The problem with verbal joint ventures

Feb 2015 |

Introduction

Almost every kind of shared investment can cause problems between the investors. A joint venture is no different. This article looks at the problems which arose with a property development joint venture in the recent NSW case of Russo & Ors v Russo & Ors [2015] NSW SC17.

The background

Joseph Russo and John Russo were brothers and operated as property developers in Sydney. Their cousin Angelo Russo, invested funds from Angelo personally, his wife and a superannuation fund, into three real estate developments of the Russo brothers.

Angelo’s company and the companies operated by the Russo brothers had an undocumented joint venture over three developments. When things soured, Angelo’s interests sought an account for the money Angelo’s interests had invested. This claim was defended by the Russo brothers.

The Court had to determine:

  1. If the joint venture was restricted to Angelo and his wife and the Russo brothers interests; or
  2. Was the joint venture narrower and restricted to Angelo’s company (trustee of the superannuation fund) and the companies associated with the Russo brother’s; and
  3. Was the claim for an accounting of the money invested by Angelo’s interests brought by the right parties.

To complicate things further, Angelo’s claim arose after six years i.e. outside the statutory limitation period.

What was entailed in examining Angelo’s claim?

The process examined the investment trail provided by Angelo’s funds in each of the projects. This entailed Angelo proving the sources of the invested funds and their application to one or more of the projects. Some money appeared to have been lent on the projects rather than as a direct investment, and a home unit was separately bought by Angelo’s wife. Additionally Angelo and his wife, from time to time, applied their money to various expenses incurred in one or more projects.

Court’s findings

There was no written joint venture agreement so the Court had to assess what was said in evidence to determine if a joint venture existed. The evidence entailed recognition from the Russo brothers about the sharing of profits with Angelo. Angelo additionally kept ledgers showing funds provided by Angelo’s interests in what the Court accepted as part of the overall evidence demonstrating a joint venture.

The claim for an account was therefore consistent with the rights of joint venturers to call for an accounting of their interests. Angelo and his wife placed trust and confidence in the Russo brothers without a formal agreement based on an agreed return for the value of funds provided. Though companies were involved, the Court considered that the joint venturers were Angelo and his wife and the Russo brothers, and ordered an account to take place supplemented by ancillary orders agreed to by the parties.

On the issue that the claim was statute barred because it was made six years after the completion of the last project, the court considered that there was no finite period for the joint venture so that the completion date of one project was irrelevant. In any event, the distribution of money to the joint venturers was within the six year limitation period as was Angelo’s discovery of misapplication of joint venture funds, leading to the claim.

The court ordered that the account:

  1. Define the contribution of each joint venturer to the projects.
  2. Determine the distribution to each joint venturer from the projects.
  3. Determine properly incurred expenses for each project.
  4. Determine the income received from each project.

Conclusion

The trial went for seven days and would have proved to be an expensive exercise. In hindsight, Angelo and his wife should have insisted on a written joint venture agreement with inherent safeguards addressing control, financial management, committee oversight and full progressive accounting. Dealing with relatives should not cloud your judgment. Do not dispense with a documented joint venture agreement because of family ties, friendship or long standing relationships.