Government Contracts Monitor

Don’t Overlook the Importance of Getting Your Joint Venture Right

December 16, 2014

By: Eric Whytsell

Ben Franklin famously advised, “An ounce of prevention is worth a pound of cure.” The recent Government Accountability Office (GAO) decision in InSpace 21 LLC, B-410852; B-410852.3 (December 8, 2014) demonstrates that those words remain as relevant today as when they were first uttered, at least in the context of joint ventures (JVs). The case reminds us once again of the dangers of entering into JV arrangements without giving proper consideration to the terms of the written agreement and the practical realities of the relationship being established.

The matter involved the procurement of operations, maintenance, and sustainment services at two Air Force missile ranges. After the agency awarded the contract to Range Generation Next LLC, a protest was filed on behalf of InSpace 21, LLC by one of its board members, who also happened to be the vice president of space system operations for PAE Applied Technologies LLC, one of the joint venturers that had created InSpace to pursue the Air Force contract. The next day, the other InSpace joint venturer, Honeywell Technology Solutions Inc., submitted a letter to the GAO asserting that PAE lacked the authority to file a protest on behalf of InSpace.

Honeywell argued that the JV’s operating agreement requires a unanimous agreement of its Management Board and provided meeting minutes demonstrating a split vote on whether to pursue the protest. According to Honeywell, this means InSpace does not qualify as an interested party under the GAO’s bid protest regulations. Significantly, the meeting minutes – and the joint venturers’ arguments before the GAO – show disagreement between the venturers concerning their agreement’s terms, particularly with respect to whether they require a unanimous vote or simply a majority vote, as PAE contended. In other words, PAE and Honeywell disagreed about both the interpretation of their operating agreement and whether PAE is authorized to protest on the JV’s behalf.

Under these circumstances involving a dispute between private parties, the GAO followed established case law and declined to do as the venturers requested and resolve the issue. And as long as the issue of authority remains in dispute, InSpace cannot affirmatively demonstrate that it is an interested party. In other words, Honeywell was right: in the absence of agreement concerning a JV’s authority to protest, the GAO will not allow a protest to go forward.

Obviously, we do not know what led to the disagreement between PAE and Honeywell. They may have rushed into the relationship in order to submit a proposal or they may have spent months carefully crafting an operating agreement that later fell apart unexpectedly over the protest issue. But regardless of the specific facts and circumstances in this case, the InSpace decision underscores the importance of a strong joint venture agreement designed with the “worst case scenario” in mind. Contractors need to make sure their JV agreements address what can happen when the honeymoon period ends, whatever the reason – and that they actually share a common understanding of what their agreement means. Otherwise, they may end up like PAE and Honeywell, not only losing out on the contract award but also forced to spend time and treasure fighting about what their operating “agreement” means.

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