Why Caution Rules in Informal Joint Working Relationships

The terms "partnership" and "joint venture" are used to describe a legal relationship between two persons and/or entities. As demonstrated in Domestic Construction, LLC v. Bank of America, N.A., 2009 U.S. Dist. LEXIS 76125 (W.D. Wash. Aug. 26, 2009), however, such a legal relationship can be formed without any formal agreements with significant consequence, based solely upon the actions of the partners or joint ventures.

The Case
In Domestic Construction, Domestic Construction, LLC ("Domestic") and Ideal Services Inc. ("Ideal") discussed the possibility of working together as a general contractor and construction firm. Although Domestic and Ideal never entered into any formal written agreement, Domestic prepared advertising materials indicating that the two companies were related, authorized two principals of Ideal to endorse checks on behalf of Domestic, and transacted business out of Ideal's office in the State of Washington.

Domestic then undertook certain construction projects in Washington state with all accounting and financial operations being handled by the two principals of Ideal working out of Ideal's offices. Upon receipt of payment checks made out to Domestic, the two principals of Ideal would endorse the checks over to Ideal and request the checks be deposited into Ideal's bank account. Bank of America, the bank for both Domestic and Ideal, deposited these checks into Ideal's bank account based upon the fact that the two principals of Ideal were authorized to endorse checks made payable to Domestic.

Domestic subsequently sued Bank of America, alleging that Bank of America "improperly accepted the checks that were payable to Domestic but endorsed by Ideal."

Bank of America immediately sought to dismiss Domestic's claims, arguing that Domestic and Ideal were either partners or joint venturers and, therefore, that Ideal was acting as authorized agent of the partnership or joint venture when it endorsed the checks over from Domestic to Ideal. Under Washington law, the act of a partner or joint venture is binding upon the partnership or joint venture. Thus, Bank of America argued that by authorizing the two principals of Ideal to endorse checks made out to Domestic, as well as considering Domestic's and Ideal's other actions, Domestic and Ideal were operating as a partnership or joint venture, meaning Ideal's actions were binding upon Domestic.

Domestic countered by presenting an affidavit from the principal of Domestic asserting that there was no formal relationship between the parties, that Domestic never intended to enter into a partnership or joint venture with Ideal, and that any reference to a partnership with Ideal in advertising material was merely due to the use of "informal vernacular." The court found this argument unpersuasive and contrary to the other evidence before the court.

The Ruling
Accordingly, the court ruled in favor of Bank of America and dismissed Domestic's claims, reasoning that Domestic's assertions were belied by the fact that Domestic expressly authorized the two principals of Ideal to endorse checks made payable to Domestic. Not only did the evidence suggest the existence of a partnership or joint venture (which necessarily would establish an agency relationship), Domestic had granted Ideal the authority to endorse checks and for Bank of America to accept checks endorsed by Ideal.

The Impact
The lesson to be learned from Domestic Construction is to be cautious when pursuing construction opportunities with another company or individual, as the actions of each could be construed to create an agency relationship whereby you may find yourself liable for the actions of another.

Gerald I. Katz is an attorney specializing in construction law throughout the United States with Katz & Stone LLP, Suite 600, 8230 Leesburg Pike, VA 22182; www.katzandstone.com.