Duties of care to joint venture partners

November 2013

I’m a company director. It’s not your company. You didn’t appoint me. So why should I owe you a duty of care? Recent case

Reading time (1-10 minutes): 4 minutes

Sophistication level (1 (idiot) – 10 (expert)): 5

Entertainment value (1 (turgid) – 10 (side-splitting)): 5

Background:

Generally, directors of limited companies like to think that they will never be personally responsible for the debts and other obligations of their companies. The company is meant to be a separate legal entity, and they can hide behind a ‘corporate veil’. But there are various exceptions, eg under the insolvency legislation, under health and safety legislation, under the law relating to directors’ duties (and the ability of shareholders to bring derivative actions on behalf of the company) now covered by the Companies Act 2006, and so forth.

But there have been a number of court cases which say that a fiduciary duty is capable of existing in a joint venture arrangement. These have all been first instance cases – ie not an appeal court such as the Court of Appeal or the House of Lords which is where good strong case law authority mainly comes from.

A fiduciary duty is basically one where someone (A) has such a high level of trust and reliance on someone else (B) that the law says that B owes duties to A as a result. This stems back to principles of equity law.

This is the first case in which the Court of Appeal has ruled on the potential duties owed by a director of a joint venture company directly to one of the contractual joint venture parties (one which is not a shareholder in the joint venture company).

Case:

This was a property development joint venture. Mr Barnett was a developer. He was introduced to Ross River Limited which agreed to help fund a new development. Ross River lent money to a company, Waveley Commercial Limited, owned by Mr Barnett, and entered into a joint venture agreement with Waveley (which Mr Barnett was not personally a party to).  Mr Barnett was the driving director of Waveley, and Ross River placed a high degree of trust and reliance in his management of the business. Under Mr Barnett’s management Waveley incurred various expenses which were paid to connected parties of Mr Barnett and/or which were not directly related to the development and which Waveley should not have incurred under the terms of the joint venture agreement. Waveley subsequently went bust, so Ross River was never going to recover from Waveley any of the share of profits it should have received and the lost value of its investment.  So Ross River made a claim directly against Mr Barnett for loss suffered by it.

Court decision:

The court held that on the particular facts of this case Waveley and Mr Barnett owed a general duty of good faith and specifically a duty not to do anything as regards dealing with joint venture revenues which favoured Waveley to the disadvantage of Ross River. The court ruled that Mr Barnett was required to pay equitable compensation to Ross River.

The court also noted that where someone owes fiduciary obligations as to how he deals with assets, it is up to him to show his justification for dealing with them, rather than for the beneficiary (ie the person to whom he owes the duty) to prove that he has dealt with them in an unjustified way.

Musings:

The Court of Appeal made clear that company directors will usually not owe duties to other parties which their company is dealing with. It very much depends on the facts of each case.

Of course, if the investor is actually a shareholder in the joint venture company it will be easier to establish a duty of care and a breach of director’s duties.

Advice:

· Always try to set out clear obligations on each joint venture partner and on the joint venture company in the joint venture agreement. An investor should ideally try to ensure that arrangements are in place for a joint venture company to keep it up to date with information about what it is doing. Think about veto rights, eg rights to approve expenses, and other protections.

· When entering into any agreement, always think what the consequences might be if one of the other parties goes bust.

· Rather than having to try to rely on more nebulous duties of good faith, think about getting controlling shareholders of a joint venture company to enter into any joint venture agreement, either with specific obligations or as a guarantor.

· An investor shouldn’t just rely on the other party to have exactly the same interests in how it operates the joint venture company, particularly in property developments when there is often scope for a developer to skim costs out of the development, eg through contracts between other supplier companies in which the developer has an interest and the joint venture company, reducing the eventual gain available for the investor.

· If you’re bringing in an outside joint venture funder, it might be worth ensuring that you do give the funder some rights, eg to observe and be informed and get involved in some way, if only to reduce the risk that you could be held to have a direct fiduciary duty to that funder which might one day lead to you being made liable to the funder.

Case: Ross River Limited and another v Waveley Commercial Ltd and others [2013] EWCA Civ 910.