Write it down before it hits you where it hurts

Had an idea for a business venture but need the help of a friend, longstanding colleague or business partner to get your dream business or project going?

If you do, be warned!  If the initial, “honeymoon period”, feelings don’t resolve issues that arise early in the developmental stages of the project there’s a very good chance obligations will be imposed on you without your agreement if you end up in Court.

That’s because, even if you haven’t entered into a formal contractual arrangement with your joint-venturer, you can be held to certain obligations that are considered to be almost inherent to a joint-venture relationship.

Take the following situation:  Mr A and Mr B were associated in a project to develop a commercial property at a viable central-city site.  Both men worked on the project but A took principal responsibility for progressing it during the initial stages (as he had done on a previous similar project with the B).

A entered into an agreement for the purchase of the site, conditional on attracting a major retail tenant.  He did so through a company in which his family trust was a major shareholder.  When a tenant was secured the plan became feasible and the agreement was finalised.  At that point A tried to exclude B, intending to complete the development alone.  There was no written agreement between the men to pursue the project to its end together.

This has happened and the Courts became involved when B attempted to hold A to his word.  The Courts agreed with B and awarded substantial compensation in the sum of $850,000.00 for lost opportunity.  The alarming aspect is that the outcome was totally outside the control of both parties simply because they began their project on a handshake.

While you may feel that casual arrangements are preferable early in a business relationship, particularly when you are uncertain whether the project will even proceed, you must be careful.

We recommend that you will be in a much better position if things turn to custard if you made formal contractual arrangements from the outset so that obligations can’t be imposed on you that you would never have agreed to.

The law has recently been clarified and it is now clear that joint-venturers owe each other what are called “fiduciary obligations”, even during the initial stages of a project, and even in situations where the relationship is “loose.”

“Fiduciary obligations” are similar to duties of loyalty and good faith.  The Courts infer the obligations based on an implicit understanding between joint-venturers that they are depending on each other to make progress towards the common objective.  That is, they infer an expectation of loyalty to the joint cause.  The extent and nature of the expectation is determined by the Courts where there is no clear indication, for instance by way of a written agreement, between the parties.

So it makes good sense to think ahead, and to negotiate the scope of that expectation with your joint-venturer before it is imposed on you.  The Courts are now unlikely to allow a person to take sole control of the business opportunity, even where that person does all the initial spadework, without some clear indication of a prior understanding between the business partners.

This is not to say that, once started, a project is impossible to withdraw from.  But there is a further expectation implied by the Courts, that the joint-venturers will act fairly toward each other in bringing the affairs of the joint venture to a fair conclusion.  Again, what is fair will be determined by the Courts in the absence of a contractual arrangement.

So what might the court require you to do if they decide that you’re in breach of your “fiduciary obligations” to your joint-venturer?

They will hit you in your pocket and likely ask you to pay substantial monetary compensation or damages to your joint-venture partner as A was held to do to B.  While this is a form of protection for you if it is your joint-venturer who takes off with your business opportunity, the opposite is unfortunately also true – it could leave you paying a good portion of your profit or potential profit should you later decide to pursue the project on your own.

The amount of damages will be determined by the court based on profit (even if not yet realised).  So again, the extent of your obligations is out of your hands if prior arrangements are not made with your joint-venture partner.

While a degree of uncertainty is inherent in creativity and an inevitable aspect of a new business venture, this type of uncertainty is avoidable by taking very simple steps at the start of the project.  That is by putting some expectations down on paper in an agreement.  Don’t leave it until you’re standing in Court to learn the extent and scope of your obligations to your joint-venture partner and are, like Mr A, ordered to pay a very large sum of money.