Two recent court cases show that joint venturers need to carefully document their relationship — in particular, they need to deal with whether fiduciary duties apply.
The considerations are all part of choosing between arranging a joint venture or a partnership.
Joint ventures and partnerships: what's the difference?
The distinction between a joint venture and a partnership is traditionally understood as follows:
- a partnership involves 'persons carrying on a business in common with a view of profit'. Generally (but not always), for a partnership to exist there must be some element of repetition which indicates the conduct of a business, and from this flows the aim of generating profit which is divided between the partners.
- a joint venture differs from a partnership in two material respects. Often the relevant activity will not amount to the conduct of a business. Instead, it may focus on achieving a one-off development or undertaking. Also, a proper joint venture will generate a product not profit (or cash).
Obviously, assessing these factors does not always lead to a simple conclusion.
Why may the difference be important?
Whether a partnership or a joint venture has been created is important because the law of equity imposes additional legal obligations ('fiduciary duties') on partners.
As joint ventures are different from partnerships, those additional legal obligations have traditionally been thought not to apply to joint venturers. The basis of this traditional view is that joint venturers are more like parties who are contracting on commercial terms at arm's length.
If you would like a bit more information about the law of equity, and fiduciary duties, there's a short addendum at the end of this article.
What are the fiduciary duties on partners?
In Australia, the fiduciary obligations imposed are 'duties of loyalty'. In the context of partnerships, this would mean that a partner cannot:
- engage in an undisclosed conflict of duty: that is, the partner could not act in circumstances in which:
- it has a conflict between its duty to one partner and its duty to another third party; or
- the person's duty to the partner conflicts with the person's own interests; and
- make a profit for themselves: that is, the partner cannot make a profit for themselves out of an opportunity that came to them as a partner.
A person who owes these fiduciary duties (known as a 'fiduciary') can only act in these circumstances with the fully informed consent of their partners.
High Court assumes a joint venture owes fiduciary duties — Farah v Say-Dee
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It was not so much what the High Court said in Farah so much as what it did not say (or assumed to be the case).
- A company, Farah (and its director Mr Elias) entered into a joint venture with Say-Dee (also a company) to develop units at 11 Deane Street in Burwood, NSW.
- Farah was to manage the process while Say-Dee provided most of the capital.
- Over time, it became evident that to develop No. 11 the land at numbers 13 and 15 Deane Street would also need to be bought.
- Mr Elias' family purchased some of the units at Nos 13 and 15 Deane St —presumably with a view to buying up all the units and obtaining full ownership of Nos 13 and 15.
Say-Dee alleged that the units at Nos 13 and 15 had been purchased in breach of Farah's and Mr Elias's fiduciary duties to Say-Dee as its joint venturer.
- that those properties could not be purchased without disclosing the opportunity to the joint venture and allowing it to purchase the properties.
- that therefore, Mr Elias had diverted a key opportunity away from the joint venture inconsistent with its fiduciary duty of loyalty.
The most important aspect of the judgment was that the High Court accepted that Mr Elias and Farah owed fiduciary duties to Say-Dee as its joint venturer. In fact, the High Court simply assumed that the parties were in a fiduciary relationship — even though the relationship had been agreed as a joint venture, not a partnership.
It is worth considering whether the High Court approached the issue on the basis that there was, in fact, a partnership — given that some of the indicia of a partnership (as referred to above) were present. This seems unlikely because the Court and the parties described the relationship as a joint venture every time.
Joint venturers can ‘contract out’ of owing one another fiduciary duties — Victorian Supreme Court in ASIC v Citigroup
So the Farah case tells us that when clients enter into a joint venture they cannot assume that fiduciary duties will be excluded from the obligations they owe to their joint venturers.
The next case tells us that clients entering joint ventures need to consider whether to exclude the application of fiduciary duties in these types of ventures — this can be done as long as the undertaking can properly be described as a joint venture (and, therefore, based in contract) and as long as those duties are explicitly excluded in the joint venture agreement.
- In ASIC v Citigroup, Toll Holdings engaged Citigroup to provide it with certain corporate finance services on a proposed takeover of Patrick Corporation.
- Citigroup had agreed to act for Toll. The agreement was set out in a Mandate Letter which specifically excluded any fiduciary relationship between the parties.
ASIC brought proceedings against Citigroup for acting in breach of a conflict of interest. ASIC said Citigroup had a conflict between:
- its duty of loyalty to Toll; and
- its own interest in allegedly purchasing Patrick shares in circumstances where it could benefit from a proposed takeover bid. (This allegation was not proved.)
ASIC submitted that the nature of Toll and Citigroup's relationship was such that it was a fiduciary relationship — regardless of the terms of the Mandate Letter.
The Victorian Supreme Court held:
- that the entire relationship between the two was based in contract and determined by the terms of the Mandate Letter;
- that Mandate Letter clearly excluded the application of fiduciary duties; and
- the law allowed a precise contractual term to exclude fiduciary duties where the entire relationship is based in contract.
Summary: Joint venturers may be owed fiduciary duties — but they may be able to contract out of them
- You can't rely on any assumption that a joint venture will necessarily be treated differently from a partnership: joint venturers may also be found to owe one another fiduciary duties; and
- If a client truly wants to participate in a joint venture then particular care should be taken to properly document the venture — including by:
- correctly describing it as the conduct of a one-off venture, not a business;
- focussing on the sharing of the product generated by the venture, not on generating profits from the venture;
- specifically excluding the other aspects of a partnership — for example: joint and several liability and the ability of one partner to bind all other partners; and
- specifically excluding the operation of equity and the imposition of fiduciary duties.
Of course, if the reality is that the relevant relationship and undertaking is more properly described as a partnership, then the documents alone are unlikely to determine whether or not a partnership exists. Ultimately, the court will examine the substance of a relationship and undertaking – not simply the form of the relevant documents.
Addendum: The law of equity, and fiduciary duties.
The law of equity is basically ‘judge-made’ law operating alongside the very old 'common law' rules (which is also “judge-made” law) and statute law. The common law and statute law focus on parties' strict legal rights and obligations, however the law of equity intervenes where reliance on strict legal rights results in some unfairness or inequity. The law of equity also intervenes in certain well-understood circumstances – like where persons are operating in partnership.
When equity does intervene, it often imposes 'fiduciary duties' on the persons who are insisting on their strict legal rights or who are acting in these well understood circumstances such as partnership.
Consequently, whether or not persons involved in an undertaking are in partnership, may in theory impact on whether fiduciary duties are owed to the other persons involved in that undertaking.
If you would like more information, please contact Maddocks on 03 9288 0555 and ask for Julian Smith.