Australia: Considering a joint venture? What duties will you owe your business partners?

Last Updated: 15 October 2017
Article by Jonathan McTigue, Allison Van Beers and Sean Kelly

Most Read Contributor in Australia, October 2017

Recent judgments from the South Australia and New South Wales Supreme Courts illustrate how the imposition by the Courts of fiduciary duties can be a double-edged sword in the joint venture context. This article provides some practical guidance for parties wishing to regulate or exclude fiduciary duties from their relationship.

Joint ventures (JV) are commercial arrangements between two or more parties to exploit a business opportunity. Key features include working towards a (usually commercial) common aim, where the parties each contribute money, property or skill1. Fiduciary duties are imposed by law. They require a party to act in the best interests of another2. The requirement to act in the interests of another can seem counterintuitive in a commercial setting – especially as a fiduciary duty may require a party to prefer another's interests to their own. Some examples of the content of fiduciary duties on individual joint venturers include obligations:

  • to avoid obtaining an advantage at the expense of, or causing disadvantage to, another joint venturer in relation to the JV project; and
  • to account for an improper advantage if obtained, irrespective of whether the improper advantage was actively hidden from the other joint venture or could have been discovered by it.

The existence of a JV agreement does not necessarily create fiduciary duties,3 and a fiduciary relationship can arise and exist independently of contract. Furthermore, recent case law from South Australia shows that an inadequately drafted JV agreement may result in a fiduciary relationship not contemplated by the parties.4

To avoid being caught unawares by the extent of their obligations to each other, prospective joint venturers should consider at the outset:

  • is the relationship to be governed exclusively by a JV agreement?;
  • what are the options for regulating fiduciary duties by a JV agreement?

Has the prospective JV given rise to a preliminary fiduciary relationship?

A fiduciary relationship may arise before the parties have executed a JV agreement, or in circumstances where the JV agreement is ultimately found to be non-binding. Therefore, the first consideration should be whether a fiduciary relationship has arisen between the parties prior to the execution of the JV agreement.

In Noble Earth Technologies Pty Ltd v Hampic Pty Ltd (in liquidation) t/as Cyndan Chemicals [2017] NSWSC 502 (NET v Cyndan), the parties agreed through a series of communications how they would promote and supply certain products in the UAE. The parties agreed to agree on the precise profit-sharing arrangement at a later date. Justice Robb held that there was no binding JV agreement because an essential term – how to share profit – had not been agreed.

However, the Court found that fiduciary duties can arise between prospective joint venturers despite the fact that no JV agreement was formed. This provides some protection for prospective joint venturers who have acted against their individual best interests in pursuit of a common goal. Ultimately, in NET v Cyndan, it was held that no such duties arose because the parties had not agreed to put their collective interests ahead of their personal interests.5

Fiduciary duties: exclude, define or ignore?

Although fiduciary duties can provide some early protection for a prospective joint venturer, once a JV agreement is negotiated and formed, commercial parties usually prefer to rely upon the rights and obligations in the JV agreement. In most cases, commercial parties will prefer the predictability of the rights and obligations of a JV agreement, over the unpredictable nature of Court-imposed fiduciary duties, though particularly vulnerable joint venturers may be the exception to this position.

The existence of a JV agreement does not necessarily create fiduciary duties, and a binding JV agreement can affect the scope of associated fiduciary obligations. Whether it does so will depend upon the terms of a JV agreement.6 Two approaches to excluding fiduciary duties by a JV agreement emerge from the cases:

  1. address the issue by expressly excluding fiduciary duties in the JV agreement; or
  2. rather than expressly excluding fiduciary duties, include obligations in the JV agreement that are inconsistent with the imposition of fiduciary duties.

Option 1: expressly exclude fiduciary duties in JV agreement

This option is preferable as it increases project certainty and decreases the risk of unforeseen issues arising between the joint venturers.

