Joint venture disputes: a lesson in kitchen sink litigation
Joint venture agreements are reasonably unusual arrangements within the agriculture industry. Certain forms, such as share farming, come in and out of fashion, very often as a means to enable the landowner to continue farming for tax or CAP purposes. Whatever the form of joint venture, if it comes to a messy end, there are all manner of potential arguments available in what might be termed ‘kitchen sink litigation’.
The case of Achom Nicholl and Grant v Lalic Papazyan and Alula Leisure Limited  provides a useful summary of the options available.
The facts of Achom are complex.
Mr Lalic ( Mr L) and his business partner Mr Papazyan (Mr P) wanted to buy a nightclub in London and were introduced to Mr Achom (Mr A), who already owned some successful nightclubs. The three men viewed and subsequently negotiated a price for a club, now called the Scotch. The company owned by Mr L and Mr P (Alula Leisure Limited) bought the Scotch club company and lease. The club was then refurbished to become ‘the Scotch’. The various contributions made by the parties were: Mr L and Mr P £606,000 (purchase price, professional fees, and refurbishment works; Mr Nicholl (Mr N), who worked for Mr A at another of his clubs, £112,065 (refurbishment works); Mr A £19,700 for miscellaneous items; and Mr Grant (Mr G), a business partner of Mr A, £56,500 (for miscellaneous items). All parties also put in varying amounts of time and effort to get the venture up and running.
The venture was not formally documented, although various e-mails, and texts were sent, as well as some draft agreements.
Mr A and Mr N essentially then ran the operation, using staff and contacts from Mr A’s other ventures. Mr L and Mr P felt that they were marginalised, and this was not helped by Mr P’s guests not being allowed access to the Club during a party held by Stella McCartney, and another occasion when Mr P himself was denied entry.
Relations between the parties further deteriorated to the point that Mr A was formally excluded from the Club, Mr N stopped working there, and Mr L and Mr P purported to serve notice to terminate the partnership.
Messrs A, N, and G then joined forces to claim a share in the Scotch business, based on the following causes of action: breach of contract, breach of partnership, a Pallant v Morgan equity claim, a proprietary estoppel claim, a conspiracy claim, a restitution (unjust enrichment) claim and a claim based on procuring a breach of contract. Thus it might be said that the claimants were operating kitchen sink litigation. We will now examine briefly all of these causes of action and how they work.
Breach of contract
Claims of this type usually start with a breach of contract angle, because many of the subsequent remedies are supposed to rescue parties from inadvertent or accidentally incomplete agreements. In the case of the Scotch, Mr Justice Newey examined the history of dealing between the parties to infer whether the parties’ objective intentions, as expressed to each other, were to enter into a mutually binding agreement.
The judge found that:
- There can be no binding agreement for so long as the parties have not reached agreement on terms, which they regard as essential to a binding agreement, and it is open to parties by their words and conduct to make clear that they do not intend to be bound until certain terms are agreed, even if those terms (objectively viewed) are of relatively minor significance.
- On the other hand, the parties may by their words and conduct make it clear that they do intend to be bound, even though there are other terms yet to be agreed, even terms which may often or usually be agreed before a binding contract is made; but the more important the term is, the less likely it is, that the parties will have left it for future decision, although there is no legal obstacle which stands in the way of the parties agreeing to be bound now, while deferring important matters to be agreed later.
These principles were drawn from the Court of Appeal decision in Pagnan SpA v Feed Products Limited .
The upshot of the Judge’s analysis was that the parties had left too many important points to be agreed, and, objectively construed, they had not reached a contractual agreement.
Procuring a breach of contract
This part of the claim did not really go anywhere, due to the finding that there was no contract for which a breach could be procured, however we do encounter this rather esoteric cause of action occasionally, so it is worth mentioning briefly.
This is a tortious claim, the elements of which are:
- Interference with another’s contract, such as by persuasion or inducement of a contracting party to breach it, followed by an actual breach of the contract, sounding in damages
- The interfering party must have knowledge of the existence of the contract, and an intention to procure the breach of contract.
The relevance of this cause of action is that it might be used where one party to a joint venture has jumped into bed with another partner, leaving the original partner high and dry. It is also an attractive angle of attack where the party that is actually in breach has no assets, and may not be worth pursuing.
Breach of partnership
The Partnership Act 1890 at section 1 defines ‘Partnership’ as: “the relation which subsists between persons carrying on a business in common with a view of profit”. The House of Lords found in Khan v Miah and others  that a partnership can arise when parties embark on a business activity, which is the subject of the arrangements between them.
