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Claim No: CA-006-2017

THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS

In the name of His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Ruler of Dubai

IN THE COURT OF APPEAL

BEFORE THE CHIEF JUSTICE MICHAEL HWANG, JUSTICE SIR RICHARD FIELD AND H.E. JUSTICE OMAR AL MUHAIRI

BETWEEN

MAG FINANCIAL SERVICES LLC

Appellant

and 

THERON ENTERTAINMENT LLC

Respondent / Cross-Appellant

Hearing: 6 December 2017

Counsel: Harris Bor assisted by Alastair Graham of Mayer Brown for the Appellant

Sarah Malik (instructed by Taylor Wessing) for the Respondent/Cross-Appellant

Judgment: 28 January 2018

JUDGMENT

Summary of Judgment

  This summary is not part of the Judgment and should not be cited as such

ORDER

UPON hearing Counsel for the Appellant and Counsel for the Respondent on 6 December 2017

AND UPON reading the submissions and evidence filed and recorded on the Court file

IT IS HEREBY ORDERED THAT:

1. The Appellant’s Appeal regarding Clause 36 of the Tenancy Contract is dismissed.

2. The Appellant’s Appeal regarding the award of lost profits by the Court of First Instance succeeds.

3. The Respondent’s Cross-Appeal regarding the security deposit succeeds. The security deposit is returnable and may be set-off against unpaid rent owed to the Appellant.

4. The Respondent’s Cross-Appeal regarding lost profits is dismissed.

5. Unless either party files written submissions to the contrary within 10 days hereof, this Court shall set aside the order for costs made below and shall order that there be no order as to costs both below and on this Appeal.

Issued by:

Natasha Bakirci

Assistant Registrar

Date of Issue: 28 January 2018

At: 2 pm

JUSTICE SIR RICHARD FIELD:

Introduction

1.The Appellant (“MFS”) appeals the decision of H.E. Justice Ali Al Madhani (“the judge”) dated 11 May 2017 by which the judge awarded the Respondent/Cross-Appellant (“Theron”) damages in the sum of AED 4,735,618.30 for breach of a Tenancy Contract dated 25 February 2014 (“the Tenancy Contract”).

2. The Respondent (“Theron”) resists MFS’s appeal and cross-appeals contending that the judge: (i) miscalculated the rent to which MFS was entitled by failing to give credit for the deductions of rent made in Theron’s calculation of lost profit; and (ii) failed to take into account a returnable security deposit when determining the amount of rent due to MFS under the Tenancy Contract.

3. At all material times, Theron was a licensee of the restaurant brand, “Asia de Cuba” and MFS was the owner of premises on the 26th and 27th floors of the South Tower of the Emirates Financial Towers in the DIFC (“the Premises”). In the Autumn of 2013, MFS and Theron entered into a Tenancy Contract dated 4 November 2013 (“the first Tenancy Contract”) under which MFS agreed to lease to Theron the Premises for a term of 3 years, plus a 6 month rent-free period, for use as a restaurant and bar. Under this contract, Theron paid a returnable security deposit of AED 289,705.66, a rental payment on the date of the signing of the agreement and delivered 6 post-dated cheques in respect of the future rent as it was to fall due.

4. In December 2013, Theron engaged TGP Consulting Limited (“TGP”) to manage and operate the contemplated restaurant. TGP was also managing and acting as a consultant to a restaurant in London and another in Abu Dhabi each under separate ownership, trading under the “Asia de Cuba” brand.

5. In February 2014, Theron and MFS entered into the Tenancy Contract dated 25 February 2014. This contract replaced the first Tenancy Contract dated 4 November 2013 and was on the same terms as that earlier contract save that the term of the tenancy was extended by two years, the floor space leased was increased, the electrical power to be supplied to the Premises was increased and the rent was increased. In place of the 6 post-dated cheques delivered under the first Tenancy Contract, Theron delivered 9 post-dated cheques for larger amounts than those provided for in the cheques delivered under the first contract.

6. It is necessary to set out a number of the clauses contained in the Tenancy Contract.

“6. Permitted Business:              Restaurant & Bar

7. Period of Tenancy: 5 years (with a rent free period for 6 Months)

            Free period:                  From 10 November 2013 To: 09 May 2014

Lease period:                From: 10 May 2014 To: 09 May 2019

. . .

11. Term of Lease: Subject to the right of the Tenant to terminate the lease by giving two months notice as specified in clause 19, this Lease shall be in force for the Period of Tenancy.

. . .

