Court of Appeal confirms implied fiduciary duty in joint venture arrangement

The Court of Appeal has recently upheld a first instance decision in which the court implied a fiduciary duty into a joint venture arrangement, including a fiduciary duty owed by the director of one of the joint venture partners to the other joint venture partner: Ross River Limited and anor v Waveley Commercial Ltd  and others [2013] EWCA Civ 910.

The ability to bring claims against a director of a joint venture partner may be significant where, as in this case, the joint venture partner itself is in liquidation and therefore unable to satisfy an award of damages for breach of the joint venture agreement. Each case will turn on its facts and it is clear that a fiduciary duty will not be found to exist in every joint venture. Such a finding is more likely in cases where, as a result of how the arrangements are structured, one party is required to place a high degree of trust and reliance in the other.

Whilst this decision may provide assistance to joint venture parties where one partner is seeking to exploit the joint venture opportunity, the starting point will always be to ensure that the scope of duties is properly defined within the joint venture agreement to avoid uncertainty. Parties may also wish to seek expressly to exclude any fiduciary duty in their contractual arrangements. Jeremy Garson and Gareth Keillor comment further on the decision below.

	Jeremy Garson Partner +44 20 7466 2791
	Gareth Keillor Senior associate +44 20 7466 2350

Background

The dispute arose out of a property development in Bedfordshire. The project was initiated by a Mr Barnett and Mr Harney. In 2004, Ross River Limited and Blue River Limited Partnership (the claimants) were introduced to Mr Barnett and became involved in the project by providing financing for the purchase of land. A new company, Waveley Commercial Limited (WCL), owned by Mr Barnett and Mr Harney, was incorporated and a joint venture agreement entered into between WCL and the claimants.

By 2008, Ross River was dissatisfied with a lack of progress and information and became suspicious of certain of WCL's dealings, including concerns that a large number of payments were being made to connected parties. In February 2009 proceedings were commenced against WCL and its shareholders, Mr Barnett and Mr Harney.

The joint venture agreement (and related side agreements) contained contractual rights and obligations as between Ross River and WCL. However, Mr Barnett was not (for relevant purposes) party to these arrangements and WCL's express contractual obligations would not assist the claimants in obtaining compensation for the profits to which they said they were properly entitled, not least because WCL no longer had sufficient assets.

Ross River therefore claimed, inter alia, that WCL, Mr Barnett (and Mr Harney) owed fiduciary duties, including specific fiduciary duties to Ross River to act in good faith, not to place themselves in a position of conflict and not to profit at the expense of the joint venture.

Decision

The judge at first instance (Morgan J) held that WCL and Mr Barnett did owe a fiduciary duty of good faith and a fiduciary duty not to do anything as regards dealing with joint venture revenues which favoured WCL to the disadvantage of Ross River. The judge did, however, seek to limit the scope of those fiduciary duties and held that the breach of those duties did not therefore give rise to any loss actionable against Mr Barnett.

The Court of Appeal (Lloyd, Fulford and Mummery LJJ) upheld Morgan J on the question of whether a fiduciary duty existed as between WCL and Ross River, and as between Mr Barnett and Ross River. However, the Court of Appeal overturned the judge on the effect of the findings that duties were owed and, in particular, held that Mr Barnett was required to pay equitable compensation to Ross River.

The existence of a duty

The Court of Appeal reviewed the earlier authorities (all first instance) in which a fiduciary duty had been held to exist in a joint venture arrangement and held that the judge's reasons for implying a fiduciary duty were sound. The judge had explained why he felt the imposition of a fiduciary duty was appropriate at paragraph 257 of his judgment, stating as follows:

"… Mr Barnett accepted as a fact that Ross River placed a very high degree of trust in him and Mr Harney. He also accepted, seemingly as a legal consequence of that fact, that he and WCL owed duties to Ross River. I am not obliged to find as a matter of law that WCL (and Mr Barnett) did owe a fiduciary obligation of some sort to Ross River just because of that answer. The issue is ultimately one of law and not one of fact. However, the issue of law is very sensitive to the particular facts of the case. … I am able to make a finding supported by this evidence that Ross River did have to trust WCL and Mr Barnett as to the operation of the joint venture and as to the necessary accounting process at the end of it. Indeed, that finding is supported by all the evidence in the case. I am also entitled to bear in mind that Mr Barnett freely accepted that he and WCL owed duties to Ross River as a result."

As regards Mr Barnett, the judge had recognised that it will not usually be right to hold that the director of a company owes a duty to a third party with whom his company is dealing, but on the particular facts of this case he was prepared to hold that such a duty did exist on the part of Mr Barnett. The judge gave significant weight to Mr Barnett's evidence that he had been "deeply involved" in the proposed development, that he was making a significant personal contribution, and that Ross River had placed "a very high degree of trust in [him] and Mr Harney to run the JV for the benefit of all parties".

The Court of Appeal said Mr Barnett's evidence that Ross River placed trust in him was not decisive. However, the structure which placed Mr Barnett in control of the development project and the fact that he was, for a time, paid a management fee, meant that it was appropriate, in the circumstances, to hold that Mr Barnett (and WCL) owed a fiduciary duty to the claimants.

The effect of the breach of duty

Morgan J had held that although Mr Barnett owed a fiduciary duty and had breached this duty, the claimants had failed to demonstrate that Mr Barnett's breach had caused them to suffer recoverable loss. Accordingly, Mr Barnett was not liable to pay any equitable compensation to the claimants. In particular, the judge considered that the nature of the limited fiduciary duty he had found was that WCL could make payments other than for proper joint venture expenses so long as they could not reasonably be expected to jeopardise WCL's ability to pay Ross River the amount to which it was entitled in due course.

The Court of Appeal disagreed and effectively widened the scope of the duties owed to Ross River. It held that the fiduciary duties: first, did not permit WCL to make any payment out of the joint venture revenues (in advance of any payment to Ross River of its entitlement) other than proper payments of development expenses and payments which Ross River had agreed could be made; and secondly, required WCL (and Mr Barnett) to justify any payment made in the event of any dispute.

The Court of Appeal also commented (at paragraph 94) that: "In general, where a person is subject to a fiduciary obligation as regards his or its dealings with assets, then it is up to that person to establish the justification for his or its dealings, if there is any contest, rather than it being for the beneficiary (i.e. the person to whom the duty is owned) to prove that the payment was not justified."

The result was that Mr Barnett was required to pay equitable compensation and the claimants could therefore recover from him.

Comment

Disputes in relation to joint ventures are not uncommon and the scope of the duties owed between the joint venturers is often a key issue in any dispute. This is not the first time a fiduciary duty has been implied in a joint venture arrangement. However, it does appear to be the first Court of Appeal authority on this point.

It is noteworthy that Mr Barnett, the shareholder and director of one of the joint venturers, was held to have assumed a fiduciary duty. This can have significant consequences where, as in the present case, the joint venture company is in liquidation and therefore the contractual duties owed pursuant to the joint venture agreement are of limited practical value.  The ability to bring claims against non-contracting parties potentially gives greater scope for making recovery.

However, both the first instance judge and the Court of Appeal were keen to emphasise that the findings, whilst findings of law, were very sensitive to the particular facts of the case. It will certainly not be the case that a fiduciary duty will be found to exist in every joint venture. However, in cases where one party is heavily reliant upon the other joint venture party, and where a very high degree of trust is vested in that other party, the court may be prepared to imply such a duty. This is not an uncommon situation in a joint venture, where often one party is the driving force behind the project and the other has a less central role, for example in providing financing.