Most directors are content to sit behind the limited liability structure of the company in which they are involved and believe that, by doing so, they will avoid incurring personal liability in respect to any matters which they are involved. Therefore, circumstances in which a director has been found to incur personal liability by being in breach of a fiduciary duty to a third party (who is not just the company and its shareholders) will be a potential cause for concern. This is what happened in the case of Ross River Limited and others v Waveley Commercial Limited and Barnett.
Background
The circumstances arose from a joint venture agreement between Ross River Limited and others (on the one hand) and a company called Waveley Commercial Limited of which Mr Barnett was the director. The joint venture related to a property development in Bedfordshire which had been initiated by Mr Barnett and a colleague. Ross River Limited and another company were introduced to the project for the purposes of providing finance.
The relationship between the parties was governed by a joint venture agreement. The parties also entered in a further side agreement later on varying the terms of the original agreement. The issue as to Mr Barnett’s potential liability as a director came in to sharp focus because although WCL was found to be in breach of the terms of the joint venture agreement, it became insolvent. Therefore Ross River Limited wished to explore the possibilities of obtaining compensation from Mr Barnett.
In the circumstances of this particular case it was clear that Mr Barnett had been deeply involved in the proposed development and, on the evidence, it also became clear that Ross River had placed a very high degree of trust in him to run the Joint Venture for the benefit of all parties. Even so, in response to the argument by Ross River that he owed a fiduciary duty to them Mr Barnett quite reasonably pointed to the joint venture agreement itself and said that if any such duty was to arise within the framework of the joint venture, it should have been expressly dealt with as a specific term in the agreement.
The judge disagreed and the Court of Appeal upheld this decision and said that, on the facts of this case, Mr Barnett owed a fiduciary duty to Ross River Limited, the other party to the joint venture agreement even though he was not contractually liable to it under the terms of that agreement.
Conclusion
Nevertheless it is clear that in any joint venture situation the court Although the Court of Appeal stated that its decision was dependent on the particular facts of the case, it also appears that where one party is heavily reliant upon another (particularly the director of another), and where there is a high degree of trust involved, it will be prepared to impose a fiduciary duty on that other party and the director.
It is not unusual to find situations in which joint venture partners play very different roles within the arrangement: for example, where one will be providing the financing and the other will be operating the joint venture, supposedly in accordance with the terms of the agreement. Therefore it would not be surprising to find these arguments raised frequently in the future.