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What Are the Pros and Cons of a Horizontal Design-Build Team Structure?

Horizontal Structure Considerations

A horizontal structure for a design-build team usually takes the form of a joint venture between a contractor and a design professional. Generally, joint venturers share in both the profits and losses on a project, providing a monetary incentive for collaboration between design-build partners. While the design professional shares in the profits of a successful joint venture, such a structure is not without risk. There are two significant risks faced by a design professional working on a design-build project as part of a joint venture.

First, joint venturers are typically “‘jointly and severally’ liable for any contractual breach or professional liability.”[1] “Joint and several liability exists when two or more defendants are collectively and individually liable for the entire amount of a Plaintiff’s damages.”[2] If the design professional is jointly and severally liable for the joint venture’s liability, then the design professional assumes responsibility for both design errors and construction errors. CNA’s standard professional liability policy covers wrongful acts by a design professional providing services through a joint venture:

Wrongful act means an error, omission, or other act that causes liability in the performance of professional services for others by you or by any person or entity, including joint ventures, for whom you are liable.

The CNA professional liability policy does not provide coverage for claims brought against the joint venture related to construction errors.

In some joint venture agreements, the risk of design errors is allocated to the design professional and the risk of construction errors is allocated to the contractor. To accomplish this, the parties agree the contractor will defend and indemnify the design professional for damages caused by construction errors and the design professional will defend and indemnify the contractor for damages caused by design errors. This allocation of risk can result in “finger pointing” between the contractor and the design professional. When both joint venturers are “on the hook” for construction errors and design errors, an incentive exists for the contractor and the design professional to work collaboratively to address and resolve issues when they arise. While some design professionals may balk at participating in a design-build joint venture knowing that they may be held jointly and severally liable for construction errors, it is important to understand that this risk exists when structuring the design-build team as a joint venture.

Second, joint venturers assume fiduciary duties towards each other, a generally uninsurable risk if the design professional’s liability is not caused by its provision of professional services. The decision in CRS Sirrine v. Dravo Corp., 213 Ga. App. 710 (Ga. Ct. App. 1994) illustrates the heightened risk faced by a design professional participating on a design-build project as a joint venture.

In CRS Sirrine, the design professional entered into a joint venture agreement with two related contractor entities for a power plant project for the United States Navy at the Norfolk Naval Shipyard in Portsmouth, Virginia. The design professional prepared the technical proposal for the project and the contractors prepared a $100,000,000+ bid based on the design professional’s preliminary design and engineering. The contractors incurred losses on the project in excess of $30,000,000 and filed suit against the design professional for breach of contract and breach of the fiduciary duties owed by the design professional to the contractors as a part of the joint venture seeking to recover $12,500,000 in damages from the design professional. The trial court awarded the contractors approximately $5,500,000 for the contractors’ breach of contract and breach of fiduciary duties claims. While it does not appear that the court distinguished between breach of contract damages and breach of fiduciary duty damages, the latter may not be covered by the design professional’s professional liability insurance policy if it does not relate to the provision of professional services or if it resulted in the design professional assuming responsibility to provide its services in accordance with a heightened standard of care. The CRS Sirrine case illustrates the potential risk to a design professional participating on a design-build project as a joint venture related to the fiduciary duties owed between and among joint venturers.

While some design professionals may believe that the potential reward in a design-build joint venture outweighs the risk, it is important for the design professional to understand these risks so that it may make an informed decision regarding the structure of its design-build partnering relationship.

How Does the Joint Venture Agreement Address Disputes and Pursuit of Claims?

Critical to any joint venture is an understanding between the joint venturers regarding how disputes will be resolved and claims will be pursued. Conflicts of interest may arise between joint venturers on a design-build project when deciding how to resolve claims and disputes, especially as it relates to deciding who will pay the costs associated with pursuing an Owner-related claim and how disputes between the joint venturers will be decided.

A joint venture’s liabilities, including costs of pursuing an Owner-related claim, are shared by the joint venturers. This does not always mean that both joint venturers agree on the merit of a claim or on the cost-benefit analysis associated with pursuing a claim. It is important to address how decisions regarding Owner-related claims will be made in the joint venture agreement so as to avoid uncertainty, or worse, conflict between joint venturers, if an Owner-related claim arises.

[2] Edward Ewing and Jon B. Masini, “Joint and Several Liability: A Practical Analysis of Case Law and Statutes for Defense Counsel and Insurers,” Proceedings of the 48th Annual Meeting of Invited Attorneys (2009).

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