20 Dec 2018

Duties of good faith in joint venture arrangements – ignore at your peril

By Alison Close, Sean Kelly and Allison van Beers

If a dispute arises in a complex joint venture project, fiduciary obligations and implied duties of good faith may be found to exist despite the parties not having turned their minds to these issues when formulating their joint venture arrangements.

Recent decisions of the Queensland Supreme Court and Court of Appeal considered the role and impact of fiduciary duties and obligations of good faith in the context of joint venture arrangements. The existence of these obligations could affect joint venture projects in unforeseen ways, including by allowing an aggrieved party to treat the contract as being at an end.

Background: fiduciary duties in joint ventures

We've previously reported on recent developments in joint venture arrangements, including the steps that parties could take to regulate the imposition of fiduciary duties. One approach ("Option 1") involved expressly excluding fiduciary duties from a joint venture arrangement.

The recent case of Lien & Anor v Clontarf Residential Pty Ltd & Anor [2018] QSC 94 highlights the ongoing importance of these issues. In Lien, the parties did not expressly address whether fiduciary duties or obligations of good faith arose between the parties. As a result, where the joint venture arrangement included management and payment powers that left some joint venturers vulnerable, it was held that both fiduciary duties and implied obligations of good faith regulated the parties' rights and liabilities to each other on the commercial project.

On the other hand, in Sentinel Robina Office Pty Ltd v Clarence Property Corporation Ltd [2018] QCA 314, the Court of Appeal gave a good faith obligation relatively narrow application.

Implication of good faith obligations

In Lien, the joint venturers were party to a joint venture agreement relating to a development of a mixed-use construction project. The defendant developer demanded payment from the Liens to third parties without adequate explanation. For these and other alleged breaches, the Liens claimed that they had validly terminated the agreement by accepting repudiation. The defendant developer sought an order for specific performance requiring the project to proceed.

The language of the agreement did not contemplate the existence of fiduciary duties or obligations of good faith. However, Justice Jackson held that the defendant owed implied duties of good faith in the performance of the contract, because:

  • at the time of making the contract, the parties were in a fiduciary relationship;
  • one of the parties had management powers which left other parties vulnerable to exercises of discretion; and
  • there were obligations of co-operative decision-making in respect of some matters, and therefore there was required to be a functioning relationship of confidence and trust.

Justice Jackson determined that to give business efficacy to the joint venture agreement, it was necessary to imply an obligation that "the parties act in good faith towards each other and in the performance of the contract and exercise of powers thereunder".

Ultimately, it was held that by authorising certain payments against the interests of some of the parties, the first defendant had breached its implied duties of good faith. The plaintiff argued that the breaches of the duty of good faith constituted repudiatory conduct and that the plaintiff could treat the contract as being at an end, allowing the plaintiff to leave a dysfunctional joint venture arrangement. Justice Jackson accepted this argument, making findings by reference to the facts that the breaches evinced an intention to fulfil the contract only in a manner substantially different from the party's obligations.

Scope of express good faith obligations

In Sentinel, the appellant (Sentinel Robina) and the respondent (Clarence Property) were considered akin to joint venturers and parties to a deed in relation to shared ownership of a building. Clause 16.9 of the deed said that:

"the parties agree that in the performance of their respective duties and the exercise of their respective powers under this deed and in their respective dealings with each other, they shall act in the utmost good faith".

The issue in the dispute was whether actions by Clarence Property, in recruiting an employee from Sentinel Robina, had occurred "in their respective dealings with each other" for the purposes of clause 16.9. This required the Court of Appeal to determine whether the aspect of the good faith obligation which regulated "respective dealings" (as opposed to aspects which regulated "respective duties and … respective powers under this deed") applied only to dealings under the deed or to dealings generally.

Sentinel Robina argued that the absence of the words "under the deed" in the aspect of clause 16.9 which regulated "respective dealings" meant that the good faith obligation had a broader application in that context. This argument was not accepted by the Court of Appeal. It was held that recruiting an employee did not bear any relationship to the bargain between the parties or the contractual objectives which each sought to achieve, and that it was not an example of one of the parties "dealing" with the other.

What does this mean for you?

Lien and Sentinel emphasises the importance of carefully considering the existence and extent of joint venturers' rights and liabilities to each other and expressly addressing these matters in the contract.

Complex joint venture projects often involve an element of management by one party on behalf of another, creating vulnerability to potential abuses of that power. In these circumstances, if a dispute arises, fiduciary obligations and implied duties of good faith may be found to exist despite the parties not having turned their minds to these issues when formulating their joint venture arrangements. The commercial outcome of such disputes can be unpredictable, and remedies may sound in damages or in a right to terminate the joint venture agreement.

High Court rejects special leave application

These cases come at a time when disputes regarding obligations of good faith are being brought to the High Court. Earlier this year the High Court rejected a special leave application to appeal the Full Federal Court's decision in Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd [2017] FCAFC 190 (thereby vindicating it), which addressed whether an implied good faith obligation is separate from reasonableness obligation, and whether reasonableness is considered objectively or subjectively.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.