Duty of Disclosure when Negotiating Joint Venture

The University Court of the University of St Andrews and others v Headon Holdings Limited and others, 20 August 2015

Background

This is an Outer House case relating to a joint venture agreement which five parties had entered with a view to obtaining planning permission for, and optimising the sale value of, an area of land to the west of St Andrews.

Four of the parties held title to the parts of the property to be developed and the fifth was the intended developer of the land. Two of the parties to the agreement (including the developer) were controlled by Joseph Headon.

Two of the parties to the joint venture (Headon Holdings and the Cuthills) reached a separate agreement under which the Cuthills would convey an area of land to Headon who would hold the land and any future sale proceeds (less the price paid by Headon to the Cuthills for conveyance of the land) in trust for the Cuthills.

Arguments

Two of the other parties to the agreement including the University of St Andrews were unaware of the agreement between Headon and the Cuthills when they entered the joint venture. When they became aware of the agreement, they sought to have the joint venture agreement reduced on the basis that (1) they had relied on a material misrepresentation by Headon and the Cuthills and (2) they argued that Headon and the Cuthills had a duty to disclose material facts to them when they entered the joint venture. The university argued that they had been led to believe that Headon and not the Cuthills had the “beneficial interest” (i.e. being the recipient of the benefit which would result from the development of the property in question) as a result of statements made by Joseph Headon and others.

The University pointed out that Headon was closely related to the developer (both were controlled by
Joseph Headon) and that, as a party to the joint venture, Headon received certain privileges under the joint venture agreement including voting rights on matters affecting the developer and enjoyed the ability to block agreement amongst the parties to the joint venture on certain issues. As such, if the university had known about the agreement between Headon and the Cuthills (the result of which the university argued was that the Cuthills were the “beneficial owners” of the property in question and not Headon as they had believed), they claimed they would have not have allowed Headon into the joint venture and would not have entered the venture themselves.

Decision

Lord Tyre rejected the university’s arguments and dismissed the action.

Duty of disclosure

In the first place Lord Tyre found that, in the circumstances, there was no duty of disclosure. The general rule is that the parties to a contract have no duty of disclosure. However, a duty can arise in relation to certain special contracts or where the parties are in a special relationship. (A common example where the duty arises is contracts of insurance, where facts material to the insurer’s risk are known only to the insured.) The university argued that the duty also applies to parties negotiating a partnership. After noting that it was not definitely decided that the duty applies to such cases in Scotland, Lord Tyre found that he was not persuaded that the joint venture could properly be characterised as a partnership (or analogous to a partnership) for the purpose of applying the law of pre-contractual duties.

Misrepresentation

Secondly, Lord Tyre held that there had been no misrepresentation in the statements describing Headon as the owner or landowner of the land in question as Headon did in fact hold title to the land. Describing Headon as the landowner did not amount to a representation that Headon was a “beneficial owner” in the sense that the term had been used by the university.

The full judgement is available from Scottish Courts here.

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