The words of Lewis Carroll’s ‘Jabberwocky’ might not usually be associated with talk of beginning a joint business venture, but one word of the famous poem should resonate with anybody considering such an enterprise: “beware”.
The term ‘joint venture’ tends to be bandied around by members of the business community to refer to any project on which they intend to collaborate with associates. In English law, though, it carries rather more commitment than a simple agreement to collaborate. A formal joint venture is an agreement between a number of parties to create a new entity and new assets by contributing equity (usually for a limited time period). In such situations, usual practice is to create a contractual agreement, signed by all parties, which explicitly details each of their duties in relation to the joint venture entity. So far, so good: under these circumstances you can contract for duties you know that you can fulfil, and when the time for performance comes, you’ll be aware of what is expected of you.
While this may become complicated, at least you all know where you stand. However, in a recent case it was found that parties to a joint venture might inadvertently acquire extra-contractual fiduciary duties in addition to the obligations written into their joint venture agreement. In Michael Donald Miller (2) Domestic Fire Appliances Limited (3) BFM Europe Limited (4) American Electric Fires LLC –v- (1) Christopher Simon Stonier (2) Hearth Products Limited (2015) the judge ruled that in certain circumstances, joint venture partners might be legally obliged to act in the best interests of their co-venturers rather than in their own best interests.
‘Beware’ indeed! So under what circumstances might a joint venture partner be burdened with additional legal obligations? In an earlier case, Murad v Al Saraj 2004 it was found that where a member of a joint venture company becomes “wholly dependent” on the recommendations and advice of another member AND where the partner is aware of that dependence, the partner may have fiduciary duties imposed upon them by law.
Whilst having to act in the interests of someone with whom you are already cooperating might not sound too bad, being obliged to act in their interests at the expense of your own is probably more of a commitment than most joint-venturers expect to make.
Duties and obligations are often imposed on the directors of joint venture companies via the venture’s articles of association and by its shareholder agreement, as well as by company law. The possibility of throwing a further set of (fiduciary) duties into the mix can seriously complicate the operation of the company and confuse the duties of the various parties involved.
To avoid incurring obligations to your co-venturers over and above those you expected, consider the extent to which they are dependent on you to make the venture successful outside the scope of the contracts between you. As things progress, regularly review how your venture is operating so as to be aware if you are moving towards the creation of fiduciary duties. You can then determine whether or not this is appropriate, and how to manage or mitigate any risks it creates.
Whilst a joint venture can seem to be a profitable mechanism to coordinate the efforts of several parties towards the best interests of all, it may not be as straight forward as it seems. In the words of Lewis Carroll, joint ventures really can have, in the worst cases, “the jaws that bite, the claws that catch!”
If you’re considering a joint venture and would like help to avoid the potential pitfalls please get in touch.