Partnership can give rise to duty of utmost good faith, Inner House affirms
Parties seeking reduction of a joint venture agreement for the development of land at St Andrews on the grounds of non-disclosure and misrepresentation have been allowed to take their case to proof, after the Inner House allowed their appeal against a decision to dismiss their action.
In an action by the University of St Andrews and the trustees of the Strathtyrum trust against Heaton Holdings Ltd ("HH"), the representatives of the late Mr & Mrs Cuthill and others, the court held that the pursuers had pleaded sufficient facts to go to proof on the question whether a joint venture between the parties constituted a partnership, and therefore that there was a statable argument "that the pre-contract negotiations, leading as they did to a contract uberrimae fidei, required the parties to disclose to each other anything of significance or materiality which might affect a party’s willingness to enter into the partnership and/or to do so on certain terms".
The agreement was entered into in 2003 between those parties, all landowners, and a company Pollpledge Ltd, the designated developer. The objects included obtaining zoning and planning consent, a master plan for development, optimising the sale value of the land, and selling the land. Zoning was achieved in 2012 but disputes then arose, and the pursuers averred that in 2014 the university became aware for the first time of an agreement (the "back minute") entered into in 2000 between the Cuthills and a subsidiary Headon company but not publicly registered, concerning the sale of an option relating to two ransom strips owned by the Cuthills but excluded from the joint venture agreement. The land was disponed under this agreement, also in 2000; the agreement further provided that the whole profits arising from the further sale of this land for development were to be paid over to the Cuthills.
The pursuers offered to prove that it was only in 2014 that they appreciated that HH stood to make no profit or gain from the joint venture, and that they had been dealing with one of the joint venturers (HH) on a basis which turned out to be false. Their averments included that "In particular, given that the purpose of the joint venture was to secure the mutually-advantageous development of separate parcels of land which each joint venturer was contributing to the joint venture, it was the duty of each prospective joint venturer to disclose fully and frankly to each other the precise nature of the interest which it held in the land it was so contributing". They gave reasons why they would not have contracted on the basis they did, had they known the true position.
Before the Inner House the defenders argued that the only relevant question was a landowner’s ability to commit the land to the project in terms of the joint venture agreement; that having regard to the duties in the joint venture agreement there was no question of the developer managing to achieve something contrary to the interests of the joint venturers; that the back minute had not been secret, being referred to in the disposition of the land it concerned; that the agreement was one to pool land and the Lord Ordinary had correctly characterised it as not constituting a partnership; that there had been no inequality of knowledge which was material and relevant; and that the fiduciary duty contended for by the pursuers was too wide, and went beyond the circumstances of a partnership.
Lady Paton, with whom Lady Clark of Calton and Lord Malcolm agreed, said: "Standing the nature of the arrangements in the joint venture agreement, the overall object of achieving the commercially best profit from the land for the various joint venturers, the nature and number of parties involved in the project, and the circumstances surrounding the entering into of the joint venture agreement, I consider that the question whether or not a partnership had been formed cannot be decided at the stage of debate, but requires investigation into the facts."
She added that an objective of “exploitation of land” may easily be one of the objects of a business carried on in common with a view of profit – part of the statutory definition of a partnership.
If the pursuers succeeded in proving there was a partnership, it was arguable that the claimed duty of disclosure would arise. Despite certain comments in Miller on Partnership, she was not persuaded "that the approach to the existence or otherwise of a duty of disclosure in pre-contract negotiations leading to a partnership should necessarily be different in Scotland and England", where the courts had held that the principle of uberrimae fidei (utmost good faith) applied.
Expanding on this point, Lord Malcolm commented: "In my view, the considerations which have led to pre-contractual disclosure duties in England & Wales apply with equal force north of the border. If a party is withholding material information, for example, a highly relevant past act of dishonesty, it would make little sense if the obligation to reveal it arose only once the contract was agreed... When negotiating a standard arm’s length commercial agreement, both sides are expected to understand that they must look out for their own interests, and, in general, cannot complain if in due course they learn that the other possessed more accurate information. However, in the case of negotiations to enter a partnership, as with insurance, it is the nature of the contemplated relationship which requires each party to state any known circumstances which could influence the other."
He emphasised that there were "important constraints", including that "before the contract will be reduced, the undisclosed fact must be both material and operative; the latter in the sense that an erroneous belief, which would have been corrected by compliance with a disclosure obligation, caused the party concerned to enter into the contract".