A recent decision in the Suffolk County Commercial Division clarifies the requirements for establishing a joint venture and provides litigants with a clear example of a potential pleading pitfall with respect to claims relating to joint ventures.

Plaintiff JRAP Enterprises, Inc. (“JRAP”) is a construction consultant that advises both contractors and property owners on house lifting, renovation, and construction on Long Island and in New York City.[1] Last year JRAP filed a complaint in Suffolk County’s Commercial Division alleging that defendants Zucaro Construction, LLC (“ZC”) and Zucaro House Lifters, Inc. (“ZHL”) entered into a joint venture agreement with JRAP to perform house lifting services following Hurricane Sandy.[2] ZC specializes in commercial construction while ZHL was formed after the hurricane caused extensive flood damage in the state in 2012. According to the complaint, ZHL works with ZC in the performance of subcontracts awarded to ZC to move homes damaged by the storm and lift them onto a raised foundation to mitigate flood damage from future storms.[3]

Following Hurricane Sandy, various government-financed programs were initiated in the region to help with the massive recovery.[4] Contracts were awarded to several general contractors who then engaged subcontractors to work on various construction projects. Defendants planned to bid for contracts to lift or reconstruct homes and allegedly engaged JRAP to help them prepare the bids, represent them in negotiating with the general contractors, work with experts in preparing the actual lifts or reconstructions, and consult with various inspectors. Defendants also allegedly engaged JRAP to administer the subcontract and to make arrangements for payment to Defendants from the general contractors. Within this arrangement, the parties agreed that JRAP would receive ten percent of the gross payment for each subcontract when it was paid by the general contractors. Supervision of the subcontracts awarded by the general contractors were allegedly to be jointly controlled by the parties.[5]

In its complaint, JRAP alleged that Defendants failed to pay them for over forty subcontracts in New York City. JRAP asserted causes of action for: (1) breach of contract, (2) breach of fiduciary duty, (3) breach of the implied covenant of good faith and fair dealing, (4) unjust enrichment, (5) quantum meruit, and (6) also alleged that they were entitled to an accounting. Defendants moved to dismiss the causes of action for breach of fiduciary duty and an accounting, both of which require a plaintiff to demonstrate the existence of a fiduciary relationship above that of mere contractual partners The Court granted Defendants’ motion, finding that JRAP failed to adequately plead that there was a joint venture agreement between the parties sufficient to establish such a fiduciary relationship.

The Court of Appeals has described a joint venture as “a special combination of two or more persons where in some specific venture a profit is jointly sought. It is in a sense a partnership for a limited purpose, and it has long been recognized that the legal consequences of a joint venture are equivalent to those of a partnership.”[6] Similarly, the First Department has explained that “[t]he indicia of the existence of a joint venture are: acts manifesting the intent of the parties to be associated as joint venturers, mutual contribution to the joint undertaking through a combination of property, financial resources, effort, skill or knowledge, a measure of joint proprietorship and control over the enterprise, and a provision for the sharing of profits and losses.”[7]

Citing both New York and federal cases, the Court here emphasized this last element: “[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.”[8] As the Court continued, it is not enough that a plaintiff show that the parties agreed to act together to achieve a common goal, joint ownership, a community of interest, or a joint interest in profits.[9] Instead, “[i]ntent to submit to the burden of making good the losses of the other is indispensable.”[10]

The Court found that JRAP had failed to establish this intent to share losses based on the facts alleged in the complaint. Specifically, JRAP alleged that it alone had agreed “to accept the loss of being denied any compensation for the multitude of hours of uncompensated time and expenses incurred” in performing the work described above. This acknowledgment, the Court found, demonstrated that JRAP failed to allege any mutual promise to share in the burden of any losses suffered by the alleged enterprise.[11] “The failure to allege an agreement to share losses precludes finding that there was a joint-venture agreement.”[12] As another court has phrased it, if plaintiff “were correct that simply expending efforts to set up a venture were sufficient to satisfy the essential element of sharing of losses, the requirement could nearly always be satisfied.”[13]

Ultimately, the Court held that in the absence of a joint venture, the parties merely had a contractual relationship, which was insufficient to give rise to the type of fiduciary relationship that is a perquisite to claims for breach of fiduciary duty. Moreover, the Court recognized that JRAP’s fiduciary duty claim was likely doomed for the additional reason that it was duplicative of the breach of contract claim. In the absence of a fiduciary relationship, the Court was similarly compelled to dismiss JRAP’s claim for an accounting.

While JRAP was unable to adequately plead the existence of a joint venture, the hurdles to doing so are not insurmountable. In fact, a party need not show an express agreement regarding the sharing of losses for a joint venture to exist.[14] For example, in Don v. Singer, 92 A.D.3d 576, 577 (1st Dep’t 2012), the court found an issue of fact to exist as to whether the parties had entered into a joint venture where defendant was silent when provided with various agreements and when repeatedly introduced as plaintiff’s partner. The Don court explained that a joint venture agreement need not even contain a provision specifying that losses be shared where there is no reasonable expectation of losses.[15] Such an agreement can also be implicit or based on a preliminary agreement.[16] Litigants asserting claims for breach of fiduciary duty should pay careful attention to this guidance when seeking to establish the requisite fiduciary relationship by alleging the existence of a joint-venture agreement. [17]