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How joint venture agreements can be a formula for disaster

legal matters

Joint venture agreements are common in the world of property development, writes Kim Franklin. The arrangement is usually along the lines of 'we provide the land, you develop it, and we'll split the profit'. Marvellous. Profit is, however, a function of incomings and outgoings.

As problems can arise over precisely what they include, most experienced developers go to some lengths to define the formula upon which the divisible element is to be calculated. If, through oversight or error, they miss something that benefits the other party, can they go back and rewrite the deal? This question was considered by the Court of Appeal in George Wimpey UK v V I Components (Judgment 3.2.05).

VIC owned an industrial site in Kent. Wimpey wanted to develop 230 flats there. Wimpey offered VIC £2.25 million for the site plus 50 per cent of the overage, that is, the amount by which the aggregate sales prices exceeded an agreed base figure. The base figure was subject to negotiation but was to include an element for 'enhancements', or premiums payable on some properties to reflect a river view, undercroft parking or a higher than ground-floor location. In each proposed formula, enhancements were included in the base figure as '+E'.

The negotiations were conducted at arm's length. Wimpey was represented by its regional director; VIC by a firm of chartered surveyors.

Both parties instructed well-known firms of solicitors. During the negotiations, Wimpey proposed a revised formula, intended to address a particular problem it had identified and which it described as 'more even-handed'. Its revised formula failed to include '+E'. VIC refined the revisions and these were accepted by Wimpey, who had failed to notice the absence of '+E' from the formula. Contracts were exchanged in 1999.

In 2003 Wimpey applied to the court to rectify the agreement on the basis that either, or both, parties had mistakenly omitted to record that the base price used for calculating the overage should have taken account of enhancements.

Its error had benefited VIC by some £800,000.

Wimpey claimed that VIC either knew of the mistake, or shut its eyes to it. Instead of drawing the oversight to Wimpey's attention, VIC took advantage of it. This, Wimpey claimed, was unconscionable conduct, and not what a reasonable person would have done in the circumstances.

The Court of Appeal rejected Wimpey's claim.

The court observed that in commercial negotiations honour and honesty are seldom on speaking terms with rationality or reasonableness. An honourable person negotiating for VIC would probably have asked Wimpey if it realised that '+E' was left out. It was to be doubted, however, whether a reasonable negotiator would have done so. In any event, neither side was bound to help the other to negotiate to the best advantage; even more so in this case, where the weaker party was accused by the stronger of failing to draw attention to its own error.

The court found that it could not infer dishonesty by VIC. Nor was it prepared to find that VIC knew that Wimpey had made a mistake. Legally there are five types of knowledge: actual knowledge; shutting one's eyes to the obvious; failing to make enquiries; knowledge of circumstances which would indicate the facts to an honest and reasonable man; and knowledge of circumstances which ought to put a reasonable man on enquiry. Wimpey was a 'heavyweight' in the market, with an experienced negotiator. VIC said that it did not believe for a moment that Wimpey had actually missed the omission of '+E', as it was 'not that kind of person'.

In any event, Wimpey had failed to show that it had made a mistake when the contract was signed. Here the negotiator was to be distinguished from the decision-maker, in this case the member of Wimpey's board who signed the contract. He gave no evidence to explain why he felt able to approve the formula.

The court concluded: 'If ever a party was entitled to assume that its opponent knew what it was doing, it was VIC in its negotiations with one of the country's largest construction and development enterprises.' Kim Franklin is a barrister and chartered arbitrator at Crown Court Chambers. Visit www. crownofficechambers. com

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