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Joint ventures – rise of the fiduciary duty

A director of a joint venture company will more often than not be a director of one of the companies participating in the joint venture.

A director of a joint venture company (JVC) will more often than not be a director of one of the companies participating in the joint venture (Corporate Members). It is therefore particularly important for a director of a JVC to understand the nature of his duties and to whom they are owed, and in the recent case of Miller v Stonier [2015] EWHC 2796 (Ch) this point was addressed in Court.

In Miller v Stonier, the parties had entered into a joint venture agreement by which they acquired the assets of a company in liquidation, which the defendant had set up to manufacture and sell gas fires. The parties fell out and the claimant submitted that the defendant had not only breached the terms of the joint venture agreement but he had breached fiduciary duties that the defendant owed to him personally as a co-venturer.

The Court dismissed the claim on this occasion, but in doing recognised that there are certain circumstances in which a fiduciary duty arises between Corporate Members of a JVC which potentially conflict with the statutory duties the directors of a Corporate Member owe to that Corporate Member under the Companies Act 2006.

Whether or not a fiduciary duty exists between Corporate Members comes down to dependency. According to the case of Murad v Al-Saraj [2005] EWHC 1235 (Ch),where A is a Corporate Member and becomes “wholly dependent” on its co-venturer B, for example for its expertise, and B is aware of this dependency, B will owe a fiduciary duty to A to act in its best interests and ensure no conflict of interest arises between them.

The exact threshold of dependency required to give rise to this fiduciary duty has not been defined and there is not a wealth of case law available for guidance. In Murad v Al-Saraj the threshold was not met, but it served as a pivotal reminder that directors need to consider the potential requirement to act in the best interests of their Corporate Member’s co-venturer.

The case of Ross River Limited and anor v Waveley Commercial Ltd and others [2013] EWCA Civ 910 gave rise to similar circumstances to Murad v Al-Saraj and in this case both the first instance judge and the Court of Appeal were keen to emphasise that the findings, whilst findings of law, were very sensitive to the particular facts of the case. Accordingly it is not the case that a fiduciary duty will be found to exist in relation to every JVC. That being said, in cases where one Corporate Member is heavily reliant on the other, and where a very high degree of trust exists between the two, the Court may be prepared to imply such a duty. This is not an uncommon situation to find with a JVC because often one party is the driving force behind a project and the other has a less central role, for example if it is predominantly involved to fund the project.

Notwithstanding the fact that a fiduciary duty may have arisen between Corporate Members, the statutory duties owed by the directors of the JVC and each Corporate Member are the same as the duties owed by a director of any other company under section 172 Companies Act 2006. For example, section 172(1) which requires directors to act in the best interests of the company must constantly be at the forefront of a director’s mind, and he/ she must consider this while concurrently considering any fiduciary duty which may have arisen in the circumstances described above.

In the event of a conflict between duties under section 172(1) Companies Act 2006 and the fiduciary duty to act in the best interest of a co-venturer, which would take precedence has not yet been directly addressed in Court. However, directors need to be aware of their various duties however arising and try to avoid conflicts of interest where possible.

The articles of association of the JVC should contain procedural provisions for directors to follow as far as possible in the event of such a conflict. The articles of association may also attempt to carve out the existence of a fiduciary duty from one party to another, although this is likely to be contested by the more dependent co-venturer.

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