Ross River Ltd & Anor v Waveley Commercial Ltd & Ors

Fiduciary duties may arise between commercial joint venturers where special features place the venture's assets and management under one party's control for the parties' common benefit. A controlling director may personally owe corresponding duties where that person undertakes the relevant managerial responsibility.

The duties must conform to the parties' contract. A fiduciary controlling joint venture proceeds must justify disputed payments and may use the proceeds only for proper venture expenses or payments authorised by the beneficiary. The fiduciary cannot anticipate its own prospective profit share or transfer to the beneficiary the risk that expected profits will not materialise.

The claimants contributed land and finance to a development conducted through Waveley Commercial Ltd. The joint venture agreement and a side agreement entitled them to a defined share of the net profits, with priority for part of that entitlement. Waveley controlled the development assets and receipts. Mr Barnett controlled Waveley and managed the project.

Morgan J held in [2012] EWHC 81 (Ch) that Waveley and Mr Barnett owed limited fiduciary duties to the claimants. In the remedies judgment, [2012] EWHC 2487 (Ch), he quantified the claimants' contractual entitlement but awarded no equitable compensation against Mr Barnett. The claimants appealed that refusal and the scope of the duties. Mr Barnett cross-appealed against the finding that any fiduciary duties existed.

The central issues were whether fiduciary duties arose alongside the contractual joint venture, their proper scope, whether the use of joint venture receipts for connected-party payments and defence costs breached those duties, and the compensation payable.

1. Cross-appeal dismissed; appeal allowed. Waveley and Mr Barnett owed fiduciary duties to the claimants. The contractual description of a relationship as a joint venture was not decisive. Each relationship had to be examined on its facts and terms. Here, Waveley owned and controlled the development assets, receipts and accounting process for the parties' common benefit. Mr Barnett controlled Waveley, undertook the managerial role and was paid management fees. Those special features justified duties owed by both the company and its controlling director.

2. The fiduciary relationship had to conform to the parties' contractual arrangements. The duties included good faith and a qualified obligation not to favour Waveley or Mr Barnett in handling the development proceeds to the claimants' disadvantage. The duties extended to entitlements under both the joint venture agreement and the side agreement.

3. The judge had applied those duties too narrowly. Waveley could use development proceeds only for proper development expenses or payments agreed by the claimants. It could not anticipate its prospective share of net profits, even if it reasonably and honestly expected the eventual profits to cover the payment. That approach would expose the claimants to a risk which the contractual priority and fiduciary relationship placed on Waveley and Mr Barnett.

4. Where the beneficiary contests the fiduciary's dealings with relevant assets, the fiduciary must justify the payments. The claimants were not required to prove separately that each of the 215 connected-party payments was improper. None was shown by Waveley or Mr Barnett to be a proper development expense or an authorised payment.

5. Waveley's expenditure on defending the proceedings was also a breach. Although it was a necessary party, the real contest was between the claimants and Mr Barnett. Waveley had no separate interest in resisting the claims. Mr Barnett was required to fund his own defence and could not make Waveley jointly or severally liable for the solicitors' charges.

6. The unauthorised payments caused recoverable loss. The risk that connected borrowers might not repay Waveley did not fall on the claimants. Mr Barnett was accountable for the sums paid away and resulting loss, up to the claimants' entitlement. Compensation could be ordered directly to the claimants instead of being restored to the insolvent company. After deducting the estimated liquidation dividend, judgment was entered against Mr Barnett for £957,755.

1. Court of Appeal (Civil Division): In [2013] EWCA Civ 910, dismissed Mr Barnett's cross-appeal, allowed the claimants' appeal and entered judgment against Mr Barnett for £957,755.

2. High Court, Chancery Division: Morgan J held in [2012] EWHC 81 (Ch) that Waveley and Mr Barnett owed limited fiduciary duties. Interim-payment orders were addressed in [2012] EWHC 407 (Ch). In [2012] EWHC 2487 (Ch), the judge quantified the claimants' contractual entitlement at £1,043,926 but awarded no equitable compensation against Mr Barnett. The final order followed a further judgment, [2012] EWHC 3006 (Ch).