When two construction firms form a joint venture (JV) to pursue a mega-project, they are not merely signing a teaming agreement. Under the Revised Uniform Partnership Act (RUPA), which governs most JVs in the United States, they are creating a legal relationship that triggers strict fiduciary duties. These duties mandate the highest standard of honesty, loyalty, and care toward the partner.
Quick Answer: The Core Fiduciary Duties in a Construction JV
Under RUPA § 404, a construction JV partner owes two primary fiduciary duties, plus one critical contractual obligation:
- Duty of Loyalty: You must prioritize the JV’s interests over your own. No self-dealing, no competing with the JV, and no secret profits.
- Duty of Care: You must not engage in gross negligence or reckless disregard for the project’s success. (Simple mistakes are standard contract breaches; fiduciary breaches require a higher threshold of failure).
- Duty of Good Faith and Fair Dealing: While technically a contractual obligation rather than a strict fiduciary duty under RUPA, courts treat it as such in JVs. You cannot manipulate project controls (e.g., front-loading the Schedule of Values) to unfairly prejudice your partner’s financial position.
In the trenches of heavy civil, commercial, or industrial construction, fiduciary breaches rarely look like outright embezzlement. They look like operational shortcuts: hoarding critical RFIs, leveraging the JV’s bonding capacity for a side job, or steering subcontracts to a partner’s affiliate. Understanding these duties—and how to enforce them—is the only way to protect your firm from catastrophic joint-and-several liability.
The Legal Baseline: RUPA and the LLC Caveat
It is critical to understand your entity structure. If your JV is structured as a general partnership, RUPA’s fiduciary duties are mandatory and generally cannot be waived.
However, many modern construction JVs are formed as Limited Liability Companies (LLCs). In states like Delaware or New York, an LLC Operating Agreement can explicitly waive or modify fiduciary duties, provided the waiver is not manifestly unreasonable. If your JV agreement is silent on this, default state LLC statutes will apply, which often mirror RUPA’s strict loyalty and care standards. Always have counsel review the specific statutory defaults of the state governing your JV.
The Construction Reality: How Fiduciary Breaches Happen on the Jobsite
Disputes rarely start with malicious intent. They start with operational shortcuts that blur the line between the partner’s corporate interests and the JV’s mission. Here is how abstract legal duties translate to daily jobsite realities, and how to fix them.
| The Action | The Legal Breach | Operational Fix |
|---|---|---|
| Front-loading the Schedule of Values (SOV) for your specific scope to extract early cash. | Good Faith / Loyalty (extracting cash at the partner’s expense, starving their cash flow). | Require the JV Controller and a financial representative from the other partner to jointly approve the final SOV before submission to the owner. |
| Withholding critical RFI responses or submittal data to protect your own schedule, delaying the partner’s work. | Duty of Care / Good Faith (sabotaging the partner’s ability to perform). | Mandate a single, shared project management instance (e.g., Procore, Autodesk Build). The JV agreement must state that all project data is jointly owned; no siloed spreadsheets. |
| Using JV project managers or equipment to supervise your partner’s private, non-JV projects. | Duty of Loyalty (misappropriating JV resources and time). | Implement strict time-tracking. Any JV employee or asset working on non-JV tasks must be billed back to the partner’s company at a premium, pre-agreed rate. |
| Settling a delay claim with the owner quickly to get cash, thereby waiving the partner’s right to claim extended home office overhead (e.g., Eichleay formula). | Duty of Loyalty (sacrificing the partner’s legitimate profit for your own cash flow). | The JV agreement must require unanimous Steering Committee approval for any settlement over a set threshold (e.g., $100,000) or any waiver of delay damages. |
The Hidden Duty: Protecting Bonding Capacity and Surety Relations
Generic business law articles miss the most critical factor unique to construction joint ventures: the surety. In a construction JV, partners typically cross-indemnify each other and provide joint and several guarantees to the surety for the payment and performance bonds.
If Partner A hides a $2 million cost overrun on their specific scope, they are not just lying to Partner B. They are secretly jeopardizing the JV’s bonding capacity. When the surety eventually discovers the loss, they may refuse to issue further bonds or demand immediate collateral. Because of joint and several liability, the surety can demand that collateral from Partner B, even if Partner B was entirely innocent.
Therefore, concealing financial distress, safety incidents, or schedule delays from your JV partner is a profound breach of the duty of good faith, as it directly threatens the project’s financial lifeblood and exposes the innocent partner to massive, unforeseen liability.
Real-World Case Study: The Cost of a Fiduciary Breach
Note: Names and specific project details have been anonymized, but the mechanics and financial outcomes reflect actual arbitration cases.
The Setup: “Project Apex,” a $150M heavy civil infrastructure project. Partner A (Earthwork) was the Managing Partner; Partner B (Utilities) was the non-managing partner.
