Joint venture (JV) are commercial arrangements where two or more parties enter into an agreement to combine resources in order to exploit a business opportunity. However, the fact that the joint venturers are engaged in a common commercial endeavour does not change the fact that they might have diverging commercial interests from time to time.
As we have discussed previously, inadequately drafted JV agreements can result in a fiduciary relationship not contemplated by the parties, which can fundamentally alter the presumed relationship between joint venturers.
Therefore, when setting up a JV, it is important to ensure that the JV agreement has been carefully drafted in order to ensure that any divergent commercial interests do not lead to costly litigation, which is what occurred in the recent case of Pilbara Iron Ore Pty Ltd v Ammon  WASCA 92. This case was recently appealed to the WA Court of Appeal and, after overturning earlier judgments, the matter has been remitted for further determination by the WA Supreme Court.
JV relationships do not automatically give rise to fiduciary relationships between the parties, particularly where the parties have created a unit trust and corporate trustee for pursuing the JV. Instead, as demonstrated by the recent case of Brady Queen Pty Ltd v Austhome Developments Pty Ltd & Ors  VSC 18, the circumstances of the JV relationship might indicate a lack of loyalty, reliance, vulnerability and other indicia of fiduciary relationships.
General approach to construing JV agreements
JV agreements, like other commercial contracts, are construed by reference to text, context and purpose. In general, commercial contracts should be given a businesslike interpretation and must be read as a whole by reference to the background knowledge that was available to the parties at the time.
As outlined by the Court in Pilbara v Ammon, this inquiry will require consideration of a number of factors including "the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract." In addition, the Court took into account the nature of the JV relationship between the parties when construing their JV agreement.
Case study: Pilbara v Ammon and the purpose of a JV relationship
Under the JV agreement, Pilbara was required to complete a feasibility study by a specified time in order to earn an 80% interest in the JV. However, the JV agreement did not expressly provide any criteria by which it could be determined that Pilbara had completed an adequate feasibility study. In the absence of a contractual definition of "feasibility study", the Court was required to determine whether the feasibility study completed by Pilbara was in accordance with the JV agreement.
Ammon contended that the feasibility study completed by Pilbara did not meet the standards required under the JV agreement on the ground that it was not "bankable" and that there were implied terms which required the feasibility study to be:
- sufficient to allow raising of project finance;
- independently verified; and
- reliable (ie. not inaccurate or incomplete).
On appeal, Pilbara submitted that the parties' deliberate use of an indefinite term provided an objectively intended measure of flexibility as to how definitive or comprehensive the feasibility study was required to be.
On appeal, the Court of Appeal held that the implied terms proposed by Ammon and accepted at first instance did not meet the criteria set out in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 as they were "too imprecise and vague". The Court proceeded to assess the proper construction of the express terms of the JV agreement.
The purpose of a JV relationship can be influential when resolving ambiguities
The Court emphasised that had the parties incorporated a defined term, the current dispute would not have arisen. Nevertheless, it was possible to give an objective meaning to the phrase "feasibility study" by considering the JV agreement as a whole. The Court of Appeal stated that the phrase "feasibility study" in the operative provisions of the JV agreement was "to be understood in the context of the overall scheme and structure of the JVA."
The Court held that the overall scheme of the JV agreement suggested that the parties had "contemplated there would be a feasibility study for the Joint Venture which in its nature, scope and analysis would meet the minimum criteria that financiers to the mining industry would ordinarily require before considering a proposal to finance the development and mining" of the Exploration Licence.
In coming to this conclusion, the Court:
- Took into consideration various clauses in the JV agreement in order to give meaning to "feasibility study" which would underpin the "harmonious operation" of the clauses "within the operation of the JVA as a whole."
- Considered the nature of the parties' relationship and the purpose of the JV. It was noted that the general purpose of the JV was expressly outlined in clause 2.1 of the JV agreement. Pursuant to this clause, the parties were associated "in an unincorporated joint venture for the purpose of exploring and, if warranted, developing and mining the Tenements."
- Highlighted that the feasibility study was intended to alter the parties' respective interests in the JV.
The matter was ultimately remitted to the Warden's Court to determine whether the feasibility study met the requirements as ascertained by reference to the terms and purpose of the JV agreement.
Case study: Brady Queen v Austhome and the use of corporate trustee to structure the JV
In Brady Queen Pty Ltd & Ors v Austhome Developments Pty Ltd & Ors  VSC 18, Brady Queen (a company associated with Mr Brady) and Austhome (a company associated with Mr Wu) pursued a JV property development in Melbourne, Australia, via a unit trust with a corporate trustee (JV Co).
The relationship between Brady Queen and Austhome deteriorated and Austhome and Wu made claims against Brady and Pethica, the directors of JV Co for breach of fiduciary duty. Austhome and Wu alleged that a fiduciary duty arose out of the JV relationship and that there was a duty to not be in a position of conflict. The alleged conflict arose out of Brady's involvement in another project, via a different JV corporation, Brady Lonsdale.
The Court held that there was no fiduciary duty as alleged and cited Mason J's judgment in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. That authority emphasises that a critical feature of a fiduciary relationship is that "the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power of discretion which will affect the interests of that other person in a legal or practical sense."
The joint venturers were Brady Queen and Austhome (and Brady and Wu), and although Pethica was a director of JV Co, he was not a joint venturer and therefore "there was no obligation on the part of Pethica to look after the interests of Wu (and Austhome) and none of the indicia of a fiduciary relationship are present." As the JV was pursued via JV Co as corporate trustee, it was a matter for JV Co to make a claim against its directors should any of them have acted in breach of statutory and fiduciary directors' duties, but JV Co had not made any such claims against Pethica.
In determining the relationship between Brady and Wu (and Austhome), the Court considered the parties' obligations under their agreement and that they had chosen to pursue the JV project via a corporate trustee, which had its own constitution and was subject to the corporations law. Ultimately, it was held that there was no fiduciary relationship between Brady and Wu (and Austhome) because the "key indicators of a fiduciary relationship – loyalty, dependency, ascendency, reliance, vulnerability" were absent from the JV structure.
Often in commercial arrangements parties will seek to exclude fiduciary relationships arising in JV relationships, so as to allow each party to pursue its own legitimate commercial interests where in accordance with the terms of a JV agreement. However, while an inadequately drafted JV agreement might fail to exclude fiduciary duties, JV relationships do not necessarily create fiduciary relationships.
When drafting a JV agreement and considering the structure of the JV, it is important to carefully consider the scope of respective responsibilities, as recent case law shows that implied terms or fiduciary duties might not be available to assist an aggrieved party in the event of a dispute.