19. The Tenant shall have the right to terminate the lease each year on the anniversary date, i.e., by giving two months’ notice.

. . .

23. The Unit is delivered as shell and core without ceiling and flooring and/or as its condition and the Tenant shall carry out his own interior fit-out works as applicable . . .

34. The UAE laws are the laws that should be referred to in the interpretation or application of this Tenancy Contract. The rules and laws applicable in the Dubai International Financial Centre shall govern the relation between the two parties to this Tenancy Contract.

. . .

36. If the Tenant wishes to determine this Tenancy Contract at any time during the Period of Tenancy and of such wish gives not less than two calendar months’ previous notice in writing to the Landlord then this Tenancy Contract and everything contained in this Tenancy Contract ceases and determines but without prejudice to any antecedent breach of any obligation by either party against the other in respect of any antecedent breach of any obligation contained in this Tenancy Contract and the Landlord shall on such determination the landlord (sic) will forfeit any part of the Annual Rent paid in advance by the Tenant in respect of any period beyond the date of such determination in accordance with this Tenancy Contract.”

7. At the time both Tenancy Contracts were entered into, the premises were permitted to be used as offices.

8. Come November 2014, no authorisation had yet been obtained from the DIFC to change the permitted use from office space to a restaurant and bar. Theron took the view that it was MFS’s obligation to obtain this authorisation at MFS’s own cost and MFS had been refusing to pay the fee for change of use demanded by the DIFC on the ground that it was unreasonably high. On 25 November 2014, Theron issued proceedings against MFS seeking an order for specific performance of an alleged obligation on MFS to secure the change of use authorisation. On 1 February 2015, the judge ordered MFS to take all action necessary to secure from the DIFC the change of use authorisation and on 5 February 2014 such authorisation was obtained by MFS on payment of the required fee. Theron were informed of the change of use authorisation on 9 February 2014.

9.Following the conclusion of the first Tenancy Contract, Theron employed a contractor to do work which Theron regarded as necessary for the premises to be put into the state of “shell and core” referred to in Clause 23 of the Tenancy Contract and to fit out the premises for use as a restaurant and bar. However, this work could not be started until the necessary change of use had been authorised.

10. On 11 March 2015, in response to its application made on 8 March 2015 for approval of the proposed fit-out works, Theron was issued with a No Objection Certificate and the Dubai Technology and Media Free Zone Authority (Tecom) granted approval for the proposed décor later in the month.

11. In May 2015, it was necessary for Theron to renew its trade license which was due to expire on the 14th of that month. In the belief that the renewal application form had to be signed by both Theron and MFS, Theron demanded that MFS sign such a form, which MFS declined to do since there was a dispute between the parties. Theron’s 10 November 2014 rent had bounced shortly after 2 May 2015. However, Theron’s trade license was nonetheless renewed; it turned out that MFS’s signature on the form was not required for this to be achieved.

12. By letter dated 14 May 2015, Theron served a notice on MFS terminating the Tenancy Contract on two alternative grounds. The first ground was that MFS had refused to sign the license renewal application form. The alternative ground was that the notice constituted a notice of termination under Clause 36 of the Tenancy Contract.

13. On 30 June 2015, Theron issued proceedings against MFS claiming, inter alia, a declaration that the Tenancy Contract had been terminated, the return of the post-dated cheques provided to MFS under the Tenancy Contract, damages for loss of profit and wasted expenditure by reason of MFS’s breaches of contract in failing to procure approval of the change of use when this ought to have been done, and for failing to deliver the premises, “shell & core”.

The Judgment Below

14. The judge held that:

(1) MFS’s refusal to sign the trade license renewal form was not a breach of the Tenancy Contract and therefore did not constitute a ground for terminating the Tenancy Contract.

(2) Nonetheless, Theron had lawfully terminated the Tenancy Contract under Clause 36 of the Tenancy Contract. Clause 36 did not have to be read as being subject to Clause 19.

(3) It followed that MFS was not entitled to retain the cheques covering the period after the determination date, 14 July 2015, and those cheques must be returned to Theron.

(4) MFS had breached the Tenancy Contract by not procuring approval from the DIFC for the use of the premises to be changed to use as a restaurant and bar until around 9 February 2015

(5) Theron was entitled to damages representing loss of profit for the period from the “soft opening” date of 16 October 2014 to 14 May 2015 (the date of the notice to terminate). 16 October 2014 was the date on which Theron contemplated opening the restaurant but without extensive advertising or marketing at that stage.

