Joint Ventures: To Whom Do You Owe Duties as Directors and Are You Covered?

group-dispute

We all know something about the nature and extent of the duties owed by directors to companies on whose board they sit and, for that matter, by partners to their fellow partners or by members to their fellow members under a limited liability partnership. 

In particular, we will be familiar with the concept of fiduciary duties underpinning obligations of good faith, honest dealing and reasonable competence. What is the position though when companies and/or individuals enter into joint venture arrangements?  Does a director of a joint venture company owe this type of duty to the other partner in the joint venture?

Ross River v. Waveley Commercial Limited

That is the issue which came before the Court of Appeal recently in Ross River v Waveley Commercial Limited. Back in 2004, Mr River had entered into a joint venture agreement with a company called Waveley Commercial Limited (“WCL”) owned by Mr. Barnett and another person.  Over a number of years the project turned sour and spawned litigation between Mr River and Mr Barnett.  By 2011 WCL had in effect become insolvent.

Mr River claimed that Mr Barnett was personally liable to him for breach of fiduciary duties owed to him. Interestingly, Mr River also argued that Mr Barnett was wrong to allow WCL to incur legal costs in defending the proceedings prior to its insolvency on the basis that such costs could not be regarded as joint venture expenditure.  In other words, Mr Barnett’s fiduciary duty to Mr River personally required him to spend his own money on the dispute and not that of the joint venture company.

What Happened?

The Court of Appeal accepted the findings of the judge at first instance based on the facts and the relationship between the parties and in particular Mr Barnett’s long-running involvement in the project that Mr River was indeed owed fiduciary duties by both Mr Barnett and the insolvent WCL.  The Court of Appeal also accepted Mr River’s contention that it was a breach of Mr Barnett’s fiduciary obligation to him to spend company money in the dispute between the joint venture partners prior to WCL’s insolvency.

The Court of Appeal took care, however, to say that its decision with respect to this particular joint venture arrangement should not be regarded as of universal application.  In particular the phrase “joint venture” was not a term of art.  It was therefore necessary to look at each individual arrangement to see whether it carried obligations of a fiduciary nature or not. So maybe the case is not all that helpful a decision in terms of guidance for future disputes but nevertheless serves as a useful reminder of the potential additional perils of this type of arrangement.

Relevant Coverage Issues

I have no idea whether either Mr Ross or Mr Barnett had the benefit of D&O insurance for their dispute, or, if they did, whether insurers funded the relevant costs and judgement.  One coverage issue which does strike me as relevant here is the question of capacity.  Often, D&O policies limit cover to claims made against directors of companies “in their capacity as such”.

Would it have been open to insurers here to argue that Mr Barnett’s liabilities were personal in nature?  In other words, would insurers have argued that they arose not out of his capacity as a director of WCL but instead by virtue of things he did or omitted to do in the context of a “personal” joint venture project with Mr River?

I suppose an even more basic question might have been whether there would have been any cover at all under a D&O programme for liabilities incurred through a company which is neither the policyholder nor a subsidiary. The answer to these questions may depend not just on the facts of any particular claim but also on the terms of any D&O policy you buy.

 

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers, Executive Risk | Tags: ,

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