Joint Ventures - How Having Clear Documentation Can Save in the Long Run

 

Last week the Court of Appeal gave judgment in the case of Donovan and another v Grainmarket Asset Management LLP[2021] EWCA Civ 686 highlighting the importance of clearly documenting the contractual relationship in a joint venture.

The parties had entered into an agreement to attract investors for the development of various properties. Their agreement consisted of a mix of written and oral communications, but no formal contract had been agreed.

Problems arose when the parties, Mr Donovan and Mr Crader (owner of Grainmarket Asset Management LLP ‘GAM’), who had known each other well and had previously been fellow employees engaged in earlier property ventures, suffered a breakdown in their relationship. An exchange of emails gave rise to a dispute over whether Mr Donovan, the financier, had repudiated the contract (i.e. refused to fulfil or discharge a material obligation), thus entitling GAM to terminate the contract.

The difficulty for both the parties and the courts was in proving whether the actions of Mr Donovan constituted a repudiatory breach or not as there was disagreement as to his contractual obligations under the agreement.

The key issue revolved around whether Mr Donovan’s share of the fees were conditional on his own performance. Following an exchange of emails, Mr Donovan had stepped back from the day-to-day involvement in the business.

In the absence of any express term (i.e., a written term within the contract) confirming this, any such term would have to be implied (meaning the agreement would be interpreted as if the term had been written in the contract). However, since the agreement worked perfectly well without such an implied term, the court held that there was no necessity to imply it. Ultimately, the court determined that Mr Donovan was not in repudiatory breach, and as such GAM had not been entitled to terminate the agreement before the fees owed to Mr Donovan fell due. The result was that Mr Donovan was entitled to his share of the fees, plus interest from the date that GAM had itself received them from the investors.

What are the practical implications of this case?

The informal nature of the agreement and lack of clarity as to the precise obligations of the parties resulted in a trial lasting 6 days, followed by a 2-day appeal to the Court of Appeal; during which both sides had senior and junior counsel acting in the dispute. The costs of the dispute will have been substantial, running into many thousands of pounds, and are ones that could have easily been avoided had the parties documented their arrangement correctly.

It can sometimes be tempting when forming an agreement with a close friend or acquaintance to bypass entering into a formal contractual agreement, as there is often the assumption that the relationship is strong enough to mean that the parties are unlikely to have any issues later down the line. However, there is always a degree of uncertainty as to how a business venture will play out. So, for the sake of the clarity and the benefit of the relationship, it is important to consider how the agreement can be documented early on to avoid any disagreements in future.

If you would like any specific advice regarding a contractual dispute or would like assistance in preparing any commercial contracts, please get in touch.

 Jade Field, Company & Commercial Solicitor