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Joint ventures and the duty of good faith

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26/02/2020

The recent case of Russel v Cartwright & Others [2020] EWHC 41 concerned four individuals who had set up a joint venture company (JV) in 2011 to buy and develop residential property. Each individual was a director and 25 per cent. shareholder in the JV. The JV bought two development sites and was looking at a third when, by late 2013, relations between one of the directors, Mr Russell, and the others began to sour.

It was agreed that Mr Russell would leave the business and a settlement deed was drawn up. Under the terms of the deed, Mr Russell was to retain an interest in the two property developments that were underway and the price that he received for his shares in the JV were to reflect that. He was also to receive fees in the future if the developments were successful.

Whilst these discussions were going on, unknown to Mr Russell, the JV was involved in negotiations to purchase a fourth development site in Wembley. The parties proceeded to execute the settlement deed on 16 July 2014 and the purchase of the Wembley site was completed just six days later.

Mr Russell subsequently found out about the Wembley deal and issued proceedings on the following grounds for their failure to tell him about the opportunity:

  1. Breach of fiduciary duties – he claimed that the JV was a quasi-partnership and that the four shareholders therefore owed each other fiduciary duties.
  2. Breach of duties of good faith – he claimed that under the joint venture agreement there were express duties of good faith.
  3. Breach of implied duties of good faith – he claimed that they owed each other an implied duty of good faith because the joint venture agreement was a ‘relational agreement’.

The judge, Mrs Justice Falk, disagreed with each of the grounds.

  1. The individuals did not owe each other any fiduciary duties. A fiduciary is “someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”.  This was not the case. The individuals were shareholders in a company, not partners, and as such they were entitled to pursue their own business interests.
  2. There was no express duty of good faith in the JV agreement. Although the agreement included obligations such as “at all times to act in good faith as regards the procurement of business for the JV” the obligations were limited to specific matters. There was no overarching duty to act in good faith towards each other at all times.
  3. In relation to an implied duty of good faith, the judge considered that determining whether such a term should be implied is an objective exercise. The JV agreement was a detailed document containing express obligations of good faith that were not breached. In the judge’s view, it was neither obvious, nor essential to the working of the document to imply some broader obligation of good faith. The existence of express good faith obligations indicated that when the parties intended to impose an obligation of good faith they did so, strongly suggesting that implying a more general good faith obligation would be inconsistent with the express terms.

WM Comment

This case illustrates the dangers of dealing with questions of good faith in a selective manner. If JV parties do not want to be bound by obligations of good faith (which are in essence vague in nature), it may be sensible to expressly exclude the obligations in the JV agreement. If, on the other hand, good faith obligations are desirable then the parties should consider whether they should apply in all situations or just in a selected few.

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