What are the fiduciary duties of a construction joint venture partner?

Understanding Fiduciary Duty in Construction Joint Ventures: Beyond General Partnership Principles

At its core, a construction joint venture is a business marriage of necessity, not convenience. While general partnership law provides the baseline, the unique pressures of a construction project—finite timelines, shared control of a physical site, interdependent safety, and the flow of progress payments—transform a standard legal concept into a live operational mandate. Why does this matter? Because the legal foundation isn’t just academic; it dictates daily behavior. The shared control over project-specific capital and assets creates an immediate relationship of trust and confidence that courts recognize as fiduciary in nature, regardless of how the parties label their agreement.

What 99% of articles miss is the profound impact of construction-specific statutes on this duty. Mechanic’s lien laws, for instance, create a scenario where one partner’s failure to pay a subcontractor can result in a lien against the entire project, directly harming the other partner. This statutory intertwining of interests intensifies the fiduciary relationship beyond what exists in a standard commercial partnership. The seminal case of Meinhard v. Salmon established that joint adventurers owe each other the “punctilio of an honor the most sensitive,” a principle that courts consistently apply to construction JVs. Crucially, this duty is not something partners can contract away entirely. While a well-drafted joint venture agreement can define the scope of business and set governance rules, it cannot legally permit a partner to act in bad faith or for purely self-interested gain to the JV’s detriment.

In real life, this means a partner cannot secretly use the JV’s bonding capacity, built through shared financials, to bid on a separate, competing project. They cannot withhold crucial safety information about site conditions that only their crew has discovered. The fiduciary duty is activated by the project’s unique capital structure—where each partner’s equipment, labor, and financial guarantees are commingled toward a single, indivisible goal. For experts, the nuance lies in how courts balance this duty against the reality that JV partners often have other, independent business interests. The trend is toward a “duty of fair dealing” within the defined scope of the JV project, not a blanket prohibition on all outside activity. However, any activity that leverages the JV’s resources, reputation, or confidential project information for purely personal gain will almost certainly be deemed a breach.

The Heart of the Matter: The Duty of Loyalty in JV Agreements

The duty of loyalty is the engine room of fiduciary obligation in a construction JV. It matters because its breach is the single greatest source of litigation and partnership collapse, directly eroding profit margins and destroying professional reputations. It moves beyond the textbook definition of “putting the JV’s interests first” into a series of daily, high-stakes decisions where self-interest and collective interest collide.

How does this work on a live project? Consider these concrete manifestations:

• Subcontractor & Supplier Selection: A partner cannot steer a lucrative electrical package to their own affiliated subcontracting company without full transparency and, often, without offering the other partner a chance to bid or propose an alternative. This is a prime example of a conflict of interest prohibition in action.
• Equipment & Resource Allocation: A partner with a crane cannot charge the JV an above-market rate for its use while their own separate, adjacent project uses that same crane at a subsidized cost. This constitutes a form of profit diversion.
• Change Order & Claim Management: A partner handling negotiations with the owner cannot settle a time-impact claim for a quick payment that benefits their cash flow if it extinguishes the other partner’s larger, more valid delay damages.
• Overhead & Cost Allocation: “Shared” project management overhead cannot be inflated by one partner loading costs from their other struggling projects onto the JV’s books.

What most analyses overlook is the judicial evolution around “undivided loyalty.” Courts increasingly recognize that construction partners are not monastic; they have other projects and businesses. The modern test isn’t whether a partner has other interests, but whether they have disclosed them and ensured that actions taken for the JV are free from the influence of those outside interests. For example, a partner may legitimately use their own procurement department to buy materials for the JV, but they must pass on all volume discounts and rebates to the joint entity, not skim them for their separate company.

Operationalizing Loyalty: Disclosure Obligations and Conflict of Interest Prohibitions

Theoretical loyalty is meaningless without enforceable mechanisms. This is where disclosure obligations and explicit conflict of interest prohibitions transform principle into practice. Why does this operational layer matter? Because it creates the “bright-line” rules and processes that prevent misunderstandings and provide a clear path for legal remedies for breach of fiduciary duty.