The Breach: Partner A aggressively front-loaded their earthwork SOV, receiving $3.5M in early payments. Instead of using these funds for the JV, Partner A diverted them to cover severe cash flow losses on a separate, private-sector project. Simultaneously, Partner A’s field team discovered a major geotechnical issue but delayed issuing the RFI to the owner to avoid a work stoppage that would hurt Partner A’s private project timeline.
The Fallout: Partner B’s utility crews were delayed and ran out of cash. Partner B requested a financial audit. Partner A refused, citing “proprietary corporate data.” Partner B invoked the JV agreement’s audit clause, uncovering the diverted funds. The owner, noticing the delay, threatened to call the bonds.
The Resolution: The surety stepped in, declared a default, and demanded $4M in collateral from both partners due to the joint indemnity agreement. Partner B immediately filed for emergency arbitration, seeking a constructive trust on Partner A’s assets and invoking the “Expulsion for Cause” clause. Partner B was forced to buy out Partner A’s interest at a 30% discount to save the project, ultimately absorbing the surety’s collateral demand to keep the job moving. Partner A’s firm filed for Chapter 11 bankruptcy six months later.
Operationalizing Fiduciary Duties: Systems Over Trust
You cannot rely on a “gentleman’s agreement” to enforce fiduciary duties. The JV agreement must build transparency directly into the project controls.
- Integrated Accounting and Joint Checks: The JV must have its own bank account with dual-signature requirements for any disbursement over a set threshold (e.g., $25,000). When paying subcontractors, use joint checks (payable to the sub and the partner who self-performed the work) to ensure funds aren’t diverted to cover losses on the partner’s other projects.
- Managing Partner vs. Steering Committee: Designate a “Managing Partner” for day-to-day field operations to maintain momentum. However, strip them of unilateral financial power. Create a Steering Committee with equal representation. Define exactly what requires committee approval: change orders, subcontracts over a certain dollar amount, schedule baseline changes, and owner claims.
- Mandatory Open-Book Audit Rights: Include a clause granting both partners the right to audit the JV’s books, as well as the specific JV-related books of the other partner, at any time with 48 hours’ notice. If a partner refuses open-book accounting, do not sign the JV agreement.
The Fiduciary Clause Kit: What to Put in Your JV Agreement
Generic legal language fails under construction pressure. Your JV agreement must be operational. Ensure your counsel includes these specific concepts:
- The “No Secret Profits” / Affiliate Subcontracting Clause: “A Material Conflict of Interest includes awarding any subcontract to an affiliate of a Partner without prior written, unanimous consent of the Steering Committee. Any undisclosed profit derived from such an arrangement shall be immediately disgorged to the JV.”
- The “Information Parity” Clause: “All JV financial, scheduling, and correspondence data shall reside exclusively in [Named Software Platform]. No partner shall maintain siloed, partner-specific financial records regarding JV operations. Both partners shall have real-time, administrator-level access.”
- The “Expulsion and Discounted Buyout” Clause: “Upon a material breach of fiduciary duty (as determined by an independent third-party expert or arbitrator), the non-breaching partner shall have the option to expel the breaching partner and purchase their JV interest at 70% of Fair Market Value, ensuring project continuity while penalizing the breach.”
Remedies: What Happens When a Partner Breaches Their Duty?
When a fiduciary breach occurs, the non-breaching partner needs remedies that protect the project first and the balance sheet second. Litigation takes years; construction projects take months.
During Construction: Injunctions and Expulsion
If a partner is actively breaching their duty (e.g., draining the JV bank account or refusing to perform their scope), the non-breaching partner can seek an emergency injunction in court to freeze assets or halt the breaching partner’s access to the site. A well-drafted JV agreement will include an “expulsion for cause” clause, allowing the JV to strip the breaching partner of their management rights and convert them to a passive financial participant until the project is done.
At Project Closeout: Accounting and Disgorgement
The ultimate equitable remedy for a breach of loyalty (like secret self-dealing) is “disgorgement.” The breaching partner must hand over any profits they made from the breach to the JV, regardless of whether the JV itself suffered a direct financial loss. Furthermore, the non-breaching partner can demand a formal judicial accounting to trace every dollar.
The Nuclear Option: Surety Step-In
If the fiduciary breach is so severe that it causes the JV to default on the prime contract, the surety will step in. The surety has the right to take over the JV, hire a completion contractor, and finance the completion. The surety will then sue both partners for indemnification. Because of joint and several liability, the surety can collect 100% of its losses from the non-breaching partner, leaving that partner to sue their former partner to recover the difference.
Fiduciary duties in a construction joint venture are not abstract legal concepts. They are the operational framework that keeps the project funded, the surety engaged, and the partners aligned. Define them clearly in your contract using construction-specific language, enforce them through rigorous project controls, and never assume your partner knows where the line is drawn.
