Can a partner to a joint venture still be entitled to its share of the profits despite not fulfilling all its obligations?
In the recent decision in Donovan v Grainmarket Asset Management LLP  EWCA 686, the Court of Appeal ruled that a partner to a joint venture was still entitled to its share of the profits despite not fulfilling all its obligations under the joint venture.
The case concerned a joint venture agreement that allowed money to be raised from investors to purchase commercial properties and pay for them to be converted into residential properties for future sale. The agreement was not contained in one agreement but formed on the basis of heads of terms dated March 2013, oral communications and by the parties’ conduct.
The parties’ obligations under the contract were disputed. Broadly, Grainmarket were responsible for finding sites to acquire, managing the redevelopment and sale of the properties. Donavan was responsible for finding investors. The division of labour was not set in stone, and they discharged other tasks from time to time.
By 2015, the relationship was breaking down and Donovan carried out no further duties in relation to the joint venture beyond February 2015.
The final property sales completed in 2020, following which Grainmarket declined to pay Donovan his share of the profits.
The Court at first instance found that Donovan was entitled to these profits. Grainmarket appealed on the basis:
- Donovan’s entitlement to payment was conditional on his fulfilling his obligations under the joint venture.
- That the joint venture had terminated before Donovan’s right to a payment had accrued.
The Court of Appeal (CA) Decision
The CA agreed with the Court of first instance that there was nothing in the terms of the agreement that made Donovan’s payment conditional on his discharging his obligations and that such a term would need to be implied into the agreement. It decided not to imply such a term as:
- The agreement had worked well without such a clause.
- Implying such a clause was likely to lead to further disputes between the parties as to what their respective obligations under the agreement were and how this affected their right to payments.
Points of Note
- Mr Donovan’s contribution to the joint venture was considerable despite his ceasing to be involved. It was therefore unfair to deprive him.
- To make Mr Donovan’s share conditional, the Court had to be satisfied that it was clear that this was intended by the parties to be the case. No wording was present to indicate this, and they did not believe that it could be implied.
- The CA did indicate that Grainmarket may be entitled to counterclaim against Donovan for sums spent on services which he would have provided under the joint venture but did not.
The roles of the parties to a joint venture are often far and wide with different expectations as to their roles and right to be remunerated.
It is important when drafting a joint venture agreement to ensure that if a party’s profit share is to be linked to the performance of their duties that this is set out expressly, what those duties are and how such profit share is to be reduced by a party’s failure to perform them.
An alternative may be to have the parties enter into a separate agreement which deals with their duties and the provision of services to the joint venture. This would cover payments and sanctions for non-performance.
If you are entering into a joint venture or have a dispute relating to one and need advice, please do not hesitate to contact Graham Mead, a partner in the firm’s commercial litigation team on 01473 298234 or by email on email@example.com.