November 06, 2014 Court of Appeal - Judgments
Claim No: CA 004/2014
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 ROGER GILES AND H.E. JUSTICE OMAR AL MUHAIRI
BETWEEN
RAUL SILVA
Claimant/Appellant
and
UNITED INVESTMENT BANK LIMITED
Defendant/Respondent
Hearing: 20 May 2014
Counsel: Tom Montagu-Smith instructed by Hogan Lovells (Middle East) LLP for the Claimant.
Bushra Ahmed instructed by Stephenson Harwood (Middle East) LLP for the Defendant.
Judgment: 21 August 2014
JUDGMENT OF THE CHIEF JUSTICE MICHAEL HWANG , JUSTICE ROGER GILES AND H.E. JUSTICE OMAR AL MUHAIRI
Justice Roger Giles:
1. The Claimant, Mr Raul Silva, was employed as CEO by the Defendant, United Investment Bank Ltd, under an employment contract dated 20 December 2010. On 25 January 2012 the Claimant was summarily dismissed.
2. The trial judge, HE Justice Ali Al Madhani, rejected the Claimant’s claim for damages for wrongful dismissal and upheld the Defendant’s counterclaim for damages for breach of the employment contract and of a director’s duties. In my opinion, for the reasons which follow, the Claimant’s appeal from His Excellency’s decision should be allowed.
Background3. The trial judge did not make detailed factual findings. His conclusions must be understood against the following background. I set out matters which are uncontroversial or beyond controversy, and refer to other evidence given where there was or could be dispute.
4. The Defendant was a Dubai-based financial services provider. It was a wholly-owned subsidiary of United Financial Partners Ltd (“UFP”), a Hong Kong based company. The major shareholder in UFP was Mr Chihab Tamdi, and Mr Yves Bayle and Mr Phillipe Tourillon were direct or indirect minority shareholders. The Claimant had been employed by UFP for about eight months prior to his appointment as CEO of the Defendant.
5. Messrs Tamdi and Tourillon were on the Board of the Defendant, to which the Claimant was also appointed. Although not on the Board, Mr Bayle as an officer and later CEO of the parent Group played a role in the affairs of the Defendant.
6. A first responsibility of the Claimant was to establish the Defendant in the DIFC and obtain its licensing with the Dubai Financial Services Authority. The licence was obtained in March 2011.
7. In February-March 2011 the Claimant presented a business plan to Messrs Tamdi, Tourillon and Bayle, to whom I will refer collectively as the shareholders. His proposals included the recruitment of Mr Dino Skandalis as Head of Asset Management and Mr Stephen Hefft as Compliance Officer and Money Laundering Officer. The document also included a “PR Plan” in the terms, “We have agreed with the Capital Club to jointly organise (and brand) 4 conferences about Emerging Markets (initially Brazil, Russia, China and Turkey)”. The first conference was to take place at the end of May or the beginning of June 2011, and the format was shortly to be formalised.
8. The Capital Club is a venue in the DIFC. At the presentation the Claimant explained to the shareholders more about the first conference, but the evidence of the extent of the explanation was scant and unclear - for example, it is not clear that the likely cost was discussed.
9. The employment of Messrs Skandalis and Hefft was approved subject to a six-month trial period; Mr Bayle’s email of 24 March 2011 conveying the approval referred to it as a period “during which UIB may stop the relationship without penalties in case of insufficient business brought to UIB compared to their business plan”. They were promptly engaged under employment contracts dated 30 March 2011, terminable by one-month notice given on 31 October 2011.
10. In June or July 2011 the Claimant pre-booked a suite at the Copacabana Palace Hotel in Rio de Janeiro for the period 27 December 2011 – 2 January 2012. It was the Penthouse Ocean View Suite, for which there was a minimum booking period of six nights at a cost of USD 45,000. No payment was made at this time.
11. It was the Claimant’s evidence that he made the booking in order to hold a New Year’s Eve event for prospective clients and contacts and so promote the Defendant’s business in the region. He said that he thought the Copacabana Palace Hotel a prestigious venue and Rio de Janeiro well-known for a celebratory show on Copacabana beach; this would project an image of “a successful Investment Bank that looked after its clients”. The main target was Brazilian clients, but he had in mind also guests from the Defendant’s Middle East “network”. He made an early booking because of the strong demand for the suites.
12. As will appear, the Defendant disputed that the Copacabana Palace Hotel occasion was a corporate event at all. This was a major issue at trial.
