A fiduciary relationship can exist between parties without a finally concluded joint venture agreement

The Supreme Court has upheld a decision determining that an informal commercial relationship between property developers gave rise to fiduciary obligations but differed on how the party should be compensated for breaching those obligations.

Background

The case1 involved two parties (the joint venture parties) agreeing in 1996 to work together as property developers. A development was completed with a third party under the arrangement. An opportunity then arose in 1997 with a Dunedin property. The joint venture parties began to discuss the opportunity in detail and gave extensive consideration to the development late in 1998.

In July 2000, following approaches by one and then both of the joint venture parties, a tenant was secured. In the period between those approaches and the securing of the tenant, one of the joint venture parties had decided to exclude the other in favour of involving other investors in the project. That party confirmed its agreement with the tenant and completed the project.

As a result, the excluded party (Mr Fay) brought proceedings against the other joint venture party (Mr Chirnside) claiming, among other things, that their commercial relationship was a joint venture relationship giving rise to fiduciary obligations. This claim became the central focus of the case.

In the High Court, it was decided that a fiduciary relationship had existed during the relevant period and that the contracting party had therefore wrongfully excluded the other party from the project, resulting in the excluded party being entitled to $495,000 in damages. This was calculated on the basis of half of the net value of the realised development ($1,290,000), representing equitable compensation or damages assessed by analogy with disgorgement of profits, less a deduction of an allowance ($300,000) for the "substantially disproportionate contribution to the project which Mr Chirnside made" prior to July 2000.

The Court of Appeal 2 upheld the High Court's finding that a fiduciary relationship existed, noting that where there was a commercial joint enterprise in respect of which a joint venture agreement had not yet been entered into did not rule out a claim that a fiduciary relationship existed.

The court determined that a duty of loyalty existed between the joint venture parties with the result that "there could be no presumptive hijacking" of the transaction and that the relationship could not be discontinued without good faith efforts to reach agreement. However, the Court of Appeal substituted the High Court's damages award3 for a smaller amount of $287,500 calculated on the basis of a "loss of chance" of participating in a profitable venture. In setting this amount the court also reduced the allowance deducted by the High Court for Mr Chirnside's contribution to the development (which they considered to be overly generous) to $100,000.

The findings that the joint venture between the parties was underway was not challenged in the Supreme Court but Mr Chirnside appealed against the determinations that he owed fiduciary duties to Mr Fay. Both joint venture parties appealed the damages awarded to Mr Fay.

Supreme Court's Decision

Fiduciary obligations

The Supreme Court unanimously rejected Mr Chirnside's contention that since he had not undertaken or agreed to act for or on behalf of Mr Fay's interests the parties were not in a position of mutual trust and confidence which would give rise to fiduciary obligations.

The Chief Justice stated that "where parties join together in a venture with a view to sharing the profit obtained, their relationship is inherently fiduciary within the scope of the venture while it continues". The fact that the parties haven't formalised their relationship through a corporate structure or agreement " does not alter the character of the relationship already established and underway".

Justice Tipping (with whom Justice Blanchard agreed) noted that it was clear that it was not necessary for there to be an express undertaking or agreement to act in the interests of another before a fiduciary duty can arise. On the facts of this case they noted that:

• the parties were working together towards a common goal which they expected would be for their mutual benefit;
  
  
• there was no finding of a partnership on the facts but their relationship was analogous to that of a partnership;
  
  
• from the time the parties agreed to work together on the Dunedin property they could be regarded as having entered a joint venture;
  
  
• the fact that the parties had not thought it necessary to enter into a detailed formal agreement before embarking on their joint venture suggested that each was reposing trust and confidence in the other as they had in an earlier venture.

On the nature of joint ventures, Justice Tipping made the following general observations:

"A joint venture will come into being once the parties have proceeded to the point where, pursuant to their arrangement or understanding, they are depending on each other to make progress towards the common objective. Each party is then proceeding on the basis that he or she is acting in the interests of all or both parties in the arrangement or understanding. A relationship of trust and confidence thereby arises; each party is entitled to expect from the others loyalty to the joint cause, loose as the formalities of the joint venture may still be."

Damages

The Supreme Court was also unanimous that the Court of Appeal had erred in the approach it took in calculating the monetary relief to which Mr Fay was entitled. They considered that the Court of Appeal's "loss of chance" approach was inconsistent with a finding that the parties were joint venturers. The loss of chance approach involves discounting for contingencies and on the facts there were no relevant contingencies. No element of chance came into the issue of the existence of a joint venture and the joint venture had already demonstrated its profitability.

The court agreed that the appropriate remedy for breach of fiduciary duties is disgorgement of the profit through an account. The Chief Justice did not however agree with the other members of the court on the question of the allowance deducted from the relief granted. In her opinion, granting Mr Chirnside an allowance simply for fulfilling the role expected of him within the scope of the joint venture was inconsistent with the "no-profit" rule and did not fit within any of the recognised exceptions.

After considering relevant authorities and recognised texts on this point, the majority of the court held that the High Court had been entitled to make an allowance for the disproportionate contribution Mr Chirnside had made to the joint venture. They noted that an appeal on this aspect was not open to an " absolutely right or wrong answer " and in relying on the approach in Estate Realties4 and Warren International5 the High Court had not erred in principle. However they considered that the allowance fixed by the High Court was not calculated on a basis which appropriately recognised the need for restraint in the amount fixed. Justice Tipping noted, " In the same way as the court should be cautious and not make an allowance to an errant fiduciary unless a clear case for doing so is made out, so to should the court generally be restrained in the amount awarded." The court therefore reduced the hourly amount fixed by the High Court but retained the number of hours it had attributed to the disproportionate amount of work carried out by Mr Chirnside and arrived at a new allowance of $200,000.

On the question of how the profits were to be calculated, this required an assessment of the rental stream to be derived from the Dunedin property. The court found it necessary to re-examine the evidence presented to the High Court over an area of vacant space that remained in the complex. The court determined that it had not been appropriate for the trial judge to assess the rental stream for the vacant space on the basis that usage would be for storage only and accordingly revised this figure upwards.

After deducting the revised allowance ($200,000) from the adjusted net gain for the project ($1.9 million), Mr Chirnside's entitlement to half the net value of the joint venture project was increased to $850,000.

 

1 Chirnside v Fay [2006] NZSC 68

2 Chirnside v Fay [2004] 3NZLR 637

3 Chirnside v Fay (No 2) [2005] 3 NZLR 689 (as to relief)

4 Estate Realties Ltd v Wignall [1992] 2 NZLR 615

5 Warman international Ltd v Dwyer (1995) 182 CLR 544

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