Rights of minority interest holders in unincorporated joint ventures

In Australia, particularly in the mining and property sectors, it is common for two or more companies to associate themselves utilising an unincorporated joint venture structure in order to pursue a common venture.

An unincorporated joint venture is one in which the participants enter into a contractual relationship to pursue together a specific activity, without forming a separate legal entity to carry on that activity. Unlike other forms of joint enterprise, such as a partnership or a jointly owned company, there is no legislation that specifically regulates unincorporated joint ventures.

An unincorporated joint venture is created and governed by a contract (Joint Venture Agreement). Commonly, apart from decisions in respect of specified matters which require unanimous decision making, the joint venture is controlled by an operating committee and the voting power of each joint venturer on that committee corresponds to the joint venturer’s percentage interest in the joint venture. If one joint venturer holds a majority interest in the joint venture, the other joint venturer(s) are vulnerable to domination by the majority interest holder.

An important question in such circumstances is whether a minority interest holder has any rights in addition to those expressly conferred by the Joint Venture Agreement. Put another way, are there any limitations on the manner in which a majority interest holder can exercise its rights under the Joint Venture Agreement or otherwise conduct its business during the term of the joint venture?

Fiduciary relationship between the joint venture participants

It has been held that, in certain circumstances, a fiduciary relationship may exist between joint venturers. The critical feature of a fiduciary relationship is that the fiduciary must act for or on behalf of, or in the interests of, another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. Therefore, if a fiduciary relationship exists between majority and minority interest holders in a joint venture, the majority interest holder cannot act solely in its own interests, but must have regard to the interests of the minority interest holder when exercising its powers in relation to the joint venture.

Unlike certain relationships e.g. solicitor and client, joint venturers are not in a fiduciary relationship simply by reason of their status as joint venturers. Whether or not the relationship between joint venturers is fiduciary depends upon the form which the particular joint venture takes, and upon the content of the obligations which the parties to it have undertaken.

The general rule is that the more a minority participant is reliant upon, and vulnerable to, the actions of the majority participant, the more likely it is that a fiduciary relationship exists between the majority and minority interest holders. In particular, if the participants undertake to act in furtherance of their joint interest, with mutual confidence in one another and pledges of good faith, a fiduciary relationship may exist.

It is important to note that for a fiduciary relationship to exist, it must be consistent with the terms of the Joint Venture Agreement and not contradict it. Therefore, express terms of a Joint Venture Agreement will operate to exclude a fiduciary relationship or specific fiduciary duties which would otherwise arise.

If a fiduciary relationship exists between participants in a joint venture, and a joint venturer breaches a fiduciary duty it owes to the other participants as a result of that relationship, the remedies available to the wronged party are potentially wider and more powerful than those available for a breach of the express terms of the Joint Venture Agreement. For example, if a joint venturer acquires property for its sole use in breach of a fiduciary duty owed to another joint venturer, the other joint venturer may be entitled to equitable remedies such as a share in the property itself or a share of the profits earned from such property.

Fiduciary obligations of the Manager

The majority interest holder in a joint venture is almost invariably also the manager of the joint venture (Manager). The participants need to be aware of the duties owed by the majority interest holder in its capacity as Manager over and above those owed in its capacity as a participant in the joint venture.

The Manager of a joint venture is always the appointed agent of the participants. By reason of that agency relationship alone, the Manager will automatically be in a fiduciary relationship with the other participants. It should be noted that the Joint Venture Agreement, as is often the case, may expressly or impliedly vary the Manager’s obligations and limit its potential liability as an agent.

Thus, when fulfilling its duties as Manager, a majority interest holder is required to act honestly and in the best interests of all joint venturers, unless the Joint Venture Agreement provides otherwise. 

Good faith

Joint venture participants may owe one another a duty of good faith. Australian law does not generally recognise that parties to a contract such as a Joint Venture Agreement owe one another a duty of good faith, unless such term is implied into the contract under the usual rules governing the implication of terms under the law of contract.

If a requirement of good faith is express or implied, it requires honesty, but what else it requires depends on the particular context of the relationship in which the duty is imposed. It may include such matters as an obligation not to try to further purposes which are outside of rights conferred in the contract or a duty to have due regard to both parties' legitimate interests as provided for in the contract.

Drafting a Joint Venture Agreement to protect minority interests

The Joint Venture Agreement is the primary source of protection of the interests of a minority interest holder and accordingly, should be carefully drafted having regard to the particular circumstances of the joint venture in question. Provisions can be included to expressly include or exclude the existence of a fiduciary relationship and duties of good faith between the participants. Key aspects of the agreement to which the participants should give particular attention to include:
  • what decisions of the operating committee will require unanimous or super majority approval;

  • remedies not available at common law for breach of contract e.g. property to be held in trust if acquired by a participant in breach of its obligations under the Joint Venture Agreement;

  • careful drafting of the stated purposes of the Joint Venture, as the power of the operating committee, and therefore the majority interest holder, to approve programs and budgets which bind other participants turns upon whether the range of activities covered by the program and budget are for the purposes of those joint venture activities; and

  • any express exclusions of fiduciary duties between participants, ensuring these clearly distinguish between the obligations of a participant acting in its participant capacity and the obligations of a participant acting as Manager/agent.

If you have any queries about the drafting, negotiation or interpretation of joint venture agreements, please contact Bronwyn Davies, Senior Associate on (08) 9288 6837 or bronwyn.davies@lavanlegal.com.au.