13. On 17 July 2011 an agreement was entered into between the Defendant and Edgware Participacoes Ltda (“EEP”), a Brazilian company, for EEP to assist in marketing the Defendant’s services, in raising capital for its projects and in establishing contacts with clients. The agreement was signed by the Claimant on behalf of the Defendant. According to the Claimant, this followed regular contact with EEP throughout the summer of 2011 concerning opportunities on which they could co-operate, and the hotel booking had been made in consultation with EEP “pretty much to target Brazilian investors”.
14. The evidence included a newsletter announcement in September 2011 of the Defendant’s proposed real estate developments in Brazil “in partnership with” EEP. The Claimant gave evidence that this was advertised on the Defendant’s website, but had since been removed. The agenda for the 24 September 2011 board meeting included discussion of “Participation in Edgware Real Estate Projects in Brazil’ and approval of “Participation in Edgware projects”. It is clear that, in general terms, the Claimant’s efforts included the development of business opportunities in Brazil and this was known to the shareholders.
15. At the board meeting on 24 September 2011 there was concern that the objectives in the business plan had not been realised, including concern over the performance of Messrs Skandalis and Hefft. According to the minutes of the meeting, it was resolved that the employment of these gentlemen should be terminated and a fresh employment contract should be negotiated with Mr Skandalis at a lesser salary. There was some dispute over the accuracy of the minutes; for present purposes, it is sufficient that continuation of their employment was a matter of consideration.
16. The first Capital Club event was held on 25 September 2011 in Dubai, in conjunction with the Brazilian Chamber of Commerce. The Claimant gave evidence that it was a large event for 350 people. The cost was approximately AED 30,000, excluding the cost of the venue.
17. In October 2011 the Copacabana Palace Hotel invoiced the Claimant for the suite for the six night package. On 11 October 2011 the Claimant paid the invoice, by bank transfer from his own funds.
18. At a board meeting on 19 October 2011 it was resolved, according to the minutes, that the employment contracts of Messrs Skandalis and Hefft should be renegotiated at lesser salary packages. There was dispute in the evidence over whether the Claimant was instructed at the meeting (which was by conference call) that the renegotiated contracts had to be terminable on short notice; I say more of the dispute later in these reasons. The minutes did not record that the renegotiated contracts should be terminable on short notice.
19. New employment contracts were signed on 1 November 2011. They were terminable on three months’ notice given on 30 April 2012.
20. On 19 November 2011 the Claimant submitted to Mr Craig Roberts, the CFO of the Defendant, an expenses claim which included the amount he had paid to the Copacabana Palace Hotel. Mr Roberts asked by email for “a quick note on these expenses and what the nature of the claim is”. The Claimant replied by email, “This is regarding an event we will hold in Brazil for potential Brazilian and Arab clients in Rio during New Year’s Eve, which has been paid in advance by me as per the wire transfer I have attached to the invoice. Let me know if you need any further information.”
21. Mr Roberts processed the claim, which was paid on 20 November 2011.
22. At a board meeting on 22 November 2011, according to the minutes, a number of existing or proposed investment funds were discussed; they included –
“Brazil Opportunities Fund
Raul advised that he had just returned from a business trip to Brazil and that he had extensive discussions with a partner company ‘Edgware Ltd, Brazil’ regarding the structure of the on shore and off shore vehicles for the fund. He advised [sic] that the structure in Brazil needs [sic] to be in place to cover any potential Tax issue and to insure [sic] that overseas investors do not have any issues repatriating dividends and invested principle [sic] Expected First quester [sic] 2012.”
23. The Claimant gave evidence that during the meeting he asked Messrs Tamdi, Tourillon and Bayle whether they would like to attend the Copacabana Palace Hotel occasion, but they said that they had other plans. He said that documents submitted to the Board at the meeting by Mr Roberts included “information regarding” the hotel expenses for which he had been reimbursed. No document so submitted seems to have been in evidence. The Claimant said that there was no comment about the holding of the event.
24. This also was disputed. Mr Bayle said that there was no mention of the event at the meeting. Mr Tamdi said the same, and gave evidence that at the September meeting the Claimant asked if he would be interested in attending a reception he “usually booked” in Brazil on New Year’s Eve and to which he invited “lots of people he knew”, which Mr Tamdi declined; he told the Claimant that the Defendant was Sharia compliant and should not host an event at which alcohol was consumed. Mr Tourillon also denied any mention of the event.
25. There was other evidence of knowledge of the Copacabana Palace Hotel occasion within the Defendant. Mr Roberts’ evidence included that at a November meeting of the Executive Committee the Claimant said in passing that he planned to hold an event in Rio de Janeiro in conjunction with EEP and they were “inviting mutual clients or contacts that they were looking to do business with”. When he approved the payment he thought the event was consistent with the dealings with EEP and approaching Brazil as a key market. He was not seriously challenged on this in cross-examination. Mr Skandalis gave evidence that the event was mentioned in about November 2011, and Mr Hefft gave evidence that he knew of an event in Brazil and thought he knew the cost.