In real life, effective operationalization looks like this:

Potential Conflict Scenario	Required Disclosure & Prohibition	Practical Governance Mechanism
Partner’s affiliate company is a potential subcontractor.	Full written disclosure prior to any bid solicitation. Prohibition on unilateral award.	JV agreement clause requiring competitive bid from 3rd parties OR a pre-agreed, audited cost-plus fee structure for the affiliate.
Partner has an opportunity to bid on an adjacent project that may compete for resources.	Mandatory pre-bid notification to JV management committee.	Governance clause requiring committee review to assess resource conflict; may trigger right of first refusal for the JV or a resource capacity fee.
Partner learns of a potential project claim (e.g., differing site conditions) before the other.	Immediate disclosure obligation. Prohibition on private settlement discussions.	Contractual clause designating a single claims manager for the JV and requiring both partners’ signatures on any settlement.

The actionable pattern for partners is to draft for transparency and process, not just prohibition. A common and catastrophic mistake is using vague language like “partners shall avoid conflicts of interest.” This is unenforceable. Instead, the agreement must define a “Conflict” (e.g., any financial interest, direct or indirect, in a transaction involving the JV), mandate a disclosure process (to whom, in what format, with what timing), and outline the consequences (e.g., the non-conflicted partner makes the decision, the conflicted partner forfeits their profit share on that transaction).

What 99% of articles miss is the critical link between these operational clauses and ultimate dissolution rights upon breach. A material and unremedied breach of these disclosure and conflict rules is often grounds for the wronged partner to petition a court for dissolution of the JV or buyout of the breaching partner. This isn’t just an exit strategy; it’s a powerful deterrent baked into the agreement’s architecture. The remedies for breach must be explicitly tied to these operational failures, specifying whether damages are limited to disgorgement of ill-gotten profits or can extend to consequential losses suffered by the JV.

Ultimately, operationalizing loyalty is about creating a system where the immense pressure of a construction project—tight margins, urgent decisions, complex supply chains—does not break the bond of trust. It forces potential conflicts into the light early, where they can be managed, rather than allowing them to fester in the shadows until they explode in litigation. For a deeper dive into structuring the foundational agreement that houses these critical clauses, see our guide on how to structure a construction joint venture agreement.

The Practical Framework for Managing Conflicts and Disclosures

In a construction joint venture, conflicts of interest aren’t theoretical legal concepts; they are operational landmines buried in daily decisions. The constant flow of procurement, subcontractor selection, and change order approvals creates a high-frequency environment for undisclosed loyalties to cause catastrophic cost overruns and erode trust. The fiduciary duty of loyalty in JV agreements demands proactive management precisely because construction is a series of interconnected financial transactions where a single undisclosed relationship can skew the entire project’s economics.

Effective management requires a construction-specific framework for disclosure obligations. This isn’t about annual ethics training; it’s about embedding transparency into the project’s workflow. A robust protocol must define three elements: what, when, and how.

• What Must Be Disclosed: Go beyond generic “any conflict” language. Mandate disclosure of:
  • Any ownership interest in or material financial benefit from a proposed subcontractor, supplier, or equipment lessor.
  • Any affiliate pricing for materials, even if “market rate,” with full transparency on the affiliate’s cost structure.
  • Participation in competing bids on adjacent or related projects that could impact resource allocation or proprietary data.
  • Potential subcontractor or vendor kickbacks, including non-cash benefits like future work promises.
• When Disclosure is Required: Tie disclosure to the project’s critical path:
  • During the initial estimating and bidding phase, before final JV formation.
  • Prior to any formal recommendation for a subcontractor award or major purchase order.
  • During change order processing, if the change benefits a party with whom the proposing partner has a relationship.
  • Upon discovery of a new conflict, with a requirement for immediate (e.g., within 72 hours) written notice.
• How Disclosure is Made: Formalize the process to create an audit trail. “Informal” hallway conversations are insufficient. Require written disclosure via a standardized form submitted to the JV’s managing committee or designated compliance officer, with acknowledgment of receipt.

What 99% of articles miss is the emerging pitfall of digital conflicts. Shared project management software (like Procore or Autodesk Build) creates data access that can itself be a conflict. For instance, if Partner A’s affiliate is bidding as a subcontractor, and Partner A’s employees can see the real-time bids from competitors within the software, that access must be disclosed and walled off. Modern conflict of interest prohibitions must govern data permissions and user roles within shared digital platforms, not just paper contracts.

For beginners, the mandatory step is establishing this written protocol in the JV’s operating agreement from day one. For experts, the actionable checklist involves drafting clauses that:
1. Define a “Disclosable Interest” with concrete, industry-specific examples.
2. Establish a standing “Conflict Review Committee” with equal representation.
3. Integrate disclosure forms into the project’s financial software for automatic flagging.
4. Link undisclosed conflicts to specific contractual penalties, such as the forfeiture of the right to propose vendors in that category for a defined period.