(6) The loss of profit damages were AED 6,282,933, as proved by a schedule of projected figures for 2014 for the proposed restaurant (“the damages schedule”) based on figures for the Asia de Cuba restaurant in Abu Dhabi for the first four months of 2015. The damages schedule was said to have been produced by a Mr Wright of TGP and the figure of AED 6,282,933 was the total of projected retained net profit for the period of January to July 2014.

(7) MFS must additionally pay Theron: (a) AED 50,000 for costs incurred for the storage of the contractor’s equipment and materials; (b) AED 37,500 for costs incurred for the storage of furniture and fit-out materials; and (c) AED 485,691 for the cost of additional contracting works completed.

(8) Theron must pay MFS: (a) on the return of the post-dated cheques, AED 2,040,780.83 as rent for the period 9 May 2014 to 14 July 2015; and (b) AED 79,724.87, for outstanding district cooling charges.

(9) The judge made no explicit finding on the issue whether MFS had failed to deliver the premises “as shell and core” as required by Clause 23 of the Tenancy Agreement. In paragraphs 41 to 53 of his judgment, he rehearsed the parties’ submissions on this issue. He then in paragraph 55 cited part of a letter from the Director of Property Development in the DIFC dated 25 August 2014 stating that the fit-out work on the premises could not begin because the premises remained designated for office use and went on to conclude in paragraph 56 that in light of this letter there was no need to examine the evidence on the “shell and “core” issue given that it was as a result of MFS’s failure to obtain the change of use that Theron had been prevented from starting work of any kind.

MFS’s grounds of appeal

15. MFS did not challenge the finding of the judge that it had been in breach of the Tenancy Contract by not having procured the change of use from office use to use as a restaurant and bar.

16. What MFS did challenge were the judge’s: (i) finding that Theron was entitled to terminate the Tenancy Contract under Clause 36; and (ii) award of AED 6,282,933 as damages for loss of profit based on the damages schedule.

17. As recorded above, under Clause 34 of the Tenancy Contract, the interpretation of the contract is governed by the UAE Civil Code Articles 265 and 266, which provide:

“Article 265

(1) If the wording of a contract is clear, it may not be departed from by way of interpretation to ascertain the intention of the parties.

(2) If there is scope for an interpretative construction of the contract, an enquiry shall be made into the mutual intentions of the parties beyond the literal meaning of the words, and guidance may be sought in so doing from the nature of the transaction, and the trust and confidence which should exist between the parties in accordance with the custom current in dealings.

                        Article 266

(1) A doubt shall be interpreted in favour of the obligor;

(2) Nevertheless it shall not be permissible to construe ambiguous words in contracts of adhesion in a manner detrimental to the interests of the adhering party.”

18. Mr Bor for MFS submitted that the combined effect of Clauses 11 and 19 of the Tenancy Contract is that the lease is to last for five years, subject only to a right to terminate it on the anniversary date on the giving of two months’ notice. Clause 11 makes no mention of Clause 36, which it would have to have done if that clause were intended to provide an additional right to terminate as found by the judge. Given the wording of Clause 11, Clause 36 should be construed as merely confirming the effect of giving notice under Clause 19, including that the Landlord is only entitled to rent up to the date of termination that would be an anniversary of the agreement.

19. In my opinion, if the words “the Landlord will forfeit any part of the Annual Rent paid in advance by the Tenant in respect of any period beyond the date of such determination in accordance with this Tenancy Agreement”, were construed to mean that the Landlord will have the right to forfeit any part of the Annual Rent paid in advance, Clause 36 would not be inconsistent with Clauses 11 and 19. Instead, its effect would be to give the lessee a right to terminate the contract in addition to the right contained in Clause 19 in exchange for relinquishing any right to claim back any part of the rent paid in advance.

20. The usual legal meaning of the verb “to forfeit” is “to lose by some breach of condition or some offence.”[1] That said, it goes without saying that words must be construed in their context. In my judgment, if the Tenancy Contract were a freely negotiated commercial agreement and the applicable rules of construction were those of the English common law, Clause 36 might well be construed to mean that, if a notice of termination be given thereunder, the Landlord will have the right to forfeit that part of Annual Rent paid in advance in respect of any period beyond the date of such termination. I say this because in Clause 36 it is the lessee who is contemplated being in breach of a condition, not the Landlord, and because such a construction avoids any conflict between Clause 19 and Clause 36.

