and Intellectual Property – identify with specificity the individuals or entities that own information acquired, used, or created over the course of the project.

Proper structuring of the joint venture helps avoid some of the conflicts that may otherwise arise during the representation. Clearly defining the partners’ shared responsibilities; requiring the partners to maintain their individual identities; assuring the continual transfer of resources; and, prohibiting divisibility of the project all add a measure of certainty to the relationship of the joint venture partners.

Attorneys should anticipate that the ability to effectively represent jointly represented clients may be impacted where:

  •  The clients have divergent objectives;
  •  The facts require the attorney to advocate antagonistic positions between two or more clients in the same manner;
  •  The attorney receives conflicting instructions from each client;
  •  One client requests that information be withheld from the other;
  •  A preexisting relationship with one client causes the attorney to favor that client’s interests over another’s; or,
  •  The attorney has been requested to represent the second client as an “accommodation” to the first.

Lawyers asked to prepare joint venture agreements sometimes mistakenly assume that they can discharge the ethical duties simply by following the directions of their clients.  However, that is an inappropriate assumption because “a lawyer must accept responsibility to give customary advice and customary range of legal services, unless the clients have given their informed consent to a narrower range of the lawyer’s responsibilities.”

Even where prospective joint venturers express their belief that they are pursuing a common objective, one or both clients might not fully understand the potential for conflict between them. However, “a lawyer is not required to suggest or assume discord where none exists, but when a conflict is reasonably apparent or foreseeable, the lawyer may proceed with multiple representations only after all affected clients have consented….”

These conflicts may be waived by informed consent in situations where it is reasonably likely that the lawyer will be able to provide adequate representation to all affected clients.  An attorney of a Joint Venture should consider narrowing the scope of representation to specific components or issues common to all clients. This anticipation by the attorney will help both the Joint Venture and the attorney avert problems before they arise.

III. The Representation of Both the Joint Venture and its Constituents

Determining to whom a lawyer’s fiduciary duties attach requires answering the question of whether the lawyer represents the Joint Venture, one or more of its constituents, or both.

The Model Rules do not specifically address whether the lawyer represents the Joint Venture or its constituents. However, “in light of the general proposition embodied by Model Rule 1.13 [Organization as Client] that an organization is separate from its constituents . . . establishing that all of a corporate client’s affiliates should be considered clients of a lawyer is unwarranted.” An attorney “retained to represent only the Joint Venture entity represents the entity itself – not its partners.”  The Restatement makes clear that, unless the lawyer and those constituents enter into an attorney-client relationship, the constituent is not a client of the lawyer.  Consequently, unless the attorney and the partners of the Joint Venture have expressly agreed to individual representation, the attorney only represents the Joint Venture – not its partners.   

An attorney-client relationship is a question of contract law, but can also be a question of fact depending on the circumstances.

An attorney representing a Joint Venture is required to communicate with its constituents to adequately carry out the representation per Model Rule 1.4. Accordingly, such communications are privileged and protected from disclosure to third parties.

When an attorney represents only the Joint Venture, the duty of confidentiality is owed only to such entity – not to its Joint Venture partners or its constituents.   Accordingly, an “attorney representing the Joint Venture may disclose to its constituents only that information which the Joint Venture has explicitly authorized or which is impliedly authorized as necessary to carry out the representation.”   

Importantly, communications between an attorney and the constituents of a Joint Venture “client,” by themselves, do not create an attorney-client relationship with those constituents.  Thus, the attorney representing the Joint Venture “is not required to keep confidential from others in the organization information obtained from [a constituent of the JV] that is personally harmful to the individual who communicated it.”

Nor is the fact that a client’s fees are paid by others, by itself, dispositive on the issue of whether an attorney-client relationship has or has not been established.  While some joint ventures pay for their representation directly, in other situations, one or more joint venture partners may pay these bills.  However, absent informed consent by the client, “a lawyer may not represent a client if someone other than the client will wholly or partially compensate the lawyer for the representation,” to prevent the lawyer’s loyalty from compromise. Even though, “a legal fee may be paid … by a third party, a lawyer must protect the confidential information of the client” from the third party.

IV. Obtaining Consent to Represent Both the Joint Venture and its Constituents

Absent informed consent, a lawyer may not represent a client if the representation would involve a conflict of interest.  A “conflict of interest is involved if there is a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s  … duties to another client, a former client, or a third person.”

