|
|
|
Advertisements
|
|
|
|
THE
LEGAL SYSTEM
RELUCTANT
BEDFELLOWS:
CAN
FIDUCIARY
OBLIGATIONS
AMONG
MINING
CO-VENTURES
BE EFFECTIVELY
DISCLAIMED?
BY JEFF
BECKER,
HOLLAND
AND HART
LLP
Mining
projects are often organized as joint ventures between multiple parties, each of
which bring different assets, land positions, tolerance for risk, and capital
contributions to the project. As time progresses and the project matures,
continued participation in the joint venture may become undesirable due to a
variety of possible internal changes, such as tolerance for risk and continued
capital expenditures, and external factors, such as changes in the regulatory
environment and commodity prices. What was once an optimistic and cooperative
atmosphere among venturers can quickly change to a contentious atmosphere as the
venture wraps up its business and each venturer attempts to protect its assets
and capital contributions.
A
joint venture generally has six critical characteristics: (1) a contribution by
the venturers of money, property, effort, knowledge, skill, or other asset to a
common undertaking; (2) a joint property interest in the subject matter of the
venture; (3) a right of mutual control or management of the enterprise; (4) the
expectation and sharing of profit; (5) a right to participate in the profits;
and (6) a limitation on the objective to a single undertaking or ad hoc
enterprise. These six characteristics create an intricate web of express and
implied rights and obligations among venturers, including an implied duty of
loyalty and honesty in the parties’ dealings with each other and in respect to
matters pertaining to the venture.
Some
courts have also found heightened fiduciary responsibilities for the venturer
entrusted with the management of the venture’s enterprise. The relationship
among venturers was eloquently described by United States Supreme Court Justice
Cardozo in the seminal 1928 case of Meinhard v. Salmon - “joint adventurers,
like copartners, owe to one another, while the enterprise continues, the duty of
the finest loyalty. Many forms of conduct permissible in a workaday world for
those acting at arm’s length, are forbidden to those bound by fiduciary ties.
Not honesty alone, but the punctilio of an honor the most sensitive, is
then the standard of behavior. As to this there has developed a tradition that
is unbending and inveterate. Uncompromising rigidity has been the attitude of
courts of equity when petitioned to undermine the rule of undivided loyalty by
the ‘disintegrating erosion’ of particular exceptions.
Only
thus has the level of conduct for fiduciaries been kept at a level higher than
that trodden by the crowd.” Despite many courts’ uncompromising rigidity on
this issue, the spectrum of joint venture fiduciary duties often can be
effectively expressly disclaimed in a venture agreement.
When a venture terminates, or one or more coventurer attempts to
withdraw, one of the critical – and often litigated – issues that arises is
whether contractual attempts to disclaim the creation of fiduciary obligations
and duties is enforceable. Mining venture agreements will often state that the
agreement does not create “any mining, commercial, or other partnership,”
and that the venturers are not the “agents or legal representatives” of each
other. The agreement may further disclaim the creation of “any fiduciary
relationship.” Whether such express disclaimers and statements are enforceable
against a disgruntled co-venturer attempting to prohibit a withdrawing venturer
from pursuing a competitive land position is dependent upon often inconsistent
and contradictory judicial decisions. Some courts readily uphold express
disclaimers of fiduciary duties and relationships, while others have held such
disclaimers void for public policy reasons or resort to the uniform law of
partnerships for guidance. Thus, it is generally not enough to rely on an
express contractual disclaimer without having first fully examined the relevant
authorities in the jurisdiction of the venture.
In
many jurisdictions, disclaimers of fiduciary duty are upheld provided the
venture agreement was negotiated among sophisticated parties with comparable
bargaining power. Express disclaimers are generally subject to standard contract
interpretation principles and are deemed the expression of the contracting
parties’ intent. If the operative agreement expresses the intent of the
parties to disclaim duties or obligations, many courts will enforce such
provisions in the absence of bad faith, unconscionability, or acts contrary to
public policy. In the Fifth Circuit Court of Appeals case of Exxon Corp. v.
