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Fraudulent non-disclosure claim in property joint venture case fails

Russell v Cartwright and others [2020] EWHC 41 (Ch)

The claimant (Mr Russell) was one of four individuals involved in a joint venture property development business. The parties entered into a joint venture agreement which obliged them to act with good faith towards each other, in certain limited respects.  Mr Russell departed the business pursuant to the terms of a settlement deed.  Shortly after that deed was executed, the remaining parties entered into an attractive development project that Mr Russell claimed the other parties did not tell him about, or give him the opportunity to participate in. Mr Russell claimed he was wrongfully excluded by the dishonest actions of the other joint venturers.  The claims alleged were: (a) breach of fiduciary duty; (b) breach of the express/implied terms of the joint venture agreement; (c) fraudulent non-disclosure; (d) unlawful means conspiracy.  As a result of the terms of the settlement deed, Mr Russell needed to establish fraud or dishonesty to succeed.

The claims all failed. The Judge (Falk J.) found Mr Russell to be an unsatisfactory witness who “avoided straight answers to a high proportion of questions asked” [42] whereas the defendants were all found to be “straightforward and honest” [59], [61], [64]; not a promising start for a claimant in a judgment to fraud claim.

The following points of interest arise from the judgment:

  1. Fiduciary duties: The Judge rejected the argument that the joint venture agreement gave rise to fiduciary duties. The critical factor was the absence of need for reliance by Mr Russell on the other defendants to act on his behalf, in circumstances where he could reasonably expect them to put his interests first.  On the contrary, each principal was “looking after his own interests” [79]. 
  2. Implied duty of good faith: The Judge agreed with earlier authority that rather than trying to identify whether the contract under scrutiny was a ‘relational contract’ (in as per the language in the seminal Yam Seng case), the better starting point is the conventional test for the implication of terms (Marks and Spencer) [87].  Applying that analysis, the existence of narrowly defined express obligations of good faith in the joint venture agreement, was a strong indicator against the implication of some broader obligation of good faith [89].  The Judge also observed, obiter, that even if there was some broader obligation of good faith to be implied, its scope was limited in nature and still entitled the Defendants to pursue their own commercial interests [97]-[98].
  3. Duty to disclose: There was no positive duty on the defendants to disclose to Mr Russell the existence of other development projects of which he was unaware, and even if there was, the defendants did not believe they were under such a duty [158]
  4. Intention: The Judge applied the two-stage approach set out in Ivey v Genting Casinos (UK) Ltd [2018] AC 391.  First, determine the actual state of the individual’s knowledge as to the facts. Second, consider whether the individual’s conduct was honest or dishonest by reference to the objective standards of ordinary decent people.  Given the defendants did not believe they were under a duty to disclose, the dishonesty claim was bound to fail [159]

Two straightforward messages can be drawn from this case.  First, the scope for imposing fiduciary duties and far reaching duties of good faith in commercial joint venture arrangements are limited, particularly where the relationship is structured to facilitate each joint venture pursuing their own commercial interests. Second, time and time again, the ability for witnesses to respond to questioning in a straightforward manner will often be a highly determinative factor at trial.  This, together with the need to establish the precise state of the individual’s mind, makes predicting the outcome of fraud claims particularly difficult.

Written by Nick Goodfellow 

Nick Goodfellow acts in wide variety of complex civil fraud claims. Nick is currently head of Littleton’s Civil Fraud Group.      

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