Parties to joint venture did not owe each other duties of good faith

04 February 2020

The High Court has held that the parties to a joint venture did not owe each other a general obligation to act in good faith, either express or implied.

Although there is no general duty of good faith between joint ventures, the court has previously been prepared to imply one in specific circumstances. This judgment helps to understand what a court will take into account when deciding whether to impose this kind of obligation.

What happened?

Russell v Cartwright [2020] EWHC 41 (Ch) concerned a joint venture (JV) established by four individuals to develop properties within the Greater London region. The JV took the form of a UK company of which each individual was a director and in which each of them held 25% of the shares.

To regulate the JV’s affairs, the individuals entered into a framework joint venture agreement (FJVA).

The JV acquired two sites and identified a third opportunity. However, at this point, relations between one individual (R) and the others started to deteriorate, culminating in R offering to resign from the JV.

The shareholders entered into discussions about the terms on which R would depart and any claims be settled. They agreed that the JV would buy R’s shares back at a price to be determined by an independent valuer, and R would no longer take part in the JV’s business.

R wanted to retain an interest in the JV’s two existing projects. To this end, the parties agreed that he would continue to hold shares in the carried interest vehicle for those projects and receive fees if those projects were successful. However, R made it clear he was interested only in those two projects.

Unknown to R, while these discussions were taking place, the JV was engaged on-and-off in discussions about a fourth investment opportunity, in Wembley, London.

On 14 July 2014, the JV incorporated a new vehicle to acquire the site in Wembley, should that acquisition proceed. On 16 July 2014, R’s settlement was finalised and implemented. On 22 July, the JV exchanged contracts on the Wembley site, and on 19 August 2014 that acquisition completed.

R found out about the Wembley acquisition. He issued a claim against the three other individuals, claiming the following (among other things):

  • The four individuals had set the JV up as a quasi-partnership, placing trust in each other. They therefore owed each other fiduciary duties.
  • The individuals owed each other express duties of good faith under the FJVA. In particular, the FJVA expressly required the individuals “at all times to act in good faith as regards the procurement of the business of [the JV]” and to “act in good faith with respect to each other and the [JV] with respect to” obligations not to acquire any real estate in competition with the JV.
  • The individuals also owed each other an implied duty of good faith, because the FJVA was a “relational contract”.

He said the three other individuals had breached each of these duties by failing to inform him about the Wembley opportunity. (R also brought other claims which are beyond the scope of this summary.)

What did the court say?

The judge found that the individuals did not owe each other any fiduciary duties. A fiduciary duty arises only where someone is entrusted with such a degree of confidence that they must put their own personal interests aside. This includes where persons enter into partnership, but the individuals here had not done that. They were shareholders in a company and entitled to pursue their own interests. The fact that they referred to each other as “partners” was purely business terminology.

He also said there was no express duty of good faith in the FJVA. Although the FJVA contained obligations of good faith in certain places, they were limited to specific matters: procuring business for the JV and refraining from competing with it. In this case, the Wembley opportunity was procured for, and taken up by, the JV. No-one had breached those duties.

That left the question: did the FJVA contain an implied duty of good faith? The judge said “no”.

The High Court has said previously (in cases such as Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) and Bates v Post Office Ltd [2019] EWHC 606 (QB)) that it may be appropriate to imply a duty of good faith into a contract involving a longer-term relationship with a substantial commitment – a so-called “relational contract”.

Indeed, in Al Nehayan v Kent [2018] EWHC 333 (Comm), the High Court implied a duty of good faith into an oral joint venture agreement on precisely this basis. See our previous Corporate Law Update for more information on that case.

But here, the judge did not feel he could imply a duty of good faith. He gave the following reasons:

  • The fact that a contract is “relational” does not automatically create an implied duty of good faith. To imply such a term, the court must apply the two traditional tests: would the term be obvious to a reasonable reader of the contract, or is it essential for the contract to work properly?
  • The FJVA contained references to obligations to act in good faith in specific circumstances. This suggested that the individuals had considered a duty of good faith and decided to impose it only in limited circumstances. They had not included a “general” duty of good faith in the FJVA. Implying such a general duty would be inconsistent with the express terms of the FJVA.
  • In any case, even if there was an implied duty of good faith, the three other individuals did not breach it. The duty would have been “limited in nature” and would not have prevented the individuals from pursuing their own interests. Their conduct was not “commercially unacceptable”.

What does this mean for me?

Al Nehayan showed us the potential consequences of not dealing with questions of good faith in a joint venture agreement. This case shows us the consequences of doing so selectively.

Above all, parties who are proposing to enter into a JV should remember that a JV is precisely the kind of arrangement that may attract implied obligations to act in good faith. Prospective JV partners should consider the following:

  • Should the partners owe obligations of good faith towards each other? There is no shame in not wanting to do so. Duties of good faith (particularly implied duties) can be vague and it is not clear what might be expected of the JV partners.
  • If the partners do not wish to be subject to this kind of obligation, they should consider explicitly excluding a duty of good faith in the joint venture agreement (or at least acknowledging that the contract is not intended to be “relational" and no implied duty is to apply).
  • If the partners do want to impose duties of good faith, they should consider in what circumstances those duties should apply. Are the partners to act in good faith in all matters, or only (as in this case) in certain circumstances? Remember that, by including a duty of good faith in limited scenarios, the parties are inviting the courts to find that no separate general duty exists.