Why do I need a written agreement with my business partners?

The recent case of Venkataramanujam v Ramasubramanian [1] demonstrates how important it is to have a clear understanding of the obligations business partners owe each other and the point at which those obligations will end.

Background

The Venkataramanuiams (“the Vs”) entered into an unwritten joint venture with the Ramasubramanians (“the Rs”). The parties would invest in property and split the profits evenly between themselves. After three years, the relationship between the two couples broke down, and they decided to sell their investment property at a “private auction” in which the Vs and the Rs would compete against each other.

Before the private auction took place, the Vs entered into an agreement with a third party under which they agreed to sell the property to the third party for a substantial profit. This was conditional on the Vs being successful at the private auction with the Rs.

The Vs did not tell the Rs about their agreement with the third party. The Vs won the private auction and then proceeded to sell the property to the third party, resulting in the Vs making a $87,500 profit. This profit was not shared with the Rs.

When the Rs discovered the Vs had on-sold the property, they claimed that the joint venture between the Rs and the Vs had not ended before the sale to the third party and the Rs were entitled to half of the Vs’ $87,500 profit.

Legal Dispute

The key question for the High Court was whether the Vs continued to owe the Rs fiduciary obligations at the time the property was on-sold.

The Vs argued that the parties intended to bring the joint venture to an end before the sale to the third party. They said the fact the Vs and the Rs were competing against each other at the auction was evidence of their intention to end the joint venture.

The High Court rejected this argument and stated that the auction actually represented a continuation of the joint venture’s purpose of maximising the financial gain from the sale of the property. Accordingly, the joint venture relationship had not ended before the sale to the third party.

To assess the point at which the joint venture ended (in the absence of any written agreement), the High Court referred to the Supreme Court case of Chirnside v Fay which stated that the fiduciary obligations owed by joint venturers to each other can be ended on appropriate notice. But until such notice has been given, the parties should continue to act equitably towards each other in bringing the affairs of the joint venture to a close. As clear notice terminating the joint venture had not been given, the business relationship continued until the profits from the sale to the third party had been fairly distributed between the parties.

The High Court awarded the Rs half of the $87,500 profit the Vs had made off the third-party sale of the investment property.

Key Takeaways

This case demonstrates the importance of giving clear notice to terminate a business relationship like a joint venture. Here, the Vs relied on their assumption that the breakdown in their business relationship with the Rs constituted the end of their joint venture.

One easy way to avoid any such ambiguity is to have a written agreement which clearly sets out the process to be followed when terminating the joint venture and the date on which termination will take effect. This principle applies equally to other business relationships, like companies and partnerships. 

Ford Sumner are corporate and commercial law experts. If you would like assistance with your business affairs, please do not hesitate to contact Sarah Churstain or Jordan Todd.

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[1] Venkataramanujam v Ramasubramanian [2024] NZHC 3591.