26. Some of this evidence was not expressed with certainty, and none extended to knowing details of the proposed event. It seems clear that the Claimant was required to operate the Defendant in a Sharia compliant manner, but he gave evidence that the rule against alcohol was broken, to the shareholders’ knowledge, when the interests of the Defendant required; he said that alcohol was served at the Capital Club event.
27. In December 2011 a number of matters occurred in relation to an occasion at the Copacabana Palace Hotel.
28. On 12 December 2011 an assistant to the Claimant enquired about booking two rooms for guests of the Defendant. The guests were not named. She was told that the cost was payable immediately and not refundable. The Claimant told her that “[w]e will have to wait then for our guests’ [sic] confirmation” and to follow up at the end of the week.
29. A design for an invitation was commissioned on 14 December 2011 and provided on 18 December 2011. It was expressed as an invitation by the Defendant and EEP to celebrate New Year’s Eve at the hotel, from a depiction of champagne glasses, one at which alcohol was to be served. The RSVP telephone numbers were those of the Claimant’s assistant and of Mr Marcelo Marinho of EEP. The invitations were sent electronically to Mr Marinho. The designer was paid US$840, on a payment instruction signed by the Claimant and Mr Roberts.
30. On 16 December 2011 Mr Marinho sent a “first” list of local guests to the Claimant. From the titles given to some of the guests, the intention appears to have been to invite eminent businessmen, MPs and government officials. On 18 December 2011 Mr Marinho asked the Claimant for the names and positions of the guests he would be bringing. The Claimant did not immediately respond. He gave evidence that he had invited Middle East guests in November and December, but at a late time they said they could not come, and that the other guests, the principal targets, were the responsibility of Mr Marinho.
31. On 20 December 2011 Mr Marinho emailed to the Claimant that he was“worried that when he saw the investors they would be told that there was no land to show them and the fund was not established in Brazil”. He was concerned “how the investors will take this” and about the effect on the Defendant’s image. There was no evidence of the Claimant’s immediate response to this.
32. On 22 December 2011 the Claimant travelled to Brazil. He went first to a family home some distance from Rio de Janeiro. On 27 December 2011 he went to the hotel. He was accompanied by his wife and infant child. They stayed in the suite until 4 January 2012. This was two nights beyond the booking; the Claimant paid for the extra two nights.
33. On 28 December 2011 the Claimant gave the hotel the names of guests for the event, as received from Mr Marinho earlier that day. Apart from Mr and Mrs Marinho, there were five couples. None had been on Mr Marinho’s list sent on 16 December 2011. The Claimant described who the guests were in his evidence; in short, he regarded them as contacts or sources of contacts for developing real estate opportunities in Brazil, and they were previously unknown to him. The change from the previously listed guests was not explored in the evidence, but there was no challenge in cross-examination to the Claimant’s description.
34. On New Year’s Eve, the Copacabana Palace Hotel provided a dinner for fourteen people in the suite.
35. On 19 January 2012, back in Dubai, the Claimant submitted to Mr Roberts an expenses claim which included USD 6,913.91 for expenses in Brazil. The expenses claim gave only the descriptions “Meals and Entertainment” and “Taxi/Transport”, similarly to other expenses claimed in the same document, but was accompanied by a copy of an invoice from the hotel. The invoice was addressed to the Defendant, and referred to “New Year Event United Bank”. The invoice seems to have been for the costs of the dinner; the Claimant said that other expenses for the wider stay in the hotel were paid by him. This does not seem to fit with the expenses claim, but was not explored in the evidence.
36. Mr Roberts processed the claim, and USD 6,913.91 was paid to the Claimant.
37. On 25 January 2012 the Claimant was called to a meeting with the shareholders and the Defendant’s lawyer. He was told that his employment was terminated.
38. The Claimant subsequently received a confirmatory letter dated 25 January 2012, signed by Mr Tamdi, which gave five reasons for the termination. Only two were relevant on appeal (and this background is limited accordingly); as to those, the letter said –
“The purpose of this letter is to confirm the outcome of our meeting this morning. As we discussed, your contract of employment with UIB is being terminated with immediate effect for the following reasons:
1. You concluded contractual arrangements with Konstantinos Skandalis and Stephen Hefft which were in breach of the clear instructions to you as to the conditions on which they were to be employed. You subsequently failed to disclose to the board or the Group CEO the changes you had agreed, which were material and which expose UIB to potential liabilities which the board was expressly keen to avoid. In particular, Mr Bayle’s email of 24 March 2011 approved the recruitment of Messrs Skandalis and Hefft on the condition that they be engaged for a six month trial period during the course of which UIB may terminate the relationship without penalty if they generated insufficient business compared to their business plan. I was dismayed to discover, upon reviewing copies of the contracts of employment this week, that these instructions were ignored.
