Good faith in joint ventures

A recent case (Ross River Limited v. Waveley Commercial Limited) involving the proposed development of land by way of a joint venture agreement has decided that the partners to such an agreement have a duty to act in good faith and this duty can extend beyond the strict terms of any formal contract between the parties.

Under the joint venture, Ross River was entitled to receive various profits, but expressed concern at the manner in which the sales of the development were progressing and the lack of information being provided by Waveley Commercial.  Ross River then brought proceedings against Waveley and its directors.

All parties to the case accepted that monies were owed to Ross River, and the Court was asked to determine numerous disputes, including the correct level of profits under the joint venture, and whether certain terms should be implied into the agreement.  In particular, the Court was asked to rule on whether Ross River were owed any fiduciary duties under the joint venture.

The Court held that there was no need to imply terms into the joint venture agreement, but that Waveley did owe fiduciary obligations to Ross River.  Importantly, the Court ruled that Waveley had an implied obligation to act in good faith in its conduct of the joint venture, and in accounting to Ross River with regard to that company’s share of the profits.  In addition, Waveley was found to owe a duty not to carry out any act in relation to the joint venture revenues which would disadvantage Ross River, but would accrue a benefit to itself.

There have been a number of cases involving property development projects and it is perhaps helpful to list several of the matters a Court will consider when deciding whether a fiduciary obligation exists:

(a)  The lack of experience in property development of one party as compared to the other;

(b)  One party having extensive discretion over how to proceed with the project;

(c)  One party placing trust and confidence in another; and

(d)  Cost sharing arrangements – especially where one party has the authority to incur the costs unilaterally.

It is clear that anyone seeking to enter into any arrangement to develop property with a view to sharing in the hoped for profit (whether in the early stages by an increase in land values following a successful planning application, or towards the conclusion of a development when the profitability of a scheme is assessed) should consider at the outset what obligations they intend to be bound by.  This approach should be reconsidered when varying or amending the original arrangements, particularly where there is a change in roles, but the parties remain the same; for example, directors from a company being party to an original arrangement forming a new company and then taking on part or all of the remaining contractual obligations.

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