Preventing Profit Diversion: Forensic Vigilance in Project Accounting

Profit diversion prohibitions are the financial backbone of the duty of loyalty. In construction, diversion is rarely a brazen theft; it’s a sophisticated manipulation of the project’s complex cost accounting, often disguised as legitimate project expenses. It matters because it directly cannibalizes the profit pool, leading to disputes that can halt work, trigger liens, and dissolve the venture. The inherent opacity of construction job costing—with hundreds of cost codes, change orders, and allocation of shared equipment—creates the perfect camouflage.

Partners must be vigilant against industry-specific evasion tactics:

• Inflated Affiliate Invoicing: A partner routes work to its own subsidiary subcontractor or equipment rental company at above-market rates. The safeguard is a pre-agreed “affiliate pricing schedule” in the JV agreement, requiring costs to be at or below verifiable open-market rates, with third-party benchmarking.
• Misallocated Shared Costs: Charging a disproportionate share of a piece of equipment (e.g., a crane) or a shared project manager’s salary to the JV, while using the resource for the partner’s separate projects. The remedy is a detailed, pre-approved cost allocation formula for all shared resources.
• Manipulated Retainage Handling: A partner in charge of collections might delay calling in retainage from its favored subcontractor, effectively providing them an interest-free loan at the JV’s expense, impacting cash flow. Governance clauses must specify strict, timely retainage enforcement protocols.
• Change Order Padding: Submitting or approving change orders that include costs for work already within the original scope or that benefit the partner’s other projects.

Forensic accounting in construction looks for specific red flags that differ from standard corporate audits. These include:

Red Flag	Construction-Specific Investigation
Abnormal cost code variances	Compare unit costs (e.g., cost per cubic yard of concrete) against regional benchmarks and the original estimate, not just budget-to-actual.
Undocumented field adjustments	Scrutinize “field adjustments” or “crew overtime” tickets that lack supporting daily reports, photos, or superintendent approval.
Consistent subcontractor selection	Analyze bid tabulations; a pattern of selecting the highest bidder from a limited pool requires justification.
Timing of vendor payments	Audit A/P for accelerated payments to affiliate companies versus standard net-30 terms for others.

For beginners, recognizing these warning signs starts with demanding transparent, detailed job cost reports. For experts, drafting requires building audit triggers into the profit diversion prohibitions clause. This includes the right to conduct a targeted forensic audit at the suspecting partner’s expense if red flags are identified, with the cost reimbursed by the breaching partner if diversion over a defined materiality threshold (e.g., 2% of the partner’s share) is proven. Clauses should also specify the use of a CPA firm with specific construction industry expertise for any dispute-related audit. For foundational financial tracking, partners should develop a solid construction business plan with clear accounting protocols from the outset.

Legal and Practical Remedies When Trust Breaks Down

When a breach of fiduciary duty occurs, the project doesn’t pause for litigation. Understanding the arsenal of remedies for breach of fiduciary duty is critical for damage control and strategic positioning. The goal is not just punishment, but project preservation and financial recovery. The legal theories available—accounting, constructive trust, monetary damages—intersect with practical construction realities like completion bonds, lien deadlines, and owner relationships.

The primary remedies include:

1. Compensatory Damages: The most common remedy, aiming to make the non-breaching partner “whole.” In construction, this is complex. It’s not just the diverted profit. It includes:
   • The increased cost to complete work using a non-affiliate subcontractor.
   • Overhead and profit margin lost on the diverted scope.
   • Interest on misallocated cash.
   • Costs of the forensic accounting investigation.

   Proving these damages requires meticulous job-cost records, highlighting why sound financial management is a fiduciary duty in itself.

2. Constructive Trust & Accounting: A court can impose a “constructive trust” on the diverted funds or assets purchased with them (e.g., a piece of equipment). An “accounting” is a detailed equitable remedy forcing the breaching partner to justify all financial transactions, often the first step in untangling complex project finances.
3. Injunctive Relief: A court order to stop ongoing harmful conduct. This is vital mid-project. For example, a court can enjoin a partner from continuing to use JV assets for its own projects or from directing further work to an undisclosed affiliate.
4. Forfeiture of Fees & Profit Share: The JV agreement can (and should) stipulate that a material breach results in the forfeiture of the breaching partner’s share of the management fee or even its profit participation. This is a powerful contractual deterrent.