…
3. You have authorised payment by UIB of certain expenses which appear to be of a personal, rather than a corporate nature. These include:
(a) the payment of USD 45,000 in November 2011 in favour of Copacabana Palace, for the period of 27 December to 2 January during which time you were on vacation in Brazil;
(b) a reimbursement to you to cover “meals and entertainment” in the sum of USD 6,213.25 whilst you were on vacation in Brazil; and
(c) a payment of USD 840 to Jeff Byers on 18 December in settlement of an invoice for a New Year’s Party invitations.
…
We are examining other expense claims you have submitted. None of these claims appear to have any business connection and I am dismayed that you saw fit to use company funds to pay such a sizeable invoice for the Copacabana Palace without first seeking approval. In the extremely unlikely event that this was a corporate event it would represent a clear breach of the repeated instructions from the board about the appropriate level of corporate expenditure.”
The employment contract39. The Claimant’s employment was for four years, subject to termination by either party after a probation period on three months’ written notice. His duties were set out in a job description, which does not seem to have been in evidence, and were said in the employment contract (Clause 2.1) to include “all such other duties as are normally expected of a Chief Executive Officer in a similar business”.
40. Clause 5.3 provided that the Claimant will be reimbursed for expenses properly incurred on behalf of the Employer, subject to compliance with guidelines clearly defined in the Employer’s [sic] expenses policy…”
41. The expenses policy does not seem to have been in evidence; we were not referred to it, nor was it in the appeal papers or taken up in cross-examination.
42. By Clause 12.4, the Claimant could be dismissed without notice “for any gross misconduct”, and also for specified “misbehaviour”. The misbehaviour ranged in severity, for example absence from work without legitimate reason for more than five continuous days, or conviction of a crime involving honour, honesty or public morals.
The trial judge’s reasons
43. The trial judge first dealt with the Copacabana Palace Hotel occasion.
44. At trial the Defendant advanced alternative cases in relation to that occasion. One was that it was a personal event, and that the Claimant dishonestly represented it as a corporate event and so obtained corporate reimbursement of personal expenditure. The other was that, although it was a corporate event, the Claimant failed to make adequate disclosure that it was to be held or to obtain approval to hold it prior to the occasion, the need for which was said to be enhanced by the Defendant’s straitened financial circumstances, or to disclose after the event that his family had benefited by staying at the hotel. It was pleaded, rather indiscriminately, that the Claimant’s conduct had been in repudiatory breach of the employment contract, or had constituted gross misconduct under Clause 12.4 of that contract, or had constituted breach of his directorial obligations under Article 53 of the DIFC Companies Law (Law No. 2 of 2009) or of his fiduciary obligations under Articles 157 to 159 and Schedule 3 of the DIFC Law of Obligations (Law No. 5 of 2005).
45. Article 53 of the Companies Law relevantly required that in exercising his powers and discharging his duties, the Claimant “act honestly, in good faith and lawfully, with a view to the best interests of [the Defendant]”. The provisions of the Law of Obligations relevantly required that the Claimant act in good faith in what he considered to be the interests of the Defendant without regard to his own interest, that he not place himself in a position of conflict of interest, and that he not “use [the Defendant’s] property, information or opportunities for his own…benefit unless [the Defendant] has consented or the use has been fully disclosed to [the Defendant] and [the Defendant] has not objected to it”.
46. The trial judge’s reasons in this respect refer to “the Claimant’s position”, which His Honour described as that “the Event was a joint corporate event with [EEP] in Brazil as he had wanted to establish and develop a client base in that country, and he has felt that a New Year’s Eve party at the Copacabana Palace would be prestigious enough to serve that purpose.”
47. The trial judge said-
“35. Although the Claimant has managed to prove before this Court that the so called EEP exists in UIB’s records, by showing that there was a memorandum signed between UIB and EEP and that an update about EEP was also mentioned in the Board time table and minutes of September and November 2012, and although Mr Silva also managed to prove that the payment to cover the Copacabana Event had been authorised by the Company’s CFO Mr Robert [sic] and invitations had been prepared to be sent to guests, the following facts are found to not be in support of the Claimant’s position:
(a) The Claimant never in fact revealed the details of the event, such as the place where it was going to be held, the cost, or numbers of hotel nights reserved to the Board or any of its members. Instead, Mr Silva blurred submissions concerning the Board’s knowledge of EEP and Brazilian market opportunities on the one hand, and the actual Copacabana event and its costs on the other, despite the fact that he had begun making arrangements for the event personally six months in advance. The company staff knowledge of the event is not helpful as all those that were informed were below him in the Company and none of them were in a position to weigh the company’s interest in holding such an event and, moreover, had no power to influence or stop Mr Silva from proceeding.