Regarding joint ventures specifically, the Restatement provides: “[u]nless all affected clients consent to the representation under the limitations and conditions provided in Section 122, a lawyer may not represent both an organization and a director, officer, employee, shareholder, owner, partner member, or other individual or organization if there is a substantial risk that the lawyer’s representation of either would be materially affected by the lawyer’s duties to the other.”  Even client consent will not allow a lawyer to represent both clients if one will assert a claim against the other. Under the circumstances, it is not likely that the lawyer will be able to provide adequate representation to one or more of the clients.

If the co-clients can consent to a conflict, it is critical that such consent be “informed.”  Under Rule 1.7, if the attorney reasonably believes that he can competently and diligently represent each joint venture partner, the attorney must receive informed consent, in writing, from all the parties.

Section 122 of the Restatement provides “[i]nformed consent requires that the client or former client have reasonably adequate information about the material risks of such representation to that client or former client," which depends on the nature of the potential conflict and risks of the representation. Generally, each client must give an affirmative response for the informed consent to be valid.

A client may at any time revoke consent.  However, such revocation only prevents the lawyer from continuing to represent the other clients if the revocation was justified (such as because of a material change in the factual basis on which the client originally gave informed consent) and whether material detriment to the other client or lawyer would result.”  “The terms of the consent itself can control the effects of revocation of consent.”  Therefore, attorneys asked to represent co-client joint venturers should take special care in identifying the factual basis upon which the consent was given, the circumstances under which the joint representation might be terminated, and the lawyer’s and co-clients’ ensuing rights and obligations.  

The fact that both joint venturers find themselves in litigation does not necessarily require the withdrawal of representation unless the clients become opposed to each other in that litigation.  Absent informed consent, a lawyer in civil litigation may not represent two or more clients if there is substantial risk that the lawyer’s representation of one client would be materially and adversely affected by the lawyer’s duties to another client.   As such, “multiple representation is precluded when the clients, although nominally on the same side of the lawsuit, in fact have such different interests that representation of one will have a material and adverse affect on the lawyer’s representation of the other.”

For example, while two joint venturing co-defendants will usually prefer to see a plaintiff’s claims against them defeated altogether, if this does not occur, the co-defendants may often prefer to see liability deflected mainly or entirely on their co-defendants, particularly if their joint venture agreement allows for indemnification under such circumstances.  Conversely, if the parties’ joint venture agreement clearly provides for how ultimate responsibility for the joint venture’s potential liabilities will be divvied up among the joint venturers, then the co-client joint venturers may each benefit from maintaining a “unified front” against the plaintiff, while avoiding the additional expense associated with separate counsel.

Another important consideration in determining the appropriateness of common representation is the effect the representation will have on the attorney-client privilege and client confidentiality. Communications between the co-clients do not receive the benefit of privilege if litigation between the co-clients ever ensued. The lawyer should, at the outset of the common representation, receive informed consent from the parties, advise the parties that information will be shared, and that the lawyer will have to withdraw from representation because the lawyer’s equal duty of loyalty to the clients will be infringed upon. There are, however, limited circumstances where the lawyer has obtained informed consent thay they can keep certain information from the other client. However, lawyers should carefully consider whether they can fairly represent both co-clients knowing they must withhold certain information from one of the clients. 

As with other issues of joint venture representation, proper documentation of both the attorney and client constituents’ roles and expectations is essential. At a minimum, that writing should identify the attorney’s prior relationship with all constituent members of that joint venture and clarify under what circumstances the attorney will be allowed to represent one joint venture partner in future matters in which the interests of the joint venturing co-clients might become adverse.  

V. Conclusion

Properly planned and executed joint ventures provide many advantages to companies. However, while there are many advantages, joint venture lawyers should be alert to the complexity of the relationships within this structure. In properly navigating this complexity, lawyers should focus on having proper communications with the joint venturers and drafting a well-structured Joint Venture Agreement. Proper communication consists of a lawyer receiving the necessary consent from the joint venturers to represent the Joint Venture and disclosing to whom the lawyer owes fiduciary duties. A well-drafted Joint Venture Agreement will anticipate future disputes and unforeseen costs and expenses.

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Jeffrey R. Cruz

Skanska USA Building Inc., New York, NY

Harper Heckman

Maynard Nexsen, Greensboro, NC

Denise C. Puente

Simon, Peragine, Smith & Redfearn, New Orleans, LA