There are many important provisions to include in joint-venture agreements between contractors pursuing a project. (For a list of five important provisions to include in joint-venture agreements, click here.) One important thing to address in a joint-venture agreement is how capital contributions will be handled.
Here are questions to consider when drafting a capital call provision in a construction joint-venture agreement:
- Who will determine that additional capital is required for the joint venture to complete the work?
- Who has to agree with that determination? In joint ventures with more than two contractors, will it be a simple majority vote or will unanimous consent be required?
- If unanimous consent is required, will one of the joint venture partners—likely the majority partner—have the right to make a unilateral capital call when/if the majority partner decides that without the capital, the joint venture cannot successfully complete the project?
- How will disagreements regarding capital calls be handled? If unanimous consent is required for capital calls, how can the partner who believes that additional capital is needed to complete a project challenge the other partner’s refusal to contribute capital to the joint venture? If a partner may make a unilateral capital call, how may the other partner challenge that capital call as unreasonable?
The above questions are worth considering and expressly addressing in a construction joint-venture agreement. If language addressing the above questions is not included, there may be disputes between partners in a construction joint venture as to capital calls.
There have been at least a couple of significant, recent disputes regarding this issue. One of those disputes is currently being litigated in a federal court lawsuit between two contractors—Archer Western and The McDonnel Group.
The Facts—A dispute with a public owner leads to capital calls for a joint venture.
In Archer Wester Contractors, LLC v. The McDonnel Group, LLC, two contractors—Archer Western and The McDonnel Group—formed a joint venture to complete an inmate processing center building for a sheriff’s department in Louisiana. Archer had a 70% interest in the joint venture and McDonnel held the other 30%.
During construction of the project, the joint venture had disputes with the owner about amounts owed to the joint venture. In particular, the joint venture had a multimillion dollar claim against the public owner for owner-caused and created costs. As a result, the majority partner—Archer—determined that the joint venture required additional working capital contributions from the parties.
The Lawsuit—The majority partner sues the minority partner for its failure to make capital contributions.
The minority partner—McDonnel—failed to make the requested capital contributions. Archer made around $6 million in capital contributions to the joint venture, which allegedly included amounts McDonnel should have contributed. And as a result, Archer sued McDonnel for breach of the joint-venture agreement.
McDonnel filed a motion for partial summary judgment in which McDonnel contended that Archer’s claims related to McDonnel’s failure to contribute capital to the joint venture should be dismissed. McDonnel argued that it did not breach the agreement because its obligation to contribute additional working capital was never triggered.
Under the joint-venture agreement, McDonnel contended that there was a two-step process for capital calls. First, the “Managing Party,” which was Archer, determined the need for working capital and the due date for that capital. Second, the “Executive Committee” would consider Archer’s determination and if the Executive Committee unanimously approved Archer’s determination, then that determination conclusively bound the parties.
The rub was that the Executive Committee was only comprised of two members—one for Archer and one for McDonnel. And the members’ voting rights were proportional to their interests in the joint venture. In other words, Archer’s vote was worth 70% and McDonnel’s was worth 30%. That meant that for votes where unanimous consent was not required, Archer could out vote McDonnel with Archer’s single vote.
Archer argued that once it determined there was a need for capital, its determination was binding. Archer further contended that if the Executive Committee’s unanimous approval were required, it would lead to an absurd result that “a 30% partner [McDonnel] can unilaterally plunge the Joint Venture into insolvency and force the Joint Venture to abandon its obligations in a major public infrastructure project without repercussions.”
The court agrees with the minority partner’s argument and dismisses the majority partner’s claims related to the failure to make capital call contributions.
Ultimately, the court granted McDonnel’s partial summary-judgment motion and dismissed Archer’s claims related to McDonnel’s purported failure to make capital contributions. The court reasoned that the relevant language in the joint-venture agreement “unambiguously demonstrates that a party is not bound by the Managing Party’s determination, and thus subject to the default provisions of [the capital call provisions], unless the Executive Committee unanimously approves the determination.”
The court further noted that other provisions of the joint-venture agreement supported the court’s conclusion. For example, the court wrote that:
the plain language in Article 4(f)(iii) provides that “[t]he Executive Committee shall have power and authority to review for approval the Managing Party’s recommendations in such matters as the overall plan for execution of the Work, determination of the amount of working capital required, [and] the timing of calls for working capital contributions.
Read along with the two-step approval process outlined above, “this process demonstrates that it is the Executive Committee which approves the Managing Party’s ‘recommendations’ as to the ‘determination of the amount of working capital required’ and the timing of when the working capital shall be provided.”
The court found that since “there was no underlying obligation to make the working capital contributions, [McDonnel] cannot be said to have been in default such that the provisions [addressing capital calls] apply. Accordingly, the Court grants [McDonnel’s] Motion for Partial Summary Judgment to the extent it seeks dismissal of any and all claims related to [McDonnel’s] purported failure to make working capital contributions.”
Bottom Line: If you are a contractor looking to form a joint venture with another contractor, always consider how capital calls will be handled. Based on the above Archer case, the joint venture partners should make sure they are on the same page as to capital calls. The clearer you can be about the requirements for capital calls, the more likely you can reduce your chances of having future disputes. (If you would like to read more about creating joint ventures to bid on public projects, click here.)
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