(b) The Claimant never disclosed that he would be taking the advantage of staying with his family in the reserved suite in the Copacabana Palace hotel for the “mandatory” six nights. The addition of two extra nights to the (existing) six nights is evidence that the Claimant and his family had a personal interest in staying in that hotel, despite his effort to deny that by putting evidence before this Court that he owned a villa only 200km away from the Copacabana Palace. As such, the Claimant gave no reasonable answer to the question why the Copacabana Palace hotel had been necessary in the first place, and why six nights had been booked.
(c) The Claimant, in his evidence, admitted that he had instructed his Assistant, Ms Pikaleva, to print and start sending the invitations to the guests in the middle of December 2011, and provided no answer to the question who would have accepted an invitation to such an event only two weeks prior to its commencement, and who would have been able to make all the necessary arrangements to attend on such short notice. The only answer was that “Unfortunately, we were not able to get confirmation of UIB’s Middle East guests in time, so I recall that at some time in December 2011, I asked Ms Pikaleva to cancel the additional hotel accommodation that UIB was seeking to book for these guests.” Even though he had started to arrange for the event six months prior.
(d) The Claimant failed to get approval for his leave during the time that the event took place, as will be discussed in more detail in the paragraphs below.
(e) The Claimant failed to adduce evidence that the event had occurred in reality by submitting pictures, reports or any documentation in support.
36. Accordingly, the Defendant has succeeded in establishing before this Court that the Claimant has acted in such a way that the best interests of the Company were put aside, and that the surrounding circumstances of the Copacabana Event, such as the costs involved, the Claimant and his family’s interest in staying in the hotel and the coinciding of the event and the Claimant’s holiday had imposed an obligation on the CEO of the UIB to act in a way so as to fulfil the duty to disclose and acquire Board approval before hosting such an event.
37. The Claimant however, failed to do so, and the Court finds that the Claimant breached his duty under the Employment Contract, specifically Clause 5.3 (appropriateness of expenses), and breached his duty as a Director of the company to act honestly, in good faith and lawfully with a view to the best interests of the Company and to disclose any personal interest as required by the DIFC Company Law No. 2009, Articles 53 and 54”.
48. Failure to get approval for leave, to which the trial judge refers in his para 35(d), had been withdrawn by the Defendant as an independent ground for dismissal without notice. It remained, on the Defendant’s case, as a matter relevant to the Copacabana Palace Hotel occasion.
49. In relation to the employment of Messrs Skandalis and Hefft, and perhaps departing from the reason as framed in the letter of 25 January 2012, the Defendant contended at trial that the Claimant was instructed that the renegotiated contracts (in November 2011) should be terminable on short notice in the event of continued underperformance; but that this had not been done, and he had not disclosed to the Board that it had not been done. It was again said that the Claimant’s conduct had been repudiatory, or gross misconduct, or contrary to his directorial and fiduciary obligations.
50. The trial judge’s reasons in this respect were –
“50. It is evident from the letter of 24 March 2011 sent from Mr Bayle to the Claimant that a six-month probation period in Messrs Skandalis’ and Hefft’s contracts was required; however, no probation period was inserted in the said contracts at the first or the second renegotiations of the contract of either of the employees.
51. This is also evident from Mr Tamdi’s evidence, who stated that “we had insisted that their contract be terminable on short notice so as to protect against the risk that they could not deliver on their business plan..” which is supported by the email dated 29 September 2013[ sic; 2011] sent from Hogan Lovells (Middle East) LLP to the Claimant regarding the termination condition in the contract of Messrs Hefft and Skandalis. The termination period in the said employees’ contracts is evidently of the essence to the Defendant.
