In the complex world of joint ventures, companies often will attempt to work together, while avoiding the term of art of “joint venture” in order to avoid potential legal implications that may follow. Take, for example, a recent case involving Michael Hiatt, an employee of Western Plastics, flame-retardant plastic manufacture. While working on the plant, Mr. Hiatt’s arms were amputated after they were pulled into the metal rollers of an extruding machine. While the machine was owned by Western Plastics, the formula and material to make Formex were owned by ITW. ITW agreed to share its formula and materials with Western in exchange for Western sharing its increased efficiencies. However, the contract did not provide for any sharing of company profits or losses based on the sales of Formex. Furthermore, the contract stated that neither party was an agent of the other, but it was silent on whether the parties shared a joint venture.
In this case, ITW and Western Plastics attempted to exist separately and avoid the joint venture label. ITW maintained that, since the contract claimed the two parties were independent contractors, they could not be held as a joint venture. The court, however, saw it differently. While a joint venture is typically a creature of contract, the formation of a joint venture does not need to be spelled out by a contract. Instead, a joint venture exists when entities intend to work together on an enterprise. In particular, the court put an emphasis on whether losses and profits are shared between the parties. Here, there was no clear cut sharing of profits or losses. Instead the companies would share the “benefits of any increased efficiencies.”
Despite lacking clear language regarding a joint venture, the court saw an intertwined business relationship where the revenues and expenses of the businesses were divided along the same lines as the manufacturing. The court identified “a long-term, closely intertwined relationship, in which [the companies] dealt nearly exclusively with each other, jointly contributed equipment and raw material and worked together to implement mutually beneficial ‘cost improvements.’” The court concluded that Hiatt had enough evidence to support a finding that a joint venture existed.
The result of this decision could have significant implications for contractually independent companies. In this case, the court looked beyond the traditional requirements of a joint venture. By the plain language of the settled case law, a joint venture requires profit and loss sharing. In this case, no such sharing existed, yet the court found that the fundamental purpose of the ITW and Western’s contract was to work in a joint enterprise. In other words, the Court liberally applied the joint venture test to find that a joint venture could exist.
While a written contract can provide many protections and even define the nature of a relationship between two business entities, this decision underlines that the written text of a contract is not where parties should draw the line. Instead, careful businesses must review their actual business practices and relationships with entities to ensure adequate separation to avoid potential joint liability. The attorneys at Rock Fusco & Connelly, LLC can help you properly understand your business relationships and contracts to ensure that you and your company are fully protected.