Executive Summary: Key Legal and Evidentiary Issues

• Dispute arose from a failed joint venture to develop two residential properties without a written agreement.

• Court held that fiduciary duties under the Business Corporations Act still applied to directors despite the informal structure.

• Mr. Takhar breached fiduciary duties by transferring a joint venture asset to his own company and entering a sale without consent.

• Phoenix Construction was held jointly liable for the fiduciary breach involving the 199A Property.

• Despite serious misconduct by both parties, the court declined to dismiss the claims under the doctrines of clean hands or abuse of process.

• Appeal against the enforceability of a land sale contract failed due to part performance, ostensible authority, and equitable estoppel.

Facts of the case

Nirmal Takhar and Kundan Singh Khela entered into an unwritten joint venture to develop residential properties in Langley, British Columbia. They created Phoenix Homes Limited to pursue the venture, with each holding 50% ownership and acting as directors. The joint venture aimed to purchase and develop two properties: one on 199A Street and another on 208th Street.

The venture began with the 199A Street property in 2005, where Mr. Khela was to contribute $1.5 million and Mr. Takhar would later contribute funds. However, the property purchase fell through and was tied up in litigation. By 2009, the property was eventually transferred to Phoenix Construction Systems Ltd.—a company controlled by Mr. Takhar—instead of Phoenix Homes. By then, the property had appreciated significantly, and Mr. Khela wanted to sell while Mr. Takhar preferred to develop it, eventually proceeding unilaterally through Phoenix Construction.

The second dispute concerned the 208th Street property, acquired in 2006. When the partnership began to deteriorate, Mr. Takhar sold part of this property to a third party, View Side Developments Ltd., without Khela’s consent. View Side had previously financed Takhar’s developments. Mr. Takhar repaid loans to View Side, who then used those funds to pay deposits on the property—deposits that were subsequently diverted to Phoenix Construction.

Procedural history

Phoenix Homes, through derivative action led by Mr. Khela, sued Mr. Takhar and Phoenix Construction over the 199A Property, alleging breach of fiduciary and statutory duties. A second action was brought against View Side over the 208th Street sale. The trial judge in the Supreme Court of British Columbia found that Mr. Takhar and Phoenix Construction were liable for breaching fiduciary duties, and upheld the enforceability of the contract with View Side. Both matters were appealed to the British Columbia Court of Appeal.

Legal issues on appeal

There were two appeals:

1. Mr. Takhar and Phoenix Construction argued that the trial judge erred in applying fiduciary obligations in the context of a joint venture and that the claims should have been dismissed due to Mr. Khela’s misconduct and lack of clean hands.

2. Phoenix Homes argued that the trial judge erred in finding the View Side contract enforceable, that Mr. Takhar had authority to enter the agreement, and that the judge failed to set aside the contract for conflict of interest under the Business Corporations Act.

Court’s analysis and reasoning

The Court of Appeal dismissed both appeals. On the 199A Property issue, it affirmed that fiduciary duties under section 142 of the Business Corporations Act remained applicable, regardless of the informal joint venture. The court emphasized that using a corporate vehicle carried statutory responsibilities and that Takhar’s transfer of the property violated his duties. Arguments based on repudiation of the joint venture were rejected because they had not been properly pleaded or established at trial. The court also dismissed the claim that the joint venture structure displaced fiduciary obligations.

Regarding clean hands and abuse of process, the Court agreed with the trial judge’s discretionary choice to proceed with the case. Though both parties had acted dishonestly, the court found no reversible error in the trial judge’s decision to assess the merits rather than dismiss the claims.

On the View Side contract, the Court found no legal error in upholding the contract’s enforceability. It affirmed the trial judge’s application of the indoor management rule and ostensible authority, concluding that Mr. Gill, View Side’s principal, reasonably believed Mr. Takhar had authority to act on behalf of Phoenix Homes. The contract was partly performed—$1.2 million in deposits had been paid—and View Side had not been repaid. Therefore, the court found that equitable estoppel and partial performance barred Phoenix Homes from repudiating the contract. The court also declined to set aside the contract under the Business Corporations Act for conflict of interest due to the long delay, lack of prejudice to Phoenix Homes, and substantial performance by View Side.

Disposition and outcome

The British Columbia Court of Appeal dismissed both appeals. Mr. Takhar was found to have breached fiduciary duties in relation to the 199A Property, and Phoenix Construction was held jointly liable. The View Side contract was upheld as valid and enforceable. Remedies for Phoenix Homes will be determined in a future phase of the trial.