Burglin, for example, the court recognized the existence of fiduciary duties
among partners, but also enforced a contractual abrogation of the fiduciary duty
of loyalty and disclosure after finding that “highly sophisticated parties
bargained for the terms of the agreement at arm’s length with the assistance
of counsel.” Similarly, the United States District Court for the District of
Colorado held in the case of Dime Box Petroleum Corp. v. The Louisiana Land and
Exploration Co. that, “where, as here, experienced and sophisticated parties
with equal bargaining power have fully negotiated a contract which specifically
disavows a joint undertaking, no joint venture was formed and, thus, no
fiduciary relationship was created.”
In July of this year, the United States District Court for the District
of Alaska relied upon the Dime Box decision and upheld an express disclaimer of
fiduciary duty after recognizing that economic effi ciency is promoted when
venturers with unrelated competing projects can expressly modify implied
fiduciary duties and unite resources for a single venture project. Thus, there
appears to be strong and growing support for effective express disclaimers of
fiduciary duties in venture agreements.
Other
courts, however, have refused to recognize a contractual disclaimer of fiduciary
duties among partners and venturers. Some courts in California and Minnesota,
for example, have held that the fiduciary obligations with respect to matters
fundamentally related to the business cannot be waived or contracted away in the
operative agreement. Further, in the absence of relevant decisions involving
joint ventures, many courts will look to the jurisdiction’s law of partnership
for guidance on disclaimers of fiduciary relationships. Under the many forms of
the Uniform Partnership Act, a partnership agreement may not contractually
“eliminate” the duty of loyalty, or “unreasonably reduce” the duty of
care. While
this statutory language may be persuasive in some jurisdictions, many courts
recognize a substantive difference between the law of joint ventures and
partnerships. Most courts will generally only apply the law of the Uniform
Partnership Act by analogy when necessary to address a question not otherwise
answered under the relevant agreement or the common law of joint ventures. Thus,
one would argue, if the venture agreement expressly addresses the issue (by
disclaimer) the “default” uniform partnership statute is inapplicable.
Importantly,
even where express contractual disclaimers are enforceable in a dispute between
coventurers, such disclaimers may be ineffective in a claim brought by a third
party. If a claim is brought by a third party against one or all of the
venturers, most courts will disregard any disclaimer of fiduciary or other
relationship among the parties and consider co-venturers de facto partners or
fiduciaries for purposes of determining such third party claim. This often
arises in disputes involving a claim by a third party that one venturer was the
agent of its co-venturer, or of the venture itself.
While the relevant authorities in each jurisdiction should be thoroughly
examined before crafting venture agreement language, many jurisdictions will
uphold a disclaimer of fiduciary duties and relationships, as long as the
venturers are sophisticated and experienced parties that negotiate with
comparable bargaining power.
Diligence
must be exercised to ensure that any express disclaimer not be contrary to the
public policy of the jurisdiction or cross the line into the murky waters of
unconscionability. Further, the unwary draftsman runs the risk of providing an
incomplete disclaimer of relevant fiduciary duties and relationships, and
thereby potentially expressly preserving that which slipped through the cracks
of an unartful disclaimer.
As
with many contract provisions, a small amount of diligence at the inception of a
mining venture agreement can be effective preventative medicine when a venture
begins to wind-down. Correctly and carefully defining and limiting the nature of
the relationship and obligations among venturers in the venture agreement can
provide significant defensive arrows in the quiver of a venturer that is seeking
a land position, asset acquisition, or new enterprise partners on a project that
may be competitive with a former venture.
Jeff
Becker is
an attorney in Denver, Colorado at Holland & Hart LLP. Jeff specializes in
transactions and environmental compliance involving mining, oil and gas and
renewable energy projects. Holland & Hart LLP is the largest law fi rm in
the Rocky Mountain West with over 350 attorneys in 14 offi ces in 7 states.
Please visit www.hollandhart.com
or call Jeff at 303-295-8287 for more information.
|
