Legal Updates

Investing in a failed venture does not qualify for termination and reimbursement if the failure is due to a business risk that materialized

May 31, 2022

Two entities executed a contract for a joint project, with one bearing financial obligations and the other being in charge of promoting the project. Eventually, the project failed, both due to regulatory reasons and due to the fact that it was not properly promoted. The financing party sought to terminate the contract and receive reimbursement of the funds invested.

The Court held that there is no right to require for termination and reimbursement. A mistake as to the profitability of the transaction - in the value of the transaction, in its commercial value or economic ratio - will not be considered a mistake that entitles the termination and reimbursement relief under the contract. Such mistake is examined according to the "risk test", according to which a mistake in the profitability of the transaction falls within the scope of the risk assumed by a party to the contract, whether implicitly or explicitly. Here, the memorandum of understanding signed between the parties expressly reflected the intent that the day-to-day management will be in the hands of one and that the other would strictly act as a financial partner. The financial partner chose to bear a business risk, which materialized. Thus, it does not have the right of termination due to the materialization of the risk or the right to be reimbursed for the invested funds.