52. The Claimant, despite renegotiating the contracts of Messrs Hefft and Skandalis to include the requirement of a fixed salary as suggested by the Board, had failed to address the instructions to enhance the termination option in favour of the Defendant. The Claimant not only failed to respond to the instructions of the Board, but in fact drafted the termination clause more in favour of the employee and against his employers’ interest, which is obvious through the comparison between the old termination clause in each of Messrs Hefft’s and Skandalis’ contracts:
‘12. The contract may be terminated in any of the following ways:
12.1 By either party giving one month notice of termination on 31 of October 2011 to the other party;’
And the negotiated termination clause which read as follows:
‘12. This contract may be terminated in any of the following ways:
12.1 By either party giving three months written notice of termination on 30th of April 2012 to the other Party. If the Employee resign voluntarily from the employment with the Employer, then the Employer shall pay to the Employee his salary and benefits in effect as the date of termination, purported through to the date of the expiry of the notice period required under this Contract plus any gratuity payment due to the Employee under the DIFC law no 4 of 2005. If the employee’s employment is terminated by the Employer without cause (section 12.2), then the employer shall pay to the Employee any accrued compensation contractually owing to him through the date of termination and shall continue paying his salary in effect as the date of termination and providing him any benefits provided for in section 6 through the natural end of the Term (31st October 2012) of the employee’s employment hereunder as specified in section 1.2.’
53. It is clear from the above-mentioned contracts that the Claimant has acted in a way against his employer’s interests by breaching clear instructions given to him to insert a probation period and to make both Messrs Hefft’s and Skandalis’ contracts terminable on a shorter term.
54. By such conduct, the Claimant breached his duty as a Director of the Company to act honestly, in good faith and lawfully with a view to the best interests of the Company under the DIFC Company Law No. 2009 Article 53.”
51. The trial judge then went onto consider “[w]hether the above-cited reasons justified dismissal”. The reasons included a third reason, to do with taking leave, which the Defendant had abandoned and which can be ignored. So far as necessary to recount, the trial judge said –
“56. I accept the evidence submitted by the Defendant discussed above, including the issue of the Copacabana Event, the Claimant’s Holiday and the issue of the Employment Contracts of Mr Hefft and Mr Skandalis, and find a breach of the duty of trust and care, breach of contract and breaches of the obligation owed under DIFC Company Law No.2. 2009 Articles 53 and 54 including the ‘duty to act honestly, lawfully and in good faith’.
57. The question as to whether those breaches justify instant dismissal can be addressed by referring to the principle derived from the famous case of British Home Store v Brunchell [sic: Burchell] [1978] IRLR 1379 where the employer must establish that there is a genuine belief based on reasonable grounds following a reasonable investigation that the employee was guilty. Alternatively, one can refer to the principle laid down by Lord Denning in Alidaier v Taylor [1978] IRLR 82 that ‘Whenever a man is dismissed for incapacity or incompetence it is sufficient that the employer honestly believes on reasonable grounds that the man is incapable or incompetent. It is not necessary for the employer to prove that he is in fact incapable or incompetent.’
58. With reference to the incidents (the issue of the Copacabana Event, the Claimant’s Holiday and the issue of the Employment Contracts of Mr Hefft and Mr Skandalis) discussed in detail above, I now take the view that at the time of dismissal, the Defendant had a genuine belief on reasonable grounds of the Claimant’s accountability which justified the action taken by the employer in dismissing the Claimant without notice which, in this case, was fairly advanced and fairly proven. I also share the Defendant’s view that what the Claimant has done can be described as gross misconduct, specifically the incident of the Copacabana Brazil event and its surrounding circumstances, and find therefore that the termination was fair and in accordance with Article 12.4 and 12.4 (b) of the Employment Contract”.
52. With respect, there are some difficulties in the trial judge’s exposure of his decision. As appears from what I have set out as background, which is far from exhaustive of the evidence, there were many areas of dispute and many matters material to their resolution. An appreciation of the trial judge’s reasons would have been assisted by more detailed findings of primary fact, and by greater explanation of his conclusions concerning the Copacabana Palace Hotel occasion and the giving of instructions on renegotiating the employment contracts.
53. However, neither the Claimant nor the Defendant sought a new trial by reason of deficiencies in the findings or in the trial judge’s expression of his reasons. In particular, the Defendant stood by the trial judge’s findings and conclusions as expressed as sufficient to found an ultimate conclusion that the summary dismissal of the Claimant was justified and effective. It relied particularly on the Claimant’s conduct constituting gross misconduct within Clause 12.4 of the employment contract.
The appeal
54. It is convenient to begin with renegotiation of the employment contracts of Messrs Skandalis and Heffts.
55. There is an unfortunate conflation in the trial judge’s reasons of the first employment contracts entered into on 30 March 2011 and the second employment contracts entered into on 30 November 2011. This may have been because the confirmatory letter of 25 January 2012 cited the email of 24 March 2011 and could be read as referring to negotiation of the first employment contracts. But that was not the Defendant’s case at trial, which rested on failure to comply with a specific instruction that the renegotiated employment contracts should be terminable on short notice.
