Can parties in a joint venture owe fiduciary duties?
Fiduciary duties can arise in a multitude of relationships. An issue can arise as to whether, in light of the terms of their bargain, parties in a contractual arrangement owe fiduciary duties to one another including in circumstances where the contract relates to a joint venture. The Queensland Court of Appeal has ruled on such a case and has set out some useful points to consider when determining whether a given contractual relationship involves a fiduciary relationship.
The facts
In Eaton v Rare Nominees Pty Limited,[1] the case before the Court of Appeal, the appellant was the sole director and controlling mind of a company, E-Coastal Developments Pty Ltd. Together with the respondent company, Rare Nominees Pty Ltd, it entered into a joint venture agreement (JVA) in 2006 for the development and sale of residential land.
Pursuant to the terms of the parties’ JVA the appellant’s company was the proprietor and the respondent a contributor to the development. In return for the respondent’s financial contribution it was a term of the agreement that E-Coastal would pay ‘entitlements’ to the respondent at least annually.
A proceeding began when the respondent sued the appellant for breach of the JVA. Amongst other bases, the respondent argued that E-Coastal had breached fiduciary duties owing to the respondent by mixing funds (‘entitlements’) payable to the respondent with its own funds and by failing to maintain proper books and records disclosing the financial health of the property development.
The respondent argued that E-Coastal’s conduct could be attributed to the appellant personally by reason of his sole directorship and pursuant to the second limb of Barnes v Addy,[2] that is, on the basis the appellant had knowingly assisted his company in breach of its fiduciary duties.
The terms of the JVA
Whether or not the appellant could be liable for his company’s breach of fiduciary duties hinged on whether a fiduciary relationship existed at all. The terms of the JVA were critical. The JVA stated that the agreement was to be ‘contractual only’ and contained a number of express provisions that sought to define and limit the nature of the relationship between the parties.
There were relevant terms in:
cl 3.2.1, which stated that the ‘legal relationship of the Parties under the Joint Venture shall be contractual only’;
cl 3.2.2, which stated that the parties’ roles ‘shall be as set out in Clauses 3.3 and 3.4’;
cl 3.3 and 3.4, which itemised the parties’ respective roles and responsibilities in the joint venture; and
cl 3.5, which stated that the ‘only duties of any Party are those set out in this Agreement’ and that ‘[t]o the extent permitted by law [duties] (including duties of a fiduciary nature) are excluded.’
Another clause, cl 14.1, was titled ‘Relationship Between the Parties’. It included a number of sub-clauses describing the nature of the relationship, including that:
the parties’ relationship did not constitute a partnership (which otherwise could have attracted a fiduciary relationship);
no party had authority to act as agent for another;
the appellant’s company as ‘proprietor’ was to retain all legal and beneficial interest in the property development; and
the appellant’s company did not hold the property development on trust for the respondent as contributor.
At trial, the judge found that E-Coastal owed fiduciary duties to the respondent notwithstanding the terms of the JVA and had breached those duties. The judge found the appellant personally liable. The appellant sought to appeal this decision for reasons including that the trial judge erred in finding there was a fiduciary relationship.
On appeal
The matter was heard before Philippides and McMurdo JJA and Davis J. Their Honours in separate reasons allowed the appeal. Philippides JA gave the leading decision.
In answering the question on appeal regarding whether or not the parties to the JVA had a fiduciary relationship, Philippides JA noted the potential for a contract to expressly exclude such an affair. Her Honour stated:
‘In the context of contractual relationships, it has been observed that, while contractual labels have been held not to be determinative as to whether a relationship is fiduciary, express contractual exclusions of fiduciary duties have generally been effective.’[3]
In holding that the trial judge erred in finding there was a fiduciary relationship, Philippides JA appears to have:
looked to the express provisions of the JVA and took a purposive approach to construing those terms; and
considered the broader commercial reality of the joint venture.