21. However, the Tenancy Contract is not an agreement whose terms were freely negotiated and the applicable principles of construction are not those of the common law, but those contained in Articles 265 and 266 of the UAE Civil Code. Applying those Articles, I conclude that the wording of Clause 36 standing alone is clear and should be given effect regardless of the postulated inconsistency with Clauses 11 and 19. Even if it be the case that there is scope for an interpretative construction, the Tenancy Contract taken as a whole, including in particular Clauses 11, 19 and 36, is a contract of adhesion (a standard form contract proferred by one only of the parties) and must not be construed contrary to the interests of the lessee, especially because the clear language of Clause 36 is likely to be relied on according to its terms by the lessee when deciding if he (or it) has the right to determine the contract.

22.I therefore agree with the judge’s conclusion that Theron had validly terminated the Tenancy Contract under Clause 36 thereof and would dismiss MFS’s first ground of appeal.

23. The damages schedule was annexed to Theron’s Particulars of Claim and the projected profit figures therein set out were said to be supported by tables of profit figures for the Asia de Cuba restaurant in Abu Dhabi which was not owned by Theron but was managed by TGP. These tables were first referred to in the reply witness statement of Theron’s sole shareholder, Mr Igor Krayushkin, who said in paragraph 22 thereof:

“… Claimant has lost a significant amount of earnings due to the loss of this highly successful brand. By way of comparison, the Asia de Cuba brand in Abu Dhabi has had very high profits for the first year of its operation. The total revenues for Asia de Cuba Abu Dhabi between the months of January 2015 to November 2015 amounted to AED 21,372,322 (IK2 013-042).”

24. As stated above, the damages schedule consisted of profit projections made by Mr Wright of TGP on the basis of figures for the first four months of 2015 for the Abu Dhabi Asia de Cuba restaurant. Moreover, the projected profit figures exceeded the profit stated to have been made in the profit tables for 2015 in respect of the Abu Dhabi restaurant.

25. MFS was told before the trial that Mr Wright would be giving evidence but in any event, he did not do so. There was therefore no evidence (other than Mr Krayushkin's bare assertion that the Dubai restaurant would be more successful than the Abu Dhabi restaurant) justifying the projected profit figures for the Dubai restaurant. Nor was there any proper verification of the figures for the Abu Dhabi restaurant contained in the tables exhibited by Mr Krayushkin.

26. Having heard Mr Bor’s submissions on the loss of profits issue and the Court’s observations made in the course of those submissions, Ms Malik for Theron abandoned Theron’s claim for loss of profit caused by MFS’s delay in procuring the change of use from office to restaurant and bar and elected instead to be awarded the wasted costs incurred by Theron by reason of MFS’s breach of contract. In abandoning the loss of profit claim, Theron implicitly conceded that the judge’s award of damages for loss of profit could not be sustained. In my judgment, that concession was well made. In the absence of admissible evidence from Mr Wright as to: (a) the basis for his projected profit figures for the proposed Dubai restaurant; (b) the evidential basis for the figures for the Abu Dhabi restaurant; and (c) why the Abu Dhabi restaurant could stand as a comparator, there was no sufficient evidence to justify the award of damages made by the judge.

27. It follows from Theron’s abandonment of its loss of profit claim that MFS’s appeal against the judge’s loss of profit award succeeds.

28. Theron can only claim in respect of costs that would not have been incurred if the permitted use of the premises had been use as a restaurant and bar at the relevant time. Theron cannot claim for all its sunken costs on the basis that it was justified in abandoning the whole project of establishing an Asia de Cuba restaurant in Dubai. This is because the abandonment of the project was the result of Theron’s voluntary termination of the Tenancy Contract under Clause 36, rather than the result of accepting a repudiatory breach of the contract.

29. In my judgment, MFS was in actionable breach of contract in respect of the obligation to procure a change of use authorisation from the date of the inception of the Tenancy Contract on 25 February 2014. Any breach of this obligation in respect of the first Tenancy Contract was clearly waived by Theron in entering into the subsequent Tenancy Contract. This is implicit, in my view, from: (a) the fact that Theron was aware of the need for a change of permitted use during the currency of the first Tenancy Contract; (b) the relatively short time between the conclusion of the two Tenancy Contracts; (c) the fact that Theron wanted more floor space and more power supply than was provided for in the first Tenancy Contract; and (d) from the judge’s finding that Theron contemplated a soft opening of the restaurant on 16 October 2014, some eight months from the inception of the Tenancy Contract concluded on 25 February 2014.

