Ross River Ltd and another v Waveley commercial Ltd and others

Joint venture – Commercial development – Fiduciary duty – Appellants contributing finance to acquire land for commercial development by respondent’s company pursuant to joint venture agreement providing for share of profit – Whether respondent owing fiduciary duties to appellants – Whether breaching duty by causing company to make payments out of joint venture revenues otherwise than as proper expense of development – Respondent held not to be liable – Appeal allowed In 2004, the appellants agreed to participate in a project for a commercial development on land in Ampthill, Bedfordshire, pursuant to a joint venture agreement (JVA) with a company incorporated for that purpose by the respondent and another. Pursuant to the JVA, the appellants were to finance the acquisition of a site needed for the project on agreed terms.The company was to be responsible for the conduct of the development and the payment of all related fees and expenses. The objectives of the joint venture included maximising the profits arising from the development and sharing in those profits in the manner provided by the agreement at the earliest practicable time. There was a proviso that no party should receive development profits in advance of the other and that such profits should be distributed as soon as practicable following receipt. A later side agreement made further provision for the claimants’ entitlement to part of the net profits of the project.The development was completed in 2007 but its realisation took some time and its last elements were not sold until 2011. Meanwhile, in 2008, the appellants became dissatisfied with the conduct of the project. They brought proceedings against the respondents in which they sought a determination of the amount of the net profit and alleged a breach of fiduciary duties by the making of improper payments. By then, the first respondent was insolvent and was being supported financially by the second respondent, such that a judgment against it was unlikely to be of any real value. The appellants’ primary case was that the second respondent was in breach of fiduciary duties that he owed to them in his personal capacity.In the court below, the judge found that: (i) the net profits were more than £1.2m and that the appellants’ share was nearly £1.044m; (ii) the first and second respondents each owed fiduciary duties to the appellants to act in good faith and not to do anything in relation to the handling of the joint venture revenues that favoured the first respondent to the disadvantage of the appellants; but (iii) the making of substantial payments to parties connected with the respondents, even if not made for joint venture purposes, gave rise to no entitlement to equitable compensation since there was no evidence that the respondents could reasonably have foreseen at the time that the making of those payments would jeopardise the first respondent’s ability to pay the claimants’ net profit entitlement. He rejected the appellants’ submission that it was a breach of duty for the first respondent to incur costs in defending the proceedings, further dissipating the funds available to satisfy its liabilities to the appellants, in circumstances where the primary claim was against the second respondent; he held that the first respondent was entitled to defend the proceedings brought against it. The appellants appealed. The second respondent cross-appealed, challenging the finding that he owed fiduciary duties. Held: The appeal was allowed; the cross-appeal was dismissed.(1) A contract in the nature of a joint venture could, in appropriate circumstances, impose fiduciary duties on the parties; however, the term “joint venture” was not a term of art and each relationship that was described as such had to be examined on its own facts and terms to see whether it carried any obligations of a fiduciary nature. The first and second respondents owed fiduciary duties to the appellants in light of the structure adopted under the JVA, where the first respondent owned all the relevant assets and was entirely in control of their exploitation and the second respondent was entirely in control of what the first respondent did in that respect: John v James [1991] FSR 397 applied. The fiduciary duty applied in relation to all the appellants’ entitlement out of the net profits.(2) The judge had correctly identified the fiduciary duties owed by the first and second respondents but had erred in his application of them to the circumstances of the case. Those fiduciary duties prohibited the first respondent from paying any part of the proceeds of the development to itself, or using them for its own benefit, otherwise than: (i) in payment of proper expenses of the development; or (ii) as otherwise agreed with the appellants. The judge had erred in allowing the first respondent the freedom to make payments to itself or for its own benefit, outside those permitted categories, if it was able to make a reasonable judgment, in good faith, that the making of the payment would not jeopardise its ability in the end to pay the appellants the sum to which they were entitled out of the net profits. That approach allowed the first and second respondents to impose on the appellants the risk that the development would not work out as well as expected. It also reversed the usual burden of proof in relation to breach of fiduciary duty; where a person was under a fiduciary duty as regards his dealings with assets, the burden lay on that person to establish the justification for its dealings, rather than on the beneficiary of the duty to show that the payment was not justified. Consequently, the judge’s interpretation was inconsistent with the essential nature of a fiduciary duty by not placing on the fiduciary the burden of justifying any contested payment or dealing and by subjecting the beneficiary to the risk of the payment for the fiduciary’s own benefit not turning out to be justified. Moreover, for the first respondent to make a payment for its own benefit out of anticipated net profit was incompatible with the contractual agreement between the parties.(3) It was a breach of fiduciary duty for the first respondent to incur spend money out of the joint venture revenues in defending the proceedings. The fact that the first respondent was a proper and necessary party did not itself justify the incurring of substantial expenditure. The real dispute, throughout the proceedings, was between the appellants and the second respondent. The second respondent’s defence of the proceedings should have been conducted at his own expense, without any of that costs or liability being shifted to the first respondent. The judge’s conclusion in relation to the first respondent’s legal expenses was erroneous and required an exception to be made to the fiduciary duty so far as it limited the purposes for which payments could be made. Where the real contest was between the appellants and the second respondent, and the first respondent had no separate interest of its own in resisting the claims, it was a breach of the fiduciary obligation for the first respondent to spend its own money on defending the proceedings and for the second respondent to procure that it should do so.(4) The appellants were entitled to be compensated for the full amount paid away out of the joint venture revenues in breach of fiduciary duty. The second respondent was accountable to the appellants by way of compensation for every one of the impugned transactions. The judge had erred in criticising the appellants for not having proved their case in detail as regards individual transactions. The appellants were not required to prove that the impugned payments were not legitimate joint venture payments.  It was up to the first and second respondents to justify those payments and they had not done so. Accordingly, the appellants were entitled to be paid the difference between the amount that they would recover in the liquidation of the first respondent and the full amount to which they were entitled. On the information available, the appellants would receive approximately £86,171 in the liquidation on its claim for £1,043,926. The second respondent `was to pay the remaining sum of £957,755. David Caplan (instructed by Mishcon de Reya) appeared for the appellants; Piers Hill (instructed by direct access) appeared for the respondents. Sally Dobson, barrister