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.
The distinction between a joint venture and a partnership is traditionally understood as follows:
Obviously, assessing these factors does not always lead to a simple conclusion.
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.
In Australia, the fiduciary obligations imposed are 'duties of loyalty'. In the context of partnerships, this would mean that a partner cannot:
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.
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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).
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.
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.
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.
ASIC brought proceedings against Citigroup for acting in breach of a conflict of interest. ASIC said Citigroup had a conflict between:
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:
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.
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.
Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.