Thus it is possible for the court to infer a partnership, and cobble together an agreement, filling in any gaps between the provisions of the Partnership Act 1890. In the case of the Scotch Mr Justice Newey indicated that if there had been insufficient agreement for him to find that there was a contract, he was unlikely to manage to find a partnership existed. In particular Mr Justice Newey noted the comment in the leading textbook on partnership, Lindley and Banks 19th edn which states at 5-06: “whilst it can properly be said that all partnerships involve a joint venture, the converse proposition manifestly does not hold good”.
Joint venture agreements tend to state explicitly that the arrangement is not a partnership. Despite such provisions, if a partnership has been created in law, it cannot be excluded by contract.
The Pallant v Morgan equity claim
This cause of action is based on the development of something called a common intention trust in the case of Pallant v Morgan .
Mr (now Lord) Justice Lewison summarised the principle in Kilcarne Holdings Ltd v Targetfellow (Birmingham) Ltd :
“Essentially, the principle is that:
- if A and B agree that A will acquire some specific property for the benefit of A and B, and
- B, in reliance on A’s agreement, refrains from attempting to acquire the property, then equity will not permit A, when he acquires the property, to keep it for his own benefit, to the exclusion of B.”
In these cases generally, one party will buy the property, whilst the other party will effectively stand back from the sale (and probably assist the purchasing party) on the basis that they are going to benefit from the venture in the long run.
In the case of the Scotch, Mr A advanced that there was an understanding that the Club would be acquired for the benefit of Mr A, Mr L and Mr P, and in reliance on that, Mr A “to his detriment refrained from making his own bid for or seeking to acquire the Underlease of the premises or the Company”.
Mr Justice Newey was not of the view that Mr A would otherwise have sought to acquire the Club, and as such did not act to his detriment.
Two other recent cases demonstrate the Court’s approach to these types of claims; see Kearns v Hova and Finlay  and Generator Developments LLP v LIDL (UK) GmbH .
Proprietary estoppel claim
Here we come to our old friend, beloved of Cinderella farmers, jilted lovers, and the otherwise disappointed in life. Readers will probably be familiar with the principles, particularly given the recent farming cases of Davies v Davies  and Moore v Moore .They are: a representation or promise, giving rise to an expectation by the claimant of a proprietary interest; followed by reasonable detrimental reliance by the claimant upon that expectation.
In the case of the Scotch the Judge was of the view that there was no clear representation or promise upon which Mr A could reasonably rely.
The lawful or unlawful means conspiracy claim
If the tort of procuring a breach of contract is esoteric, then the tort of conspiracy is positively exotic, but an essential ingredient of any kitchen sink action!
The starting point for either lawful or unlawful conspiracy is an agreement between two or more parties who take concerted action, that causes damage to the target. Unlawful means conspiracy requires the use of unlawful means in furtherance of the agreement, and an intention to cause (financial) injury to the target.
Lawful means conspiracy does not require any unlawful acts to be done by the parties to the agreement, however it does require the parties’ sole or predominant purpose to have been to cause injury to the target.
In the case of the Scotch the claim was brought on the basis that once the parties had fallen out Mr L and Mr P managed to obtain the head lease to the club, then engineer a surrender of both the head lease and sub lease in return for the grant of a new lease to a different company. That had the effect of cutting the Claimants out of the proprietorship of the property altogether.
The Claimants argued that the lease transactions were completed with the sole or predominant purpose of injuring the Claimants. However the Judge found that the process of obtaining a new lease, granted to a different company was carried out for ‘proper commercial reasons’ and as such this claim failed too.
A restitution (unjust enrichment) claim
For those feeling sorry for the Claimants at this point, one last item from the kitchen sink yielded a result; that is the restitution claim.
Restitution is a remedy where a defendant has been enriched, or has received a benefit, and that enrichment is unjust, and at the expense of the claimant. A claim for restitution needs to be coupled with a reason for the court to find ‘injustice’ of some sort. Those reasons are usually a mistake, or a total failure of consideration (what was paid for has not been delivered).
In the case of the Scotch the Judge found that the Claimants had been mistaken in their belief that they had acquired an interest in the Scotch. However he also found that the Defendants had considered that the payments were being made in the expectation that an agreement would be concluded, therefore the Claimants were in principle entitled to restitutionary relief.
The case of the Scotch demonstrates a number of angles of attack which parties can use to recover a bargain, which they thought they had, or should have had. The general message is that there is no substitute for properly drafted agreements, even if they set out a mechanism for agreeing outstanding matters, and mopping up if matters go wrong.
A secondary message might be that the courts are not enthused by the prospect of correcting sloppy business practice, amongst parties who should perhaps know better, particularly where such a precedent would breed uncertainty in other business relationships and in the negotiation of transactions.
As a footnote, rural practitioners will be aware of the added difficulties encountered in disputes over property, due to the various statutory overlays, such as the Agricultural Holdings Act 1986, the Landlord and Tenant Act 1954, and the various housing Acts; all potential claims to go in with the sink.