56. As I have said, there was dispute in the evidence over whether the Claimant had been instructed that the renegotiated employment contracts should be made terminable on short notice. He maintained that he had not, and that he had acted upon a board resolution as minuted which contained no such requirement. The Defendant’s case shifted a little. It was pleaded that the instruction was given by Mr Bayle at the September board meeting and confirmed in a written resolution of 19 October 2011. With some confusion in the evidence, Messrs Bayle and Tamdi said that it was given at the October board meeting. The written resolution following the meeting did not include it.
57. A definitive finding was necessary, but the trial judge did not make a finding by regard to these competing recollections. Rather, he rested his conclusion of failure to follow the Board’s instructions on the letter of 24 March 2011, which could not constitute instruction as to the renegotiation of the second employment contracts; on evidence of Mr Tamdi which was given in relation to the first employment contracts; and on an email from solicitors which did no more than advise on giving effect to the termination provisions in the first employment contracts. Possibly the trial judge referred to these matters only to show that the termination period was regarded as important by the Defendant. If so, it remains that there is no finding that an instruction was given in September-November 2011 in relation to renegotiation of the employment contracts.
58. It could not be found that the Claimant failed to obey an instruction unless, the giving of the instruction being in dispute, it was first found that it had been given. When there was the dispute in the evidence and the misdirected basis for the trial judge’s conclusion, a finding could not in my opinion be implied from the conclusion of failure to obey instructions. That conclusion is not well founded in the reasons, and in the absence of the necessary finding the Defendant has not established this reason for the summary dismissal.
59. It is not necessary to consider whether any such failure would have constituted a breach of Article 53 of the Companies Law, as found by the trial judge, or otherwise been conduct justifying summary dismissal. By passing on, I should not be taken to endorse that it would.
60. I go then to the Copacabana Palace Hotel occasion.
61. The trial judge did not clearly find whether the occasion was a personal event or a corporate event. His observation as to no evidence that the event occurred “in reality” is a little odd; there is no doubt that the booking was taken up and guests were entertained in the suite on New Year’s Eve. Although he set out matters “found not to be in support of the Claimant’s position”, he did not plainly reject that position, and from the reference in his paras 35 (a) and (b) to the Claimant failing to reveal “the details of the event” or disclose the advantage to his family, markedly short of the Claimant holding a personal event and dishonestly obtaining corporate reimbursement, it may be that the trial judge accepted that it was a corporate event.
62. However that may be, the Defendant accepted on appeal that there was a Copacabana Palace Hotel event, as I understand it meaning a corporate event. That acceptance was appropriate. Business opportunities in Brazil were being explored. EEP had been engaged to promote them and an investment fund was being established. Mr Marinho had proposed local guests with business significance, then substituted local guests, and whatever the position about inviting Middle East guests there was no challenge to the Claimant’s evidence that the later guests were regarded as contacts or sources of contacts for business opportunities and not previously known to him. It may not have been the corporate event originally envisaged, but that is another matter: it was not a personal junket.
63. Prominent in the Claimant’s submissions on appeal was that a finding of dishonesty was necessary to underpin the trial judge’s conclusions of breach of directorial or fiduciary duty, and that no such finding could be made if the event was a corporate event. The respondent submitted that the trial judge had found dishonesty, but I decline to see the finding in the various and wrapped-up references to putting aside the Defendant’s best interests, failure to disclose and failure to act honestly, in good faith and lawfully with a view to the best interests of the Defendant. Dishonesty is a finding which should be clearly made, with appropriate explanation.
64. It is preferable, in my view, to pass over consideration of the place of dishonesty in the Claimant’s contractual and statutory obligations, and to identify the misconduct found by the trial judge and ask, with regard also to the background earlier set out, whether it could found summary dismissal. This accords with the Defendant’s approach on appeal.
65. Before going further, it should be said that so far as the trial judge found and in part relied on breach of Clause 5.3 of the employment contract, in my respectful view he was in error. Clause 5.3 gave an entitlement. If the expenses were not “proper “expenses, they did not fall within it. Claiming or obtaining them was not a breach of the clause.
66. On the trial judge’s findings, the conduct entitling summary dismissal lay in –
(i) failure to inform the Board of “the details of the event, such as the place where it was going to be held, the cost, or numbers of hotel nights reserved”;
(ii) failure to disclose (scilicet, to anyone in the Defendant) that he and his family would be staying at the hotel for the six nights, to his and their personal benefit;
(iii) the Claimant “gave no reasonable answer” to why he chose the Copacabana Palace Hotel and why six nights had been booked;
(iv) the Claimant did not satisfactorily explain why the invitations were sent out so late; and
(v) perhaps as a surrounding circumstance, failure to obtain approval for leave.
