22 Aug Joint Misadventures
Joint ventures are widely used in New Zealand business. The size of our country and constraints on access to capital mean that this type of collaboration is often essential for business expansion. A joint venture arrangement will typically involve each joint venture partner bringing their respective expertise and resources together for a common business purpose, often exploited through a new company owned by the joint venture partners.
A recent decision of the Court of Appeal has highlighted the dangers for joint venture partners in expanding a joint venture business without final documentation or a considered eye for the future. The case also serves as useful reminder for current or prospective joint venture partners of the obligations they may owe to each other even in the absence of formal corporate structures or contracts.
The joint venture business in this case started from a New Zealand company involved in commercialisation of the Habode portable home concept. The two principal shareholders of the company were Mr Gibson (who provided design expertise) and Mr Curtis (who provided finance and marketing expertise).
In 2004, the parties began with great gusto to document their intended arrangements for a New Zealand and international joint venture business. But inertia soon set in. Only a limited number of contracts were ever concluded and signed (primarily in relation to the New Zealand business) and the stuff of day-to-day business then took over. Mr Gibson spent significant time in China developing a Habode prototype while Mr Curtis took care of business in New Zealand and began to explore licensing opportunities in Australia. Additional Habode companies were incorporated by Mr Gibson and Mr Curtis in Hong Kong and by Mr Gibson in Australia.
The wheels then started to fall off. By 2006, the New Zealand business was facing cashflow difficulties and there were doubts about the solvency of Habode NZ. This company was placed into liquidation by a group of unsecured creditors and the New Zealand business was swiftly brought to an end. This also spelled the end of the business relationship between Mr Gibson and Mr Curtis.
Undeterred, Mr Gibson picked up on developments in Australia and in short order secured a significant deal for the sale of a minority interest of the business in Australia. This deal was secured using contacts who had previously dealt with Mr Curtis. This windfall was in turn the impetus for Mr Curtis to bring the court action against Mr Gibson.
What did the Court of Appeal decide?
The general position under New Zealand law is that a joint venture arrangement of the nature established by Mr Gibson and Mr Curtis gives rise to fiduciary duties of loyalty, trust and confidence on each joint venture partner approaching the seriousness of those owed by a trustee to his/her beneficiaries. A joint venture can exist if the parties are dependent on each other to make progress towards a common objective, regardless of whether all the necessary details have been agreed.
The Court found that the formal corporate structure for New Zealand provided both a model for the Australian side of the business and a platform from which expansion into Australia could occur. Although the arrangements for a joint venture company were never finalised in Australia (i.e. they never progressed beyond the incorporation of the company by Mr Gibson), the Court held that it was intended by the parties that a company would be used in Australia to market and distribute the Habode concept and that the ownership of that company would be owned equally by Mr Gibson and Mr Curtis.
Upon termination of a joint venture, any assets of the joint venture, whether tangible or intangible, are held on trust for the former joint venture partners pending agreement between them on the wind up of the joint venture. For this reason, the Court of Appeal held that information gained with respect to the business opportunity in Australia was gained during the course of the joint venture and constituted confidential information belonging to the joint venture.
The net result was that Mr Gibson could not exploit any confidential information of the joint venture in Australia for his own benefit to the exclusion of Mr Curtis. Mr Curtis was therefore entitled to a share of the profits made by Mr Gibson in Australia. The case has been referred back to the High Court to decide the share of the profit that should be paid to Mr Curtis.