UK: Joint Venture Partner Has An Obligation To Act In Good Faith

Last Updated: 20 February 2012
Article by Clive Hopewell and Victoria Brett

Ross River Limited & others v Waveley Commercial Limited & Others [2012] EWHC 81

Waveley and Ross River were parties to a JV Agreement to undertake a property development project. Both parties acknowledged that Waveley owed Ross River money under the JV Agreement, although the amount was in dispute. The JV Agreement provided that Ross River would get a share of the net profits on sale of a part of the development site which it could elect to receive either as a fixed sum or a percentage share. Ross River chose the latter on the back of information provided by Waveley.

Waveley subsequently sold the site to a company incorporated by one of its directors, Barnett (B), and Ross River brought proceedings arguing that Waveley and B were liable under terms to be implied into the JV Agreement or pursuant to fiduciary obligations. In particular, Ross River sought to imply into the JV Agreement:-

  • a term preventing Waveley from conducting any business other than that necessary for implementing the development; and
  • a term preventing Waveley and B from acting in any way that would prejudice Waveley's ability to pay the sums owing to Ross River.

The Court held that there was no need to imply the terms, but that Waveley did owe Ross River fiduciary duties:

  • Implied terms - The Court found that neither term should be implied (following AG of Belize v Belize Telecom Limited (2009)). With regard to (a) the Court said that this was too far reaching and there was no support for it in the pre-agreement negotiations. Neither was it obvious nor necessary to give business efficacy to the agreement. With regard to (b) the Court said implying this would mean that potentially, where a contract required one party to pay a debt to the other and the potential debtor dissipated its assets in a way likely to leave it unable to pay its debts, it would be committing a breach of contract.
  • Fiduciary duties Ross River did succeed in respect of part of the fiduciary duties claim. The Court held that Waveley had an implied obligation to act in good faith in its conduct of the joint venture and in its accounting to Ross River in respect of the net profits, and it had an obligation not to do anything in relation to the handling of the joint venture revenues which put itself at an advantage over Ross River.

    However, the Court said that Waveley did not owe fiduciary obligations not to allow a conflict between its own interests and its duty to Ross River nor did it have a duty not to profit from its fiduciary position. The Court drew a distinction between the fiduciary relationship between the parties to a JV, where a commercial relationship exists, and those of the classic fiduciary, such as a company director.

    The Court then went further and held that B owed similar fiduciary duties to Ross River. Whilst acknowledging that normally it will not be right to hold that a director of a company which is dealing with a third party owes personal fiduciary obligations to that third party, the Court said the circumstances in this case were special enough to warrant such a finding. The special circumstances were B's long term personal involvement in the development prior to the JV (he had an 80% shareholding in Waveley) and the fact that he was receiving a personal management fee of up to Ł120,000 for managing the JV.
  • Breach of fiduciary duties? The Court was unable to determine whether there was any breach of the fiduciary duties however as that still depended on the final calculation of the net profits by accountants. That said, it was anticipated that the final calculation was likely to reveal that Waveley and B had breached their fiduciary duties by using the JV revenues in a way that jeopardised Ross River's right to payment.

The case confirms that parties to a JV can owe each other fiduciary obligations, and here the Court has extended this principle to a director of a corporate JV party. The Court did acknowledge that it will only do so in exceptional circumstances, not least because such fiduciary obligations may conflict with the statutory duties the director owes to its own company.

If the name Ross River seems familiar, it was a party in a 2007 case on fiduciary duties in joint ventures; in that case Ross River was on the other side, i.e. it was the party alleged to be in breach of fiduciary duty.

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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Clive Hopewell
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