Joint Ventures Should Anticipate Professional Liability Claims

A joint venture is essentially a partnership, but only for a specific, and usually limited, purpose. Both partnership agreements and joint venture agreements usually allocate responsibility and compensation between or among the parties. Comprehensive joint venture agreements also address issues such as determining fault for performance that is deficient and establishing obligations for rectifying harm through reciprocal indemnification obligations; but that allocation is internal only.

How a joint venture is organized to provide services and how it assigns tasks and measures performance is a business management process. To the rest of the world, the partners or joint venturers are, in essence, co-promisers, and usually under the law are “jointly and severally” liable for any contractual breach or professional liability. That means an injured party—whether the project client or a third party—may recover the full scope of damages awarded by a trier of fact such as a court or arbitration panel from either party or from both parties in any combination.

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 each of the joint venture firms from all risks caused by others; nothing in a joint venture agreement limits the separate liability of joint venturers to a client or a third party. The perception is that the joint venture is truly a single point of responsibility for a project, and that perception is usually reasonable and recognized in any litigation against the joint venture.

Approaching a joint venture

Many design professionals approach joint venturing 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 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 as well as their own. Some firms do little to anticipate the problems a joint venture might create by ignoring the fact that when they hold themselves out as a “team” and sign a contract together, they have created a joint venture. 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.

. . . each party is also fully liable for the business risks of the joint venture . . .

In any joint venture, both business and professional exposures should be addressed. Concern should be given to the exposure of each firm for the negligent professional services of the other. But, as with a general partnership, each party is also fully liable for the business risks of the joint venture and the other’s acts and omissions that do not constitute negligence in the performance of professional services.

Planning for professional liability exposure

In any teaming arrangement, joint venture, partnership, or project-specific limited liability company, the participants must be concerned that their exposure to claims from their client and from third parties can be properly addressed. Each of these is a progression along a spectrum of shared risk. At the teaming stage, a common or joint exposure to client claims is rarely addressed. In a formalized relationship concern has to be given to: the level of coverage and deductibles of each party; how the parties will internally fund deductible obligations; and to what extent the parties will attempt to participate in a common defense against professional liability claims that would be applicable on a joint and several liability basis.

While each firm’s professional liability insurance usually covers the specific firm for its exposure to professional liability claims caused by its negligence in the performance of professional services, comprehensive policies also cover the firm’s risk as a joint venturer. Because of the shared liability, the negligence of another joint venturer might cause a firm to be concerned that its policy would be eroded by negligence that is essentially out of its control.

Defending a joint venture works best when the firms clearly assign duties and recognize their proportionate share of risk.

Often, unrelated design professional firms who wish to form a partnership to perform services on a particular project through a joint venture attempt to state a requirement for similar professional liability insurance coverages and deductibles (on similar policy forms).  In addition, they establish a fund for deductible obligations, often equal to the deductible of both parties combined, so that the separate policies can respond as efficiently as possible. Obviously, if members of a joint venture are insured by the same carrier, the resolution of any professional liability claim is easier. Defending a joint venture works best when the firms clearly assign duties and recognize their proportionate share of risk when those duties are carried out in a negligent manner.

Prime-sub agreements provide clearer legal liability

From a professional liability insurance coverage perspective, it makes far more sense to provide services through a more traditional arrangement, with a prime design professional and a sub-consultant. When a prime signs a contract, it is completely responsible for the performance of the duties of the agreement, including those that might be delegated through sub-consultant agreements to other design professionals. The sub-consultants are only responsible for their own actions. This provides a much clearer understanding of duties and obligations and an articulated distribution of risk. From a professional liability exposure perspective, the clear lines of authority and responsibility of a prime-sub arrangement are preferable to the murky division of labor and liability that often accompanies a joint venture.

Limited liability partnerships

Of course, a limited liability partnership (LLP) is a recent alternative to a joint venture. LLPs (or limited liability corporations) do not change the responsibility of each party for harm caused by the negligent professional services provided by either party, but they do provide protections from business risks that might not be properly addressed in a joint venture agreement. The non-negligent firm’s stake in the LLP is still at risk for the negligence of any participant. LLPs seem to 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 LLPs and other forms of cooperative business ventures.

Understand the risks

Firms entering into a joint effort should understand the legal status of joint venturers under the applicable law and the insurance coverage ramifications of sharing risk. It is prudent for firms to organize their common endeavor properly. This includes recognition that there might have to be a defense of the joint venture based on each party’s participation. A specific distribution of effort within the joint venture facilitates defense based on responsibility. Examining the language of professional liability insurance policies, determining when and how a joint defense could be advantageous, and determining how defense costs and controls will be shared are essential business-planning decisions.

Victor and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability, Business Owners, and Cyber Liability Insurance Programs to address the challenges that architects face today and in the future.