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Legalese: Joint ventures

We can’t live without joint ventures, but can we live with them? By Mark Klimt

Architects are frequently asked to act as lead consultant and to engage others to act as their subconsultants. Also, particularly on overseas projects, you may be required to enter into a joint venture (often with a local consultant) as an alternative way to satisfy a client’s wish for a one-stop shop; that way the client doesn’t need to ask which consultant is responsible for which element of work, as all the joint venturers are equally responsible.

But if you enter into such an arrangement, you will wish only to be held responsible for your own wrong-doing. Also, your insurer will have agreed to protect you against breach of professional duty, but will not wish to insure practices (and possibly disciplines) of which it has no knowledge.

When part of an appointed joint venture, in order to demonstrate to insurers that you have tried to separate obligations and liabilities at source, you should attempt to build clauses into that appointment that clearly identify which party will perform which services, stating that each party will only be responsible for its own activities.

But as these would undermine the attraction of a joint venture appointment to clients, they are unlikely to agree to it and it will be necessary to draw up a separate agreement between the joint venture parties. So as far as the client is concerned, the parties are jointly and severally liable, but there will be a separate document governing relations between the joint venturers.

That document (the JV agreement) will provide for each joint venturer to maintain adequate insurance and, in the event of a party defaulting on its contractual responsibility to the client, to protect the innocent joint venturer where it is held jointly liable to the client. In that way, your insurer will be able to see that any initial outlay from them can be retrieved from the responsible member.

You should also include other, more practical conditions in your agreement, for example stating how profits and expenses are to be divided up, who will be the authorised representatives, how decisions are to be made and what to do in the event of deadlock.

Your insurer is likely to sanction subconsultancies, using the same criteria as for joint ventures – wanting to be satisfied that it is possible to recover any primary liability that you may assume under a head agreement with your client, if the subconsultant to whom you have entrusted an item of work causes the loss.

Insurers’ blanket requirement will be that you appoint your subconsultants under terms which exactly mirror your main appointment obligations and that you do not waive any rights of recovery that you may have against your subconsultants. It is certainly sensible to have a back-to-back subconsultancy agreement, the essence of which is that you tell the subconsultant that you have been appointed on certain terms, and that it must perform its services for you in a way that will not put you in breach of those terms.

Whether it will be appropriate, or even possible, for a subconsultant to have the same obligations and liabilities as the architect lead consultant will depend on the nature of the subconsultancy. It would be unreasonable, for example, to insist that a minor specialist subconsultant is insured to the same level as a lead consultant with full project responsibilities.

Should your insurer insist upon this, you run the risk of being unable to persuade any subconsultant of that discipline to sign up, obliging you to perform work yourself that you may not feel qualified to do. This in turn increases the risk to your insurer. It is therefore necessary to have a discussion with your insurer so that you are given some leeway to negotiate realistic terms, without having to fear that an insurer will take issue with it because its rights of recovery have been potentially impaired.

Nevertheless, you want your subconsultants to accept your main appointment obligations. But any temptation to involve them in your main appointment negotiations to avoid later problems is best resisted; trying to reflect the manifold points of other parties in addition to your own will make the process unmanageable. Your subconsultants may have to take on trust that you have negotiated the best available terms with the client (in your interests and theirs) and that it now behoves them to make the arrangement work.

The key, though, is probably to choose your subconsultants wisely from practices who will work co-operatively with you, rather than seeking simply to protect themselves and to extract onerous terms at every turn. That way, once you have agreed a workable document, the likelihood is that you will be able to file it and not refer to it again.

Mark Klimt is a partner at Fishburns and specialises in professional indemnity insurance, advising architects and engineers, and defending them against claims. He is legal advisor to the RIBA and operates the RIBA Legal Helpline.

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