The recent case of Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd [2017] SASC 137 is an important reminder that an inadequately drafted JV agreement may not exclude all forms of fiduciary duties, even if it seems possible that the parties did not want them to apply. In that case, the binding JV agreement contained the following clauses:

  • clause 3.6.1 stated that each party must act in the best interests of the JV; and
  • clause 10 stated that nothing in the JV agreement shall be construed to constitute any party as an agent or representative of the other, or to create any trust or commercial partnership.7

Justice Parker held that clause 10 was not wide enough to preclude the existence of all fiduciary duties, because fiduciary relationships are not limited to those involving an agent, representative, trustee or partner. In addition, as clause 3.6.1 required each joint venturer to act in the best interests of the JV, it was held that the joint venturers owed mutual fiduciary duties (in addition to the obligations arising in the JV agreement) to not exercise their property management powers to their own advantage and to the detriment of other joint venturers.8

Accordingly, parties seeking to exclude fiduciary obligations, while maintaining contractual obligations requiring each party to act in the interests of the other joint venturers, must carefully consider the drafting of the JV agreement. To increase the chances of achieving this, a JV agreement may:

  • contain obligations to co-operate and act in good faith, circumscribed to suit the parties' preferred level of involvement in each other's affairs;
  • expressly state that the contractual obligations do not create any fiduciary rights or obligations between the parties, nor any partnerships or other recognised fiduciary relationships; and
  • set up profit- and loss-sharing arrangements, while ensuring that the project is driven by a jointly constituted decision-making panel, and not by one party on behalf of another.

Option 2: create contractual obligations in the JV agreement inconsistent with fiduciary duties

If a JV agreement is well drafted, this option can have the same effect as Option 1. However, as it relies upon a favourable interpretation of often complex contracts, it is an inherently less certain exercise.

The effectiveness of drafting techniques was considered in Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323. Red Hill Iron Ltd and API Management Pty Ltd (API) were joint venturers in relation to mining tenements in the West Pilbara. A key issue in dispute was whether API owed fiduciary duties as a result of either its role as Manager of, or participant in, the JV. Beech J stated that:

"the relationship will be fiduciary to the extent, and only to the extent, that the fiduciary has agreed or undertaken to exercise powers or discretions for the principal, or, in the case of a horizontal relationship, for the parties jointly."9

Ultimately, it was held that API did not owe fiduciary obligations. This was because, while acting as Manager of the JV, API did not have discretion to determine the manner and timing of exploration under the relevant JV agreement. Although API possessed such a discretion under a separate agreement, it possessed it only as a participant who solely funded its work under that separate agreement, which also allowed it to pursue its own interests in its absolute discretion.

Consolidating the options

The cases discussed above demonstrate that retaining the freedom to act in the parties' own interests and discretion may preclude the existence of fiduciary obligations. However, it was recently held that where this freedom of discretion can be isolated to specific activities, then fiduciary obligations may continue to exist in respect of other activities contemplated by a JV agreement.[10]

Therefore, a "belts and braces" approach should be adopted if the parties intend to exclude fiduciary duties from the JV relationship.

RELATED KNOWLEDGE

Footnotes

1United Dominions Corporations Ltd v Brian Pty Ltd (1984-1985) 157 CLR 1 at 10 (Mason, Brennan and Deane JJ).

2 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41.

3 United Dominions Corporations Ltd v Brian Pty Ltd (1984-1985) 157 CLR 1 at 10–12 (Mason, Brennan and Deane JJ).

4 Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd [2017] SASC 137.

5 Noble Earth Technologies Pty Ltd v Hampic Pty Ltd (in liquidation) t/as Cyndan Chemicals [2017] NSWSC 502, [231].

6 United Dominions Corporations Ltd v Brian Pty Ltd (1984-1985) 157 CLR 1 at 10–11 (Mason, Brennan and Deane JJ).

7 Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd [2017] SASC 137 at [28] and [245] (Parker J).

8 Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd [2017] SASC 137 at [496] (Parker J).

9 Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323 at [365] (Beech J).

10 Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd [2017] SASC 137 at [498] (Parker J). B

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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