30. Theron therefore has a claim for any rent paid in respect of the period 25 February 2014 to 9 February 2015, the date the required change of use was authorised. The first six months of the lease period of the tenancy starting on 10 November 2013 were rent free and Theron paid AED 1,448,528.30 for the period down to 10 November 2014. No further rent payments were made. Thereon is therefore entitled to recover the sum of AED 1,448,528.30 as rent paid for a period of the tenancy when the permitted use remained “office”, with the result that no fitting-out work could be started.

31. Theron also paid a security deposit of AED 289,705.66. This sum is recoverable by Theron subject to MFS’s entitlement to rent for the period 9 February 2015 to 14 July 2015.

32. Exhibited to Mr Krayushkin’s first witness statement and the reply witness statement of Ms Elena Bagaeva is a schedule of costs incurred by Theron on the Asia de Cuba project (“the Costs Schedule”). This schedule was prepared on the basis that Theron was entitled to abandon the Dubai restaurant project by reason of an actionable breach or breaches of the Tenancy Contract. A copy of the Costs Schedule is annexed to this judgment as Appendix A.

33. Item 1 claims the sums paid to Al Reyami LLC for work done on the premises. I infer that included in this item is the AED 485,691 awarded by the judge for completed additional works, which award MFS has not challenged on appeal. This being so, it seems to me that the balance of the claim in item 1 is not recoverable as wasted costs because this claim is predicated on a termination for repudiatory breach whereas the contract was voluntarily terminated for reasons other than a repudiatory breach.

34. Items 2-4 are irrecoverable because the Tenancy Contract was voluntarily terminated.

35. Item 5 is rent paid to MFS which I have dealt with in paragraphs 29 – 30 above.

36. Item 6 is a claim for employees employed in the period August 2014 – 2015. This item was not allowed by the judge and it is not known whether this was because he thought the claim was alternative to the loss of profit claim or because he found it was insufficiently proved. Regrettably, there is insufficient evidence for it to be decided in this appeal what the number of employees was that were unnecessarily hired in the pleaded period by reason of MFS’s delay in obtaining the change of use, and at what cost.

37. Item 7 was awarded by the judge and there is no appeal against that part of his order.

38. Nothing was awarded by the judge in respect of item 8 notwithstanding the claim for AED 42,000 for storage. One presumes that this was because he was not satisfied that the claim had been proved, but it is possible that he was of the view that it was inconsistent with the loss of profit claim.

39. In my judgment, items 9 to 31 are irrecoverable because these losses are not caused by the acceptance of a repudiatory breach of contract but arise out of Theron’s voluntary termination of the Tenancy Contract. I note too in respect of items 10 and 11 that the judge awarded AED 37,500 for the storage of furniture and fit-out materials and this award has not been challenged on appeal.

40. As to items 32 and 33, it is again not clear whether the judge rejected these claims on the ground that they were alternative to the loss of profit claim or for lack of proof.

41. In fairness, having regard to items 6 and 32-33, I think that Theron should be allowed to advance a claim in the Court of First Instance on the basis of documentary evidence and written submissions only and without an oral hearing for wasted costs incurred in respect of the employment of staff that were wasted because, once hired, they could not provide any useful service in and by reason of the period of the delay in the procuration of the change of permitted use of the premises.

Theron’s cross-appeal

42. It was conceded by MFS that the judge should have held that the security deposit of AED 289,705.66 was returnable to Theron and therefore could be set-off against MFS’s claim for unpaid rent.

43. As to the contention that the judge should have given credit for the deductions for rent made in Theron’s calculation of lost profits, this was not conceded by MFS but the point fell away with the abandonment of the lost profits claim.

Costs

44. In my judgment, unless either party files written submissions to the contrary within 10 days hereof, this Court should set aside the order for costs made below and should order that there be no order as to costs both below and on this appeal. I take this view because: (i) MFS has succeeded only on its appeal against the lost profits award and lost on the Clause 36 issue; (ii) Theron succeeded on its cross-appeal as to the return of the security deposit (although MFS conceded this point sometime before the hearing of the appeal); and (iii) the judge’s decision that Theron was entitled to damages by reason of MFS’s delay in obtaining the required change of permitted use has not been overturned.

CHIEF JUSTICE MICHAEL HWANG:

45. I agree with the  judgment of Justice Sir Richard Field and have nothing further to add.

H.E. JUSTICE OMAR AL MUHAIRI

46. I also agree and have nothing further to add.

Issued by:

Natasha Bakirci

Assistant Registrar

Date of Issue: 28 January 2018

At: 2 pm

APPENDIX A – COSTS INCURRED BY THERON ENTERTAINMENT LLC ON THE ASIA DE CUBA PROJECT