Clarifying fiduciary obligations in a joint venture arrangement

Daisley v Ark Contractors Limited [2020] NZHC 793

Fee Langstone was recently involved in a High Court trial which has shed light on the fiduciary duty that arises from a joint venture arrangement.  It also usefully affirms the requirement that there be a contract of retainer or assumption of responsibility to a party involved in a transaction before a lawyer will owe fiduciary duties to that party.

Fee Langstone acted for the third defendant (Thomson Wilson) who had been the solicitors for the second defendant (the Kellers) and subsequently, the first defendant (Ark).  A number of causes of actions were pleaded, including claims of duress, breach of contract, constructive trust and breach of fiduciary duty.  Of note is the extensive judicial discussion around the owing of fiduciary duties in a joint venture arrangement.

Ultimately, Fee Langstone was successful in defending the claim of breach of fiduciary duty against Thomson Wilson.  The High Court did, however, find for the plaintiff in respect of his claims against the Kellers and Ark for breach of contract and against the Kellers for breach of fiduciary duty.

Background

The proceeding arose out of a joint venture agreement entered into by the plaintiff (Mr Daisley) and the Kellers.  Mr Daisley faced a mortgagee sale of properties owned by him. The Kellers offered financial assistance by which Mr Daisley’s properties were sold to the first defendant company, Ark Contractors Ltd (Ark).  In return, Mr Daisley was to get a commensurate shareholding in Ark.  Thomson Wilson acted for the Kellers and, once it was incorporated, Ark.

Breach of fiduciary duty

Claim against Thomson Wilson

Mr Daisley alleged that Thomson Wilson breached its fiduciary duty to him on the basis that by acting for Ark, the firm was implicitly acting for the joint venture parties.  Mr Daisley alleged that Thomson Wilson did not treat him with the same loyalty as the Kellers (the other party to the joint venture).

The fundamental hurdle to the claim was that there was no joint venture between the parties before 2 December 2009, the day that documents for the venture were executed.  Whilst there was an agreement in principle that Thomson Wilson would act for Ark (the joint venture vehicle), it did not follow that this encompassed acting for the parties to the joint venture.  For Thomson Wilson to have acted for both joint venture parties, it would have needed to be retained by both parties.

The Court found that at no time did Mr Daisley instruct Thomson Wilson.  No retainer was ever discussed or agreed, nor were there any discussions between Mr Daisley and Thomson Wilson before the execution of the Ark Agreement.  Further, there was no assumption of responsibility on Thomson Wilson’s part and thus, quoting Blanchard J in Brownie Wills v Shrimpton, “there [was] no room for any argument” that Thomson Wilson was a fiduciary for Mr Daisley.

Claim against the Kellers

Against the Kellers, however, the Court found that there had been a breach of fiduciary duty.  Mr Daisley claimed that the Kellers owed him fiduciary duties because the joint venture agreement was characterised by trust, reliance and confidence.  He claimed that the Kellers breached their duties by placing themselves in a position of conflict of interest in various ways.

As with the claim against Thomson Wilson, the Court held that there was no joint venture before 2 December 2009, therefore there was no fiduciary duty owed by the Kellers up until that point.  However, upon execution of the Ark Agreement and, in particular, once the venture commenced after 29 January 2010, the relationship between Mr Daisley and the Kellers changed fundamentally, such that each party owed the other duties of loyalty and of good faith.

By failing to issue shares to Mr Daisley after the venture commenced, the Court held this constituted a breach of fiduciary duty as the Kellers were essentially appropriating the joint venture for themselves.  Whilst the Court acknowledged there were ongoing disputes, the Kellers were not entitled to avoid their obligation to issue shares.

In this regard, the Court considered the particular vulnerability of Mr Daisley before the issue of the shares in Ark because of the imbalance of power. In addition, the nature of the agreement relating to Ark required Mr Daisley to repose trust in the Kellers which exacerbated the power imbalance.  Further, once Mr Daisley’s properties were transferred, the joint venture had progressed to the extent that there was then a common purpose and a goal to develop the properties for joint profit.

Accordingly, the Court awarded equitable contribution to the first plaintiff for breach of fiduciary duty.  In addition, the Court found there had been a breach of contract by both the Kellers and Ark for failing to issue the shares.

Virginia is a Partner at Fee Langstone

Claim for a constructive trust

The Court also considered whether to impose a constructive trust as a proprietary remedy.  Mr Daisley argued that there was a constructive trust as the transfer of his land to the Kellers was never contemplated as being part of the joint venture.

The Court did not accept Mr Daisley’s argument.  Whilst Mr Daisley had a reasonable expectation that he would receive an interest in Ark for his contribution of transferring his properties to Ark, it was not possible for a constructive trust to exist over future property.  Thus, there was no prospect of a constructive trust over shares that were yet to be issued.  As Mr Daisley was unable to identify particular assets or property which would be subject to a constructive trust, the Court dismissed the claim against the Kellers.

Comment (Virginia Wethey)

Virginia Wethey comments that the existence of a joint venture does not necessarily follow that there will be fiduciary duties owed.  A more detailed analysis of the relationship between the parties is critical to assess whether there is anything that entitles one party to repose trust and confidence in the other to give rise to a fiduciary relationship.

Virginia also says that in respect of the claim against Thomson Wilson, this decision once again affirms that in order for there to be liability on a lawyer for breach of fiduciary duty, there needs to be a subsuming contract or retainer, or some other relationship between the lawyer and the third party to give rise to that duty.  Simply acting for one party to a transaction does not create a fiduciary duty to another party to that transaction.

Virginia Wethey and Harriet Birch appeared for Thomson Wilson.