The most critical, underreported remedy is the strategic trigger of dissolution rights upon breach. A well-drafted JV agreement will define a material fiduciary breach as a dissolution event. This isn’t merely an exit; it’s a leverage tool. It allows the non-breaching partner to force a buyout of the breaching partner’s interest, often at a discounted value, or to take over the project entirely. In the middle of a bonded project, this threat can force a swift settlement. However, the pitfall is navigating the terms of the completion bond and owner contract during dissolution, which requires careful coordination to avoid default. The process must be structured to ensure a smooth transition, as outlined in guides on structuring joint venture agreements.

What 99% of articles miss is the “reputational damage multiplier” in construction. A public lawsuit over fiduciary breach can trigger default clauses in the project owner’s contract, damage bonding capacity for all partners, and lead to decertification from programs like DBE or MBE. The remedy often sought is not just money, but confidential arbitration and a structured exit that allows the project to continue without public scandal. The true consequence is often an uninsurable loss of reputation, making prevention through clear governance, as detailed in resources like contract review best practices, the only cost-effective strategy.

From Theory to Job Site: The Real-World Efficacy of Fiduciary Breach Remedies

In theory, the law provides a robust toolkit for a wronged joint venture partner. In the chaotic reality of a live construction site, these theoretical remedies for breach of fiduciary duty often collide with immovable deadlines, bonded contracts, and half-built structures. Understanding this gap between legal principle and practical enforceability is what separates strategic partners from litigants facing pyrrhic victories.

Why Standard Legal Remedies Stumble on the Job Site

The core challenge is that construction is a forward-moving, capital-intensive process. A court order for disgorgement of profits from a diverted change order sounds powerful, but it does not pour concrete or placate an owner threatening liquidated damages for delay. The most potent remedy, an injunction or specific performance to stop a conflicted action, is often viewed skeptically by courts if it would bring the entire project to a halt, harming innocent third parties. The legal system moves at the speed of law; construction projects move at the speed of crane cycles and drying concrete. This mismatch often forces the aggrieved party into a brutal calculation: pursue the ideal remedy and risk project failure, or seek monetary damages later while the breaching partner remains in control.

Strategic Selection of Remedies Based on Project Phase

The phase of the project dictates the viable strategic response. This is the calculus most articles miss.

Project Phase	Viable Primary Remedies	Strategic Rationale & Real-World Limitation
Pre-Construction / Bidding	Injunction, Declaratory Judgment, Dissolution	Leverage is highest before mobilization. Stopping a bad-faith bid or conflicty procurement is clean. The primary risk is lost opportunity cost, not a physical project in jeopardy.
Active Construction	Expedited Arbitration, Constructive Trust, Court-Appointed Receiver	Project continuity is paramount. A constructive trust on misappropriated funds can be effective, but tracing commingled progress payments is forensically complex. A receiver can oversee finances but may lack construction expertise, creating new friction.
Post-Construction / Closeout	Disgorgement, Monetary Damages, Dissolution & Accounting	The project is complete, so remedies focusing on financial reckoning are most feasible. However, collecting a large judgment from a potentially asset-light JV entity is a separate battle. The threat of dissolution rights upon breach finally becomes a clean tool for winding up affairs.

Recent case outcomes underscore this pragmatism. Courts are increasingly reluctant to order remedies that functionally destroy the JV mid-project unless the breach is egregious and goes to the venture’s very heart. A partner secretly bidding against the JV may trigger dissolution; a partner allocating slightly more overhead to shared equipment likely results in a post-project damages award. The emerging trend is toward court-mandated “cooling-off” periods and ordered buy-outs, allowing the project to proceed while resolving the partnership dispute—a nuance rarely captured in legal textbooks.

For the expert, the key insight is to draft the JV agreement with this enforceability timeline in mind. Specify that fiduciary disputes are subject to expedited arbitration with an arbitrator possessing construction industry knowledge. Pre-define a buy-sell process or the appointment of a neutral project manager as an interim remedy, preventing the “nuclear option” of dissolution from being the only tool available. This aligns your contractual leverage with the practical reality that the show must often go on. For more on foundational business structuring, see our guide on LLC vs. sole proprietorship for contractors.

Beyond Boilerplate: Drafting JV Governance Clauses for Construction Realities

Generic joint venture agreements are a fiduciary hazard. In construction, where conflicts are not just financial but operational, precision in drafting JV governance clauses is your first and most critical line of defense. The goal is to remove ambiguity—the breeding ground for disputes—by anticipating the unique pressures of a job site.

