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Beware the operation of savoy or "Russian Roulette" clauses in joint venture arrangements

Newsletter 20 December 2010

A recent case in the Supreme Court of New South Wales illustrates the dangers of buy-out clauses in project agreements governing the joint ownership of real property for development.

The case concerned a sole purpose joint venture trustee and unit trust formed for the purpose of ownership and redevelopment of the Sheraton Hotel at Noosa, Queensland by two Sydney-based developers: Valad and Ashington.

Although the case ostensibly related to an action for damages for breach of contract and in the alternative relief against oppression through a compulsory share buy out order or the winding up of the joint venture vehicle, the real purpose of the litigation was an attempt by Ashington to avoid the operation of a compulsory buy-out of its interest in the hotel by Valad.

Key Facts

Although some aspects of the facts of the case were complex, the essential points were as follows:

  1. The unitholders agreement required each owner to contribute specified funding on specified dates as set out in a schedule in the unitholders agreement.
  2. The unitholders agreement provided that the schedule may be amended by the agreement of the unitholders.
  3. On 30 June 2009 each owner was required to contribute $2.5 million to the project.
  4. The unitholders agreement provided for the preparation and acceptance of a project plan and project budget setting out, among other things, the timing for payment of contributions.
  5. The parties were unable to reach agreement as to the project plan and the project budget. Valad in particular objected to the proposed project plan because it did not provide for the 30 June 2009 owner contribution.
  6. The unitholders agreement provided that “If there is a deadlock between the Directors of the Board in relation to any decision of the Board that decision shall be immediately referred to the Chairman of each Unitholder for resolution.”
  7. On 13 April 2010 Valad referred the issues of timing for capital contributions and approval of the project plan to a meeting of the Chairmen for resolution.
  8. On 20 April 2010 Ashington responded stating that Ashington did not believe there was a deadlock as the board had not voted on resolutions in relation to any of the matters set out in the notice. (Although the drafting of the unitholders agreement was not ideal in this respect, given that events moved on after this technical point was raised by Ashington, it was not considered relevant to the outcome of the case.)
  9. Clause 22 of the unitholders agreement provided that if a meeting of the Chairmen was unable to resolve a deadlock within 20 business days, either party may serve on the other a “Transfer Notice” to either buy the other party’s interest, or sell their interest for a stated transfer price.
  10. The unitholders agreement went on to provide that if the recipient of a Transfer Notice didn’t accept either of the offers in the Transfer Notice within 10 business days, the sender could nominate which of the offers the recipient was required to accept.
  11. On 29 April 2010 Ashington wrote to Valad stating that as a meeting of the Chairmen had not been held, Ashington referred the matters in the 13 April letter to deadlock resolution under clause 22 of the unitholders agreement.
  12. On 22 May 2010 Valad served a transfer notice on Ashington pursuant to clause 22 offering to purchase the interest of Ashington in the project for $20 million or to sell Ashington its interest in the project for $20 million. Ashington did not respond to this notice.
  13. On 1 June 2010 Ashington commenced proceedings in the Supreme Court of New South Wales.
  14. On 8 June 2010 Valad sent a notice requiring Ashington to transfer its interest to Valad at the transfer price.


Ashington’s attempt to prevent Valad from invoking the buyout provisions of the unitholders agreement was unsuccessful. Further, Ashington had agreed to pay Valad a $20 million introduction fee arrangement five years after completion of the acquisition of the property. That fee became immediately payable in the event that a transfer took place under the deadlock clause. Therefore, Valad was able to acquire Ashington’s interest in the Noosa Sheraton for no additional consideration (except stamp duty).

Ashington’s claims

  • Refusal to progress the project - Ashington claimed that Valad breached the unitholders agreement by refusing to progress the project by not taking proper steps to advance it, by wishing to sell the project without the redevelopment being completed, by refusing to approve the project plan and budget, and by not engaging in community consultation. All of these claims were rejected, with Windeyer AJ noting that the last claim, engaging in community consultation, was actually Ashington’s responsibility. His Honour held that the serious downturn in the Noosa market was the reason that extended time for the completion of the project had been recommended by the project control group. Further, it was not only Valad which put forward the proposal of obtaining relevant consent and then selling the project: this was something which was considered by the Ashington interests as well. The refusal to approve the project plan and budget could not be said to be unreasonable in the circumstances.
  • The Deadlock notice - Windeyer AJ went on to hold that the matters listed in Valad’s deadlock notice were not matters where Valad was seeking to take advantage of its own wrong. Nor did his Honour consider Valad’s actions to be in breach of the good faith obligation in the unitholder agreement. In any event, although Ashington’s statement of claim said that Valad referred the matters for resolution under clause 22 of the unitholders agreement, that was not correct. The matters were referred by Ashington in its 29 April letter. Valad had taken no steps to refer the matters for resolution pursuant to clause 22. It was the activating of the deadlock provisions of clause 22 which resulted in the transfer notice. Ashington was responsible for this and his Honour held that Ashington’s referral at the least must have indicated acceptance of the validity of the deadlock notice.
  • Claims of dishonest conduct - His Honour held that even though the evidence showed that the managing director of Valad was more concerned with the welfare of Valad than with that of the joint venture, he did not believe Valad had engaged in improper conduct. He found that the uncertain economic future and the proper doubts about the ability of Ashington to contribute funds to the project justified the desire to control the project. Accordingly the deadlock notice claims did not arise through Valad taking advantage of its own wrong doing so as to make its issue a breach of contract.

Practice Pointer

Whenever parties enter into joint venture arrangements they need to anticipate all of the possible future circumstances (both positive and negative) that may arise during the course of the project. If one party becomes unable to fulfil its obligations under the project agreement, the other party may legitimately invoke the provisions of that agreement to take advantage of the other party’s misfortune and ultimately force that other party out of the project.

Martyn Tier, Partner

Newsletter 20 December 2010
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