Our surveying firm has 20 employees. We were
recently approached by a civil engineering firm, which has engaged our firm in
the past, with a proposal that the two firms form a joint venture to respond to
a Request for Proposals from a county agency so that the joint venture can
present the resources of both firms to the client. We have never formed a joint
venture before. What are some of the issues that we need to consider?
In a joint
venture, each party is entirely responsible to the client, and to any third
party, for the actions of the other joint venturer. Although a carefully
drafted joint venture agreement may set up a framework for the distribution of
liability between the joint venturers, that framework cannot insulate a firm
from all risks; nothing in a joint venture agreement can limit the separate
liability of joint venturers to a third party.
Although there
are standard contract forms to establish the legal and practice aspects of
joint ventures, many design professionals approach a joint venture on a far too
casual basis. In most states, if a contract is signed by more than one entity
or by a joint venture representing more than one entity, the firms become jointly
and severally responsible under the terms of that contract. They assume the
business risks inherent in the contractual agreement and, more importantly,
from a professional liability perspective, they assume responsibility for the
negligence of the other joint venturers. Whether firms attempt to use language
such as “in association with” or “as part of the design team consisting of,”
the result in almost every case is the same—responsibility for the other party
without any real authority or ability to control the other party’s actions.
From a
professional liability insurance perspective, it makes far more sense to
provide services through a more traditional arrangement, with a prime design
professional and a subconsultant. Forming a joint venture with another design
professional or with a non-professional firm can create problems of
insurability and liability. In the traditional scenario, the prime signs the
contract and is completely responsible for the performance of the duties of the
agreement, including those that might be delegated through subconsultant
agreements to other design professionals. The subconsultants are only
responsible for their own actions. This provides a much clearer understanding
of duties and obligations and an articulated distribution of risk.
If a firm does
want to proceed with a joint effort, it should consider forming a separate
entity for the venture. In many states, a joint effort can be established as a
limited liability partnership or corporation. While such a business form does
not limit the liability of a participating firm for its own negligence, the
firm may be protected from the negligence of the other participating firm or
firms. The non-negligent firm’s stake in the limited liability entity is still
at risk for the negligence of any participant.
Limited
liability companies may provide an excellent form for pursuing design-build
projects and other opportunities where a non-professional firm may be involved.
Local legal counsel can provide advice on the formation of limited liability
entities and other forms of cooperative business ventures.
Do you have a question regarding an insurance or practice
management issue? Email your question to AskVic@Schinnerer.com and look for your answer in a
future issue of the NSPS News & Views weekly newsletter. Victor O.
Schinnerer & Company, Inc., is the underwriting manager for the CNA
professional liability program, and has a longstanding relationship with NSPS.
