A recent decision from the U. S. District Court for the Middle District of Florida, is a MUST READ for any lawyer or construction executive involved with joint ventures (“JV’s”). This decision provides a rare, detailed look into the contentious dynamics at play when JV relationships go bad. The case also discusses how the relationships between design-builder JV partners were affected by (1) the purchase of a JV partner by a foreign entity and (2) affiliated entities being part of the JV concessionaire. The decision in Lane Constr. Corp. v. Skanska USA Civ. Se., Inc., Case No. 6:21-cv-164-RBD-DCI, 2024 U.S. Dist. LEXIS 80882 (May 3, 2024), does not mark any new legal principles, but does detail how the legal opinions of various JV lawyers and the business discussions of JV partners can be unexpectedly discovered and thrust into the litigation spotlight.
The case arose out of Florida’s largest construction project ever: the “I-4 Ultimate Project” – a six-year, $2 billion reconstruction of more than 20 miles of highway, spanning from Longwood through Orlando. The Project took a year longer and cost $125 million more than anticipated. Ultimately, the three contractors in the design-build JV that built the Project ended up $500 million in the hole and in litigation among themselves. The court noted how the “construction world is a small one,” given that the JV partners had worked together before.
The Project was a public-private partnership (“P3”) financed partially by the state (FDOT) and partially by a private concessionaire that would profit by maintaining the road over time. I4MP, an entity made up of Skanska Infrastructure Development and John Laing was chosen as the concessionaire. To perform the construction, I4MP engaged a design-build JV, Skanska-Granite-Lane (“SGL”), made up of majority partner Skanska SE (40%) and minority partners Granite (30%) and Lane (30%).
The court noted how the partners’ relationship “was cordial” when the project began in 2015 but had deteriorated badly by 2018 with the Project over budget and behind schedule. Lane was purchased during construction by a foreign company (WeBuild) which dramatically impacted the JV partners’ relationship. As the losses grew and the partners faced multi-million-dollar capital calls, they sought strategies to stop the bleeding. SGL focused on two options: (1) negotiating a global resolution with FDOT for more funding and a time extension, or (2) demanding that the concessionaire give notice to FDOT to terminate the Project.
In a detailed and well-reasoned memorandum, SGL’s outside counsel cautioned against the termination option which would “lead to ruined reputations and protracted litigation.” As a result, the SGL partners pursued the settlement option. As negotiations with the state began to bear fruit, Lane (with its purse strings pulled tight by its new foreign guarantor, WeBuild) reversed course and decided it wanted to pursue the termination option. The other JV partners disagreed with Lane and accepted settlement with the state in 2020. Settlement resulted in $124 million payment from FDOT and a near year-long extension of the completion date. The settlement also curtailed SGL’s exposure to liquidated damages by reducing the delay-related damages from about $178k per day to about $4,600 per day—a good deal because SGL was facing potentially $90 million in delay-related liquidated damages when the settlement was negotiated. And, while the deal waived SGL’s ability to pursue termination, it permitted SGL to file a cumulative impact claim, seeking recovery of an additional $368 million for other issues. Despite the settlement, the losses kept mounting.
In 2021, Lane stopped paying its capital calls and sued the JV managing partner, Skanska SE, claiming that Skanska SE breached its fiduciary duties by accepting the settlement with FDOT over Lane’s objection. It argued that Skanska SE, a member of the design/build JV, had been working in favor of its affiliate, Skanska ID, which was a member of the concessionaire JV. Skanska SE, in turn, sued Lane for breaching the SGL partnership agreement by failing to pay the capital calls. Ultimately, all three JV partners and the JV ended up in the lawsuit. Skanska SE and Granite kept funding the Project pending the dispute. The opinion describes how the purchase of Lane by a foreign company led to “hotheads” from Italy coming over with a more aggressive and uncooperative attitude. The opinion cites damaging internal emails from the foreign entity WeBuild and how capital calls were made with mounting losses.
In determining whether there was a breach of fiduciary duty, the court relied heavily upon the various legal memoranda prepared by SGL’s counsel that pointed out numerous disadvantages and risks in the termination option. Indeed, SGL even sought opinion memoranda from two separate law firms to confirm their understanding of the risk of the termination option. The court also looked at email communications between Skanska SE’s in-house counsel and SGL’s outside firm. While Lane argued the emails indicated Skanska SE’s in-house counsel was trying to influence SGL counsel, the court found that the emails indicated nothing nefarious but instead showed that SGL’s counsel was trying to understand all options available to SGL, including termination and the potential consequences. Presumably, the many lawyers who proffered their legal opinions in this dispute did not anticipate that those opinions would become the key evidence is subsequent litigation. Despite the warnings by SGL’s outside counsel, Lane (pushed by WeBuild), wanted to pursue the termination option. In October of 2018, Lane’s outside counsel provided a memorandum about the termination option, opining that it was the “best opportunity for SGL to avoid the losses it is projected to incur through completion.” The production of these legal memoranda and opinions in the litigation, and extensive discussion of them in the court’s opinion, will alarm lawyers advising construction JV’s and the JV partners as they deal with ongoing JV disputes.
After Lane’s counsel’s memorandum was produced, SGL’s counsel produced yet another memorandum outlining further risk in proceeding with the termination option. Despite Lane’s attempts to align the other minority partner, Granite, with its position, Granite agreed with Skanksa SE and SGL’s counsel that the termination option was not in SGL’s best interest. The court noted that Granite’s alignment with Skanska SE weighed heavily on its finding that rejecting termination was in SGL’s best interest.
Similarly, the decision is a must read for CEOs as it reveals how their conduct will also come under the spotlight in litigation. The Court’s opinion details various JV partner meetings debating the business risks involved and the alleged self-interest of the other JV partners. Nor did the executives involved anticipate that attendees’ “body language and facial expressions” would be the subject of courtroom testimony and a judicial decision later.
The Court summarized that at the end of 2018, the factors weighed by the JV about the termination option were as follows: (1) two of SGL’s outside firms had strongly warned against pursuing the termination option based on several elements of risk; (2) there were doubts as to whether I4MP would terminate even if SGL requested it; (3) there were significant questions about whether SGL could prove the requisite delay to justify termination; (4) FDOT cautioned that it would view a termination option very poorly; (5) there were colorable questions about what would happen to SGL’s obligations under the design build agreement even if FDOT agreed to terminate the Concessionaire Agreement; (6) walking off the Project would subject SGL to potentially unlimited damages, and no one actually planned to walk off the Project; and (7) executives of all JV partners were concerned about the impact of the companies’ reputations if they were to terminate. Based on these factors, the court agreed that it was in the JV’s best interest to decline to pursue the termination option and instead pursue settlement negotiations. Indeed, the court determined that choosing the settlement option over termination “was a no-brainer, not a breach.”
The court reasoned that whether there were some conflict of interest given Skanska SE’s relationship with Skanska ID was of no moment, and that the dispositive question was whether Skanska SE acted on that conflict to Lane’s detriment, which the record shows it did not. The court also pointed out that the damage to Lane was purely speculative – even Lane conceded that no one knew exactly what would have happened had the JV made a demand for termination. Thus, the court found that the overwhelming evidence established that Skanska SE acted in the best interest of SGL and its partner in rejecting the termination option and that Lane owed its JV partners $80 million.
The opinion gives a detailed account of how a high-profile, high-risk JV went bad on a high-profile project and the internal legal and business risk debates that were conducted during the dispute. The opinion is a comprehensive study for lawyers and CEOs advising JV’s on the risks in managing a large JV project suffering financially.
