Joint venturers beware?

We all know that an agent who commits a breach of fiduciary duty in respect of a given transaction presumptively forfeits his remuneration for that transaction. But, according to a curious decision today from Newey J (Hosking v Marathon Asset Management [2016] EWHC 2418 (Ch)), this principle is much wider. In that case H, an active partner entitled to a sizeable share of the profits of a very profitable partnership, committed a breach of fiduciary duty, essentially consisting in attempting to filch a part of its business and four of its employees. The loss caused to the partnership was £1.38 million, and there was no doubt of H’s liability for that sum. But an arbitrator also decided that H forfeited his entitlement to some £10 million, being one-half of about five months’ profits entitlement. He did this on the basis that 50% of H’s drawing entitlement was in effect remuneration (his entitlement being exactly twice that of non-executive partners), and that the agent rule should apply. Newey J upheld this decision, saying that the agent rule should apply to partners and (it seems) fiduciaries in general.

This, if taken literally, is enormously significant for anyone setting up a partnership or joint venture, whether in shipping or elsewhere. Joint venturers are, after all, fiduciaries in the same way as partners; furthermore, normally it will be a fair inference that most of the profit entitlement of each venturer amounts to remuneration for the work and services put in. If any breach of fiduciary duty — which can be quite a technical matter — is apt to lead to forfeiture of profit share, this is to say the least a drastic result, which until today would have caused quite a few raised eyebrows.

We don’t know whether Newey J’s decision will be appealed, or if it is what the Court of Appeal may have to say. But as a matter of prudence anyone drafting a joint venture agreement who wishes to avoid this kind of sword of Damocles hanging over his client might be well advised to introduce a term excluding the forfeiture of profits for breaches of duty: something which, thankfully, Newey J at Para.[43] accepted was possible.

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