The duties of joint venture parties to one another

22nd January 2016

A joint venture agreement will typically set out obligations by the joint venture parties to one another and to the joint venture company. Typically there will be a mixture of positive and negative obligations – to exercise their voting rights to ensure that the governance of the joint venture company is conducted in a particular manner, for example, and commitments not to do certain restricted matters without the consent of the joint venture partner(s) and not to compete with the business of the joint venture company.

In Miller v Stonier [1], 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 but, in doing so, recognised that there were circumstances in which a commercial joint venture partner might be legally obliged to act in the best interest of their co-venturer as opposed to their own commercial interest. The test is set out in a case from 2004 [2], which held that where a member of a joint venture company becomes “wholly dependent” on their co-venturer (for example, for advice and recommendations), and the partner is aware of his or her co-venturer’s dependence, the co-venturer may be found to owe fiduciary duties to his or her co-venturer.

On the facts of this particular case, that threshold was not met and neither of the joint venture parties owed a fiduciary duty to the other. However, it is a consideration to be bear in mind when negotiating or managing a joint venture agreement that where one party is or becomes dependent on the other, a fiduciary duty may arise. Where a fiduciary duty does arise, the fiduciary will owe a duty to act in the best interests of their co-venturer and ensure that there is no conflict of interest between their own interests and those of the co-venturer. This will be most relevant where the fiduciary wants to withdraw from the venture but wants to continue its existing operations which may in some measure conflict with the joint venture company’s activities.

WM comment

The case is also a reminder of the difficulties that directors face in managing their duties as a director of the shareholder company and of the joint venture company itself. The directors owe statutory duties to each company and care must be taken to ensure that conflicts of interest between the two companies are managed properly. The articles of association should include provisions detailing how actual and potential conflicts of interest will be managed.

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[1] [2015] EWHC 2796 (Ch)
[2] Murad v Al-Saraj [2005] EWHC 1235 (Ch)