67. It should be added that, although not expressly found by the trial judge, it seems clear enough that the Defendant was short of funds. The letter of 25 January 2012 referred to “repeated instructions from the board about the appropriate level of corporate expenditure”. There was no clear evidence of instructions but, for example, the renegotiated employment contracts of Messrs Skandalis and Hefft were meant to bring a cost saving. The Defendant relied on the shortage of money to support the need for disclosure to the Board and Board approval, and also for misconduct in extravagance of the corporate event. This was probably the trial judge’s point behind (iii) above, which was expressed as a reflection on the Claimant’s evidence rather than a finding of past conduct. Similarly, (iv) above was expressed as a reflection on the Claimant’s evidence. It appeared to question whether there was a genuine corporate event, which is no longer in question, but can remain as an implicit finding of mismanagement in organising the event.
68. I have described the dispute in the evidence over whether, at the November board meeting, the Claimant invited the shareholders to attend the Copacabana Palace Hotel occasion. This was of some importance, including because there would thereby have been disclosure at least that the event was to take place. The trial judge did not make a clear finding. From his reference to the Claimant’s failure to reveal the details of the event or disclose the advantage to his family, it appears that the trial judge found that the event was disclosed to the Board although not with full information. On that basis, the trial judge’s reference in his paragraph 36 to disclosure and obtaining Board approval was to disclosure of the details including cost and his family’s benefit and to approval when the Board was more fully informed.
69. The Defendant submitted that the Copacabana Palace Hotel event should be measured against the Capital Club event. The latter event was disclosed and explained to the Board, although the extent of the explanation was not very clear. It cost about AED 30,000. So also, it was submitted, holding a promotional event in Brazil should have been disclosed and explained, the more so when it involved the penthouse suite, a minimum booking of six nights, and considerable expense, and the Defendant was short of funds.
70. I do not see great significance in the precedent of the Capital Club event. Telling the Board of a programme of four conferences may well have been appropriate, but it does not follow that every other promotional event had to be disclosed and explained to the Board.
71. The Claimant was the CEO. In the absence of his job description, presumably he had a wide responsibility in developing the Defendant’s business opportunities. Although the Defendant was short of funds, spending money in order to bring in business is commonplace, often a necessity, and the Claimant gave evidence (which was disputed up to a point, but no finding was made) of much money to be made from the Brazilian market, and explained why he chose an expensive venue. The Board knew that Brazil was amongst the Claimant’s target countries.
72. No doubt the Board could have been fully informed and been told of the Claimant’s purpose in attracting investors, but in my opinion it was not shown to be a necessity that it be informed of the cost or other details of the event (or, if my understanding of the trial judge’s reasons is incorrect, of the event at all). The shareholders may have been dismayed when told of the expense (although perhaps a little precipitate in taking it to have been a personal event), but it was not shown that in nature or cost it was beyond the remit of the Claimant or contrary to clear instruction.
73. The enjoyment of the six night package by the Claimant and his wife does not add much. The guests at the event were couples, and it was appropriate that the Claimant’s wife accompany him at the New Year’s Eve dinner. Once it be accepted that having the event for business purposes involved the minimum six nights, why should the remainder of the package not have been used? Again, this could have been included in information given to the Board; but to the extent that there was a benefit to the Claimant, in the circumstances it was not to the detriment of the Defendant and, if breach of fiduciary duty, of little significance.
74. The failure to obtain approval for leave does not contribute to the nature of the Claimant’s conduct.
75. The last-minute organisation of invitations, and the late change from guests proposed by Mr Marinho on 16 December 2011 and some Middle East guests, suggests some poor management. Taking the Claimant’s conduct as a whole, however, and respectfully differing from the trial judge, it did not amount to breach of Article 53 of the Companies Law (if otherwise applicable), or if a breach of Article 54 one which would justify summary dismissal. Nor was it gross misconduct within Clause 12.4 of the employment contract; a strong phrase, requiring misconduct at the level of being gross. Nor in my view was it repudiatory of the employment contract, or if a breach of the fiduciary obligations under Articles 157 to 159 of the Law of Obligations which would justify summary dismissal.
An addendum
76. The Claimant could be summarily dismissed under the employment contract for gross misconduct, or under the general law for cause. Breach of a directorial or fiduciary obligation would not of itself be a basis for dismissal, although the conduct constituting the breach could provide cause: it would depend on the conduct.
77. The trial judge’s consideration of “[w]hether the above-cited reasons justified dismissal” included a test of genuine belief on reasonable grounds after reasonable investigation, or honest belief on reasonable grounds. With respect, this was in error. The cases to which His Excellency referred were decisions under a statutory unfair dismissal scheme, and were inapplicable in Dubai which had no such scheme. Whether the Claimