Australia: Joint ventures: Are the parties bound by fiduciary duties?

Joint ventures are commonly used as a vehicle to pursue projects and initiatives between one or more entities. Sometimes the purpose of the joint venture is to share risk; at other times, it is to combine skillsets or resources to a common end. Joint ventures are not always formally documented, and when they are, the documentation is sometimes limited to a simple memorandum of understanding or term sheet.

More sophisticated industry participants enter into complex joint venture agreements recording their rights and obligations. Irrespective of the purpose of the joint venture or the manner in which it is recorded, the question often arises as to the nature of the respective obligations of the joint venture partners and, in particular, whether the parties are bound by fiduciary duties.

STATEMENT OF PRINCIPAL – THE HIGH COURT IN UNITED DOMINIONS

In 1985 the High Court of Australia handed down judgment in United Dominions Corp Ltd v Brian Pty Ltd1 (United Dominions), with the majority (Mason, Brennan and Deane JJ) observing:2

"One would need a more confined and precise notion of what constitutes a "joint venture" than that which the term bears as a matter of ordinary language before it could be said by way of general proposition that the relationship between joint venturers is necessarily a fiduciary one (but cf. per Cardozo C.J., Meinhard v. Salmon (1928) 164 NE 545, at p 546). The most that can be said is that whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken."


ADVENTURE GOLF SYSTEMS AUSTRALIA PTY LTD V BELGRAVIA HEALTH & LEISURE GROUP PTY LTD

The application of fiduciary duties to a joint venture relationship was considered recently by the Victorian Court of Appeal in Adventure Golf Systems Australia Pty Ltd v Belgravia Health & Leisure Group Pty Ltd3 (Adventure Golf Systems).

The trial judge had concluded, amongst other things, that an agreement between the disputing parties was one which did not, in any relevant sense, create fiduciary duties.4 The relevant agreement recorded the parties' agreement governing the construction and operation of an adventure golf course and the sharing of revenue (after the deduction of certain expenses arising under a separate management agreement).

Adventure Golf Systems appealed on two grounds, including whether the trial judge had erred in finding that the parties' agreement was not of a fiduciary nature. In reaching this finding, the trial judge had distinguished the arrangement between the parties in this case from the arrangements in United Dominions.5 His Honour at first instance concluded that whilst the parties were 'joint venturers in a commercial enterprise with a view to profit', the 'features' of the relationship the High Court identified in United Dominions as exhibiting 'all the indicia of a partnership' are largely absent.6

On appeal, Santamaria JA (with whom Kaye and Ashley JJA agreed) observed that there is no single test for determining whether a fiduciary relationship exists in any given case7, noting that:

"The essence of a fiduciary relationship is that one party to the relationship is obliged to act in the interests of another party (or, in the case of a partnership or joint venture, their joint interest) to the exclusion of the former's self-interest. As a result, the fiduciary is prevented from entering into any engagement in which the fiduciary has, or could have, a personal interest conflicting with that of his or her principal; nor is the fiduciary allowed to retain any benefit or gain obtained or received by reason of or by use of its fiduciary position or through some opportunity or knowledge resulting from it."

His Honour cited both Mason J's judgement in Hospital Products Ltd v United States Surgical Corporation8 (Hospital Products) and the observations of Gaudron and McHugh JJ in Breen v Williams9 in identifying the hallmarks of a fiduciary relationship, concluding, amongst other things, that:

"The existence of one or more of the above indicia is not determinative of the existence of a fiduciary relationship; 'the fundamental question is for what purpose, and for the promotion of whose interests, are powers held?' That being said, a fundamental and inflexible feature of a fiduciary relationship is the existence of an obligation of loyalty: '[t]he principal is entitled to the single-minded loyalty of his fiduciary.'"10

His Honour also concluded that:

"More often than not, commercial transactions which were negotiated at arm's length between self-interested and sophisticated parties on an equal footing do not give rise to fiduciary duties."11

From this starting point, his Honour examined the interplay between the terms of any contract governing a commercial relationship and the existence of fiduciary obligations between the parties to that contract. In most commercial cases involving sophisticated parties, this becomes a key issue.

Relying on Mason J in Hospital Products, his Honour observed:

"In cases where the commercial relationship is governed by a contract, 'the ordinary rules of construction of contracts apply' in determining the existence of a fiduciary relationship and the scope of any fiduciary obligations."12

His Honour also added Mason J's observation at [97] that '[t]he fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them.'13

As to the agreement itself before the Court, his Honour concluded that there was in fact no fiduciary relationship between the parties to it:

"There are a number of other features, some of which were identified by the trial judge, that weigh against the conclusion that AGS and Belgravia owed each other fiduciary obligations. The critical starting point is the [agreement] itself. The [agreement] is elaborate. It spells out a number of rights and obligations on the part of each of AGS and Belgravia that related to the management, maintenance, operation and development of the [facility]. Viewed as a whole, these features of the [agreement] are difficult to reconcile with an obligation that one party act for or on behalf of or in the interests of the other, except in a broad sense that each party was obliged to perform its obligations under the [agreement] in accordance with its terms. [...] Neither the terms of the [agreement] nor the way in which the parties conducted the adventure golf business thereunder suggests that one party was obliged to subordinate its own interests and to afford paramountcy to those of the other."14

Relevantly, and of interest to those who prepare joint venture agreements, his Honour noted that a term of the agreement which clarified that the relationship between the parties was not one of 'partnership, employment or agency' was by no means conclusive of the issue,15, although it tends in favour of the conclusion that no fiduciary relationship exists.16

MANAGEMENT SERVICE AUSTRALIA PTY LTD V PM WORKS PTY LTD

Within a month of the Court of Appeal handing down judgment in Adventure Golf Systems, the Supreme Court of New South Wales gave judgment in Management Service Australia Pty Ltd v PM Works Pty Ltd17 (Management Service).

In this case, the Court was asked to determine whether fiduciary obligations existed between parties who had worked together to provide training services to the Commonwealth Bank of Australia. Although there was no written contract between the parties, McDougall J notes that '[t]he defendants accepted, sensibly, that some sort of contract must have subsisted between the two companies. As the statement of issues indicates, the real dispute is as to the terms of that contract, and whether it was attended by fiduciary obligations owed by PM Works to PPPM.'18

Much of the judgment is directed towards an analysis of the terms of the contract between the parties, based on the communications between the parties and their conduct. After a detailed analysis, his Honour concluded that there were 'circumstances from which the reasonable bystander would infer that the parties had not only reached a consensus, but intended to be legally bound by it; to be held to it'19 and that '[t]hose circumstances are further consistent with the parties' having reached a legally binding agreement, if not by 5 April 2013 then by shortly thereafter, to participate in the submission of the proposal to CBA and to participate in (and be rewarded for) the provision of services if a contract were awarded. They are consistent, also, with the contract being one of joint venture and not merely a subcontract.'20

On the question of whether the commercial relationship between the parties included obligations fiduciary in nature, his Honour's analysis relied (as had that of the Court of Appeal in Adventure Golf Systems) on the observations of Mason J in Hospital Products as to the definition of a fiduciary duty and the need for the relevant contract to accommodate fiduciary obligations which are said to co-exist with it. His Honour added, given the absence of a written agreement between the parties in the New South Wales case, that:

"The terms of the contract to which any fiduciary obligation must conform include not only those that are expressed within the contract but those that are implied, including "in fact" (that is to say, on the basis explained in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales)."21

The circumstances in which the fiduciary relationship was said to arise in this case included circumstances where the plaintiff and the defendant had worked together to submit a proposal to the CBA for a training program. The proposal was submitted in the defendant's name. The proposal was successful and the plaintiff and defendant then worked together to develop the program. However, CBA required the entity providing the services to be an accredited entity and only the plaintiff was accredited for this purpose. For this reason, the offer to provide [the] services was made on behalf of both [the plaintiff and the defendant].22

