Company

Dealing with company - Dealing with company in good faith

Ross River Ltd and another company v Waveley Commercial Ltd and others: Chancery Division (Mr Justice Morgan): 25 January 2012

The claimant companies and the first defendant company were parties to a 'joint venture agreement' (JVA). The second and third defendants, officers of the first defendant, were also parties to the JVA. The JVA was later the subject of a number of supplemental agreements. There was also an agreement called a side agreement. The JVA was in connection with the building of a development which was completed around 2007.

Under clause 10.2 of the JVA, the claimants were entitled to elect to take development profit rather than basic profit. The claimants did so elect. Development profit was defined as 40% of net profits. The claimants became concerned at the lack of progress in relation to the sales of the completed developments and suspicious of the fact that the second defendant had caused the first defendant to enter into three contracts to sell various interests in the completed development to himself, or to a company which he had formed for the purpose of entering into such contracts. The claimants brought the instant proceedings against the defendants. The substantive relief sought by the claimants included damages, which was restricted to the first and second defendants.

It was common ground that a sum was payable by the first defendant to the claimants under the JVA, however the parties were very far apart, for a large number of reasons, as to the amount payable. The court was asked to determine the many disputes as to that amount, including what was meant by the term 'net profit'. 'Net profit' was stated to be the difference between all revenues received from the disposal of the composite site and the costs, fees and expenses incurred in achieving such revenues calculated in accordance with the provisions of part II of the schedule to the JVA.

The first two disputed items concerned revenues said to have been received by the first defendant. The remaining disputed items concerned costs, fees and expenses said to have been incurred by the first defendant. The claimants further contended that there were to be implied into the JVA two terms (the implied terms) about how the defendants were to behave during the period of the JVA. The claimants pleaded that those implied terms were obvious and/or necessary to give business efficacy to the JVA. The first term imposed a negative obligation on the first defendant not to conduct any business other than that necessary for the purposes of the implementation of the development, the subject of the JVA. The second term sought to prevent the second and third defendants from acting in any way that would prejudice the first defendant's ability to pay the terms owing to the claimants.

The main issues in the case were: (i) what the true level of net profits under the JVA was; (ii) whether the JVA contained the implied terms, which would impose contractual obligations on the first and second defendants; and (iii) whether the first and second defendants owed the claimants any fiduciary duties in relation to the development which was the subject of the JVA.

The court ruled: (1) In the instant case, the court had to decide the issues of fact, and any issues of law, as to the amount of the net profits on the evidence before it, applying the usual rules as to the burden of proof. The court had to consider, disputes as to, inter alia, revenue, costs and expenses to be deducted, the cost of the freehold, historic costs and legal fees. In construing the 'financial proposal' in the JVA it could be seen that in general the overall intention of the parties was that the first defendant would incur costs and could deduct those costs from the revenues of the development for the purpose of calculating net profits.

In general, the first defendant could be required to produce evidence that it had incurred the relevant costs. In relation to some of the costs, the sums expended had to meet an express test of reasonableness; in relation to some other costs, it was probable that it was to be implied that costs were to be recovered only to the extent that they had been reasonable. If the first defendant had not in the end incurred a cost at all, or had incurred a cost at a level below the figures shown in the financial proposal, then only the lower (if any) figure could be brought into account (see [79], [80], [87] [100], [105], [111], [125] of the judgment).

(2) In considering whether to imply terms: (1) a court could not improve the instrument it had to construe to make it fairer or more reasonable. It was concerned only to discover what the instrument meant; (2) the meaning was that which the instrument would convey to the 'reasonable person' or the 'reasonable addressee' having all the background knowledge which would reasonably be available to the audience to whom the instrument was addressed. The objective meaning of the instrument was the intention of 'the parties' or the intention of whoever was the deemed author of the instrument; (3) the question of implication of terms only arose when the instrument did not expressly provide for what was to happen when some particular (often unforeseen) event occurred. The phrases which courts had used as 'tests' to decide whether a term ought to be implied could detract from the task that the court had to undertake. That was to see whether the proposed implication spelled out what the instrument would reasonably be understood to mean. The oft-expressed requirement that an implied term had not just to be reasonable but had to be 'necessary' simply reflected the requirement that the court had to be satisfied that the term had to be implied because that was what the contract had to mean (see [218],[219] of the judgment).

In the instant case, applying established law, the claimants' contention that any of the suggested terms should be implied into the JVA would be rejected (see [230] of the judgment). A-G of Belize v Belize Telecom Ltd [2009] All ER (D) 150 (Apr) applied.

(3) In the instant case, it was right for the court to hold that the first defendant had impliedly undertaken an obligation to act in good faith in relation to the operation of the JVA and in relation to the accounting to the claimants in respect of their share of net profits. The first defendant had not owed the claimants a general obligation not to allow duty and interest to conflict, nor a duty not to profit from the fiduciary position, but had owed a fiduciary obligation not to do anything in relation to the handling of the joint venture revenues which favoured itself to the disadvantage of the claimants. The second defendant owed to the claimants a similar fiduciary duty.

His fiduciary duties extended not only to protect the claimants' rights to payment under the original JVA, but also to payment of the sums due to the claimants under the side agreement. The duties had to be applied in a case where, at the outset of the joint venture, the parties to it had expectations as to the likely level of net profits which would allow them to assess what sum would ultimately turn out to be payable by the first defendant to the claimants and what sum would be retained by the first defendant. The answer to whether there had been a breach of fiduciary duties depended on the calculation of net profit (see [258], [259],[263], [264], [279] of the judgment.

All that remained for the purpose of calculating net profits was for the accountants to calculate the sums which ought to have been payable by the first defendant by way of bank charges and interest in relation to joint venture matters. When the amount of net profits was finally calculated, then the sum payable to the claimants for development profit would be known and would be payable by the first defendant to the claimants (see [283], [284] of the judgment).

Conway v Ratiu [2005] All ER (D) 103 (Nov) considered; Wetherspoon (J D) plc v Van de Berg & Co Ltd [2007] All ER (D) 82 (May) considered; J D Wetherspoon plc v Van de Berg & Co Ltd [2009] All ER (D) 101 (Apr) considered.

David Cavender QC and David Caplan (instructed by Mishcon de Reya) for the claimants; Nicholas Davidson QC and Malcolm Chapple (instructed by Geoffrey Leaver LLP) for the first, second and fourth defendants.