The terms of the agreement and the parties’ intent
Her Honour disagreed with the trial judge’s assessment that a fiduciary relationship could be imposed notwithstanding clear terms of the JVA to the contrary. Her Honour stated:
‘[T]he trial judge failed to give proper weight to the critical consideration that any fiduciary relationship in the present case had to accommodate the terms of the JVA so as not to be inconsistent with them. Fiduciary and contractual relationships may co-exist. However, superimposing the fiduciary obligation as the trial judge did, in the circumstances of the present case, had the effect of altering the operation which the contract was intended to have according to its true construction.’[4]
In support of this conclusion, her Honour noted that the parties went to the effort of spelling out in the terms of the JVA; ‘[t]he parties gave express and detailed attention in the JVA to the relationship between them’.[5] Her Honour considered that to superimpose a fiduciary relationship despite the various express provisions of the JVA would be to ‘defeat, rather than give effect to, the legitimate expectations of commercial people’.[6]
Her Honour also noted that the JVA did not in any way restrain the appellant’s company from carrying on business other than that of the joint venture without being accountable to the respondent. Had it been otherwise, it might have paved the way for conflict of interest — the type of circumstance a fiduciary ought avoid.
The commercial reality
Besides her Honour’s view of the impact of the express provisions of the JVA itself, Philippides JA also disagreed with the reasons the trial judge gave for overcoming such provisions. In doing so, her Honour appears to have been mindful of the broader commercial context of the joint venture.
First, whereas the trial judge had found that there was a degree of trust placed by the director of the respondent in the appellant Philippides JA held that this was ‘at odds with the contractual allocation of risk’ and also inconsistent with evidence given by the director of the respondent at trial.[7]
Second, the trial judge found that the respondent had a certain vulnerability in terms of its limited rights as joint venturer under the terms of the JVA to inspect and require information about the property development. Philippides JA considered that the JVA elsewhere contained provisions which gave the respondent certain ‘contractual enticements by which its potential vulnerability to E-Coastal’s position of control could be addressed’[8] and held that the trial judge failed to give adequate weight to those provisions.
Third, although the trial judge considered that the purpose behind the respondent’s contribution to the property development was to achieve an entitlement which could be protected from commercial risk — such a matter suggesting the respondent’s vulnerability and, it might follow, the existence of a fiduciary relationship — Philippides JA considered that the express terms of the JVA did not specify any such goal or entitlement. In those circumstances, the express provisions of the JVA, including those disclaiming the existence of a fiduciary relationship, were to prevail.
In a separate decision and agreeing with Philippides JA, McMurdo JA summarised the matter:
‘In Hospital Products Ltd v United States Surgical Corporation, Mason J observed that the critical feature of those types of relationships which are generally accepted as fiduciary relationships “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 or discretion which will affect the interests of that other person in a legal or practical sense.” By the terms of the Joint Venture Agreement, in my view, it was clear that E-Coastal did not undertake to act in the interests of the respondent, in preference to any other interest, when disposing of its own money.’[9]
Comment
When determining whether or not the parties to a joint venture are bound by a fiduciary relationship, Eaton v Rare Nominees Pty Limited highlights the importance of looking to the terms of the agreement between the parties.
To the extent parties wish to attempt to exclude the possibility of a fiduciary relationship, the Queensland Court of Appeal’s comments suggest that it is essential to express clearly that intention in the text of an agreement. This is so not only in terms of having provisions which state that a fiduciary relationship is not to apply but also in terms of having provisions that effectively shut out any alternative way of reaching that conclusion. In the present case, that involved having clauses in the JVA which ruled out the existence of a partnership, any type of agency, or the existence of a trust for the benefit of a particular party in the joint venture. Such matters might otherwise have served as a ‘back door’ to imposing fiduciary duties.
At the same time, a party wishing to enjoy the protection that a fiduciary relationship can afford might take care to negotiate appropriate terms for inclusion in the bargain they are signing up for.
Postscript, 19 May 2023:
Where parties are negotiating the terms of a contract but have not yet reached a binding agreement, they might still be bound by fiduciary duties owed to one another. In Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd,[10] the New South Wales Court of Appeal observed:
‘Even if, contrary to our view … one could properly characterise the parties’ dealings as not having proceeded beyond mere negotiation, the nature of their dealings was such that the mutual confidence and trust which would underlie the most consensual fiduciary relationship, was readily apparent in this case.’[11]
[1]: [2019] QCA 190.
[2]: (1874) LR 9 Ch App 244.
[3]: Eaton v Rare Nominees Pty Limited [2019] QCA 190, [63].
[4]: Ibid [64] (emphasis added).
[5]: Ibid [65].
[6]: Ibid [67], quoting Australian Oil & Gas Corporation Ltd v Bridge Oil Ltd [1989] NSWCA 239, [21].
[7] Eaton v Rare Nominees Pty Limited [2019] QCA 190, [69].
[8]: Ibid [70].
[9]: Ibid [82].
[10]: [2023] NSWCA 102.
[11]: Ibid [99].