Case law: Joint venture discussions didn’t create obligations between the parties because they did not amount to an ‘understanding’

Parties negotiating a potential joint venture should ensure their discussions are completed, and preferably committed to writing, before they take any action to carry out their joint venture, or risk the court ruling later that there was no enforceable agreement between them.

A local developer and a large supermarket chain were interested in acquiring the same development site. The developer approached the supermarket to discuss a joint venture.

An offer was made to buy the site – expressed to be made by the developer and ‘our joint venture partners’ - while they continued to discuss the possible joint venture.

The arrangement being discussed was that the supermarket would acquire the site, the developer would apply for planning permission and the supermarket would transfer the site to the developer once that was obtained. In return, the developer would build a store and lease it back to the supermarket.

The supermarket bought the site but heads of terms for the joint venture were never finally agreed, and drafts were marked ‘subject to contract’. A joint venture agreement was never signed. The supermarket then found another developer to work with.

The first developer claimed that the supermarket had bought the site on the understanding it would hold it on trust for them both, under what lawyers call a ‘constructive trust’. The basis of a constructive trust is that one party acquires property under an understanding (which need not be enforceable as a contract) that the other will have an interest in it, and the other acts in reliance on that understanding to its own disadvantage (or the other party’s advantage) in circumstances where it would be ‘inequitable’ for the party that acquires the property to continue to own it for its own benefit alone.

The court found that the developer’s negotiations with the supermarket, including the possibility of transferring the site to the developer at some stage, had never amounted to an ‘understanding’ for these purposes – they were merely discussions. The documentation showed that a number of key points had not yet been agreed, indicating a lack of agreement rather than a common understanding. There were other features of the paperwork that indicated absence of a final understanding over their respective roles.

Operative date

• Now

Recommendation

• Parties negotiating a potential joint venture should ensure their discussions are completed, and preferably committed to writing, before they take any action to carry out their joint venture, or risk the court finding there was no ‘understanding’ between them.

Case ref: Generator Developments Ltd v LIDL UK Gmbh [2018] EWCA Civ 396

Please note: An article published in the June 2016 edition of Legal Alert covered this case at an earlier stage in the legal process.