Key Construction-Specific Clauses and Tactical Language

Move beyond stating a duty to avoid conflicts. Define them with surgical precision and create mechanisms for transparency.

1. Material Conflict Thresholds: Instead of “any conflict,” define it objectively. “A ‘Material Conflict’ under this Agreement shall include, but not be limited to: (a) a Partner or its affiliates bidding, directly or indirectly, on any project within a 50-mile radius that falls within the JV’s defined specialty (e.g., municipal wastewater plants) as stated in Exhibit A; (b) the sourcing of materials or subcontractors from an affiliate at a markup exceeding 5% of open-market rates; (c) the allocation of owned equipment to the JV at a rate exceeding 80% of the current Ritchie Bros. auction average for comparable machinery.”
2. Real-Time Financial Transparency: Mandate technology, not just periodic reports. “Partners shall maintain all JV financial records on the integrated cloud-based platform [e.g., Procore, QuickBooks Online] with full audit access granted to each Partner. All project invoices, change orders, and payroll records shall be uploaded within 48 hours of issuance or receipt.”
3. Objective Equipment & Cost Allocation: Eliminate arguing over “fair share.” “Overhead equipment costs shall be allocated based on verifiable telematics data (e.g., GPS hourly usage) submitted weekly. If telematics are unavailable, allocation shall follow the Associated General Contractors (AGC) published equipment rental guidelines for the region.”

Addressing Emerging Issues: Force Majeure and Data

Modern drafting must cover new frontiers. A force majeure event (e.g., a material shortage) doesn’t suspend fiduciary duties; it transforms them. Your clause should state: “In the event of a force majeure affecting material supply, Partners have an enhanced duty to jointly seek alternative sources and may not preferentially allocate constrained materials to their separate projects.” Furthermore, with Building Information Modeling (BIM), data is a critical asset. Specify: “The JV shall own all BIM models and data. No Partner may use the project’s BIM data for proprietary machine learning training or for bidding similar future projects without the JV’s express written consent and a defined revenue-sharing agreement.”

The strategic takeaway is that governance clauses must act as a pre-litigation dispute resolution manual. For every potential conflict, the agreement should answer: How is it defined? How is it discovered? How is it resolved? This turns a legal document into an operational one. For the financial planning that underpins such a venture, review essential financial statements for construction.

Structuring the Exit: Dissolution Rights and Project Continuity

The ultimate test of a JV agreement is not how it governs success, but how it manages a breach-driven collapse. An automatic dissolution right upon breach is a blunt instrument that can destroy more value than it protects, leaving a partially built structure and a furious client. Sophisticated agreements plan for a controlled demolition, not a sudden implosion.

Phased Dissolution and the “Wind-Down” Procedure

The clause must separate the dissolution of the partnership from the completion (or orderly transfer) of the project. Key components include:

• Safety & Site Handover Protocol: A mandatory 30-day transition period where the non-breaching partner (or a neutral third-party manager) assumes control of site safety, securing materials, and preserving work-in-place.
• Lien Bond Obligations: A requirement that the breaching partner fund, or jointly fund, a lien bond to release any claims against the project, ensuring the client’s property is clear. This ties directly to understanding how to avoid mechanic’s liens.
• Client Contract Continuity: A pre-authorized assignment mechanism that allows the non-breaching partner’s company to step into the JV’s shoes under the prime contract, subject to client consent (which the breaching partner must cooperate in securing).

Valuing the Unfinished: Calculating Termination Damages

This is where most generic agreements fail. Damages must be construction-aware. A robust clause will specify that termination damages calculations must incorporate:

1. The estimated cost to complete the remaining work, based on a mutually agreed-upon third-party estimator.
2. Lost productivity impacts (e.g., remobilization costs, learning curve for a new crew).
3. Any liquidated damages the JV may now owe the owner due to delays caused by the breach and dissolution process.
4. The value of the work-in-progress, calculated using the percentage-of-completion method, not just costs incurred.

The expert-level strategy is to negotiate a “right to cure” for certain breaches and a “buy-out option” as an alternative to dissolution. For example, if a partner fails to disclose a conflict, the other partner may have the right to purchase their interest at a formula-driven discount after a 15-day cure period. This preserves the project entity and continuity. Ultimately, the goal of these clauses is not to make dissolution easy, but to make breach so costly and operationally disruptive that the fiduciary duties are self-enforcing. For partners considering this complex structure, beginning with a solid construction business plan is the essential first step in aligning long-term objectives.