Ask Vic!

Question: 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.