Having distinguished cases where parties have entered into a commercial relationship and have negotiated and documented in full detail all of their rights and obligations as cases where it would ordinarily be inappropriate to impose a fiduciary duty,23 his Honour observed:

"However, where parties enter into a contract to pursue a mutual aim – one in which each of them has an interest – the situation is likely to be very different. Each of them will depend on the other – place trust and confidence in the other – to cooperate to achieve the outcome to which their contract is directed, and to do so for the benefit of each. Although, no doubt, each party has its own individual and legitimate interest in entering into the bargain, the bargain is one not merely for the achievement of that interest, but also for the achievement of the joint interest. That, I think, is one reason why parties to a contract that may properly be described as one of 'joint venture' have been found to owe fiduciary obligations to each other."24

His Honour's observations were, however, qualified:

"Nonetheless, it is not enough to find that the contract may properly be described as one of "joint venture". As the plurality reasons in United Dominions Corporation Ltd v Brian Pty Ltd demonstrate, it remains necessary to examine the form of the joint venture and the content of the obligations that each party to it undertakes."25

In this case, although indicating that fiduciary duties would likely attach to the parties' commercial relationship, the Court did not find it necessary to express a concluded view because the circumstances that are said to amount to breach of the suggested duty go nowhere near establishing it.26

WHAT DOES THIS MEAN FOR PROSPECTIVE JOINT VENTURERS?

The recent jurisprudence on the issue of fiduciary obligations in the context of joint ventures highlights the fact whilst the legal principal for which United Dominions stands remains good law, a detailed factual enquiry will be required in each case where parties seek to establish fiduciary obligations within a joint venture framework.

This remains the case irrespective of whether the parties have negotiated and executed a written contract. In fact, the analysis in Management Service suggests that a fiduciary relationship might be more readily identified where there is no competing formal record of the parties' rights and obligations.

As Knowler and Rickett conveniently conclude:

"The majority of self-styled "joint ventures" are, invariably, nothing more in legal terms than contracts. If parties are going to be bound by fiduciary duties, over and above the contractual duties they owe each other, this will only be by virtue of the particular arrangement they have entered into which, on a thorough examination of the facts, is found to require each party to give unstinting loyalty to the other."27

Footnotes

1(1985) 157 CLR 1.

2 Ibid [5].

3 [2017] VSCA 326.

4 Adventure Golf Systems Australia Pty Ltd v Belgravia Health & leisure Group Pty Ltd [2017] VCC 185 [79] (Anderson J).

5 Ibid [78].

6 Ibid [64]–[66].

7 Adventure Golf Systems Australia Pty Ltd v Belgravia Health & Leisure Group Pty Ltd [2017] VSCA 326 [120] (footnotes omitted).

8 (1984) 156 CLR 41.

9 (1996) 186 CLR 71.

10Adventure Golf Systems Australia Pty Ltd v Belgravia Health & Leisure Group Pty Ltd [2017] VSCA 326 [124] (footnotes omitted).

11 Ibid [125] (footnotes omitted).

12 Ibid [127] (footnotes omitted).

13 Ibid.

14 Ibid [133].

15 Ibid [137].

16 Ibid.

17 [2017] NSWSC 1743.

18 Ibid [11].

19 Ibid [89].

20 Ibid [97].

21 Ibid [183] (footnotes omitted).

22 Ibid [4].

23 Ibid [186].

24 Ibid [188].

25 Ibid [189] (footnote omitted).

26 Ibid [192].

27 Jane Knowler and Charles Rickett, 'The Fiduciary Duties of Joint Venture Parties – When Do They Arise and What Do They Comprise?' (2011) 42 Victoria University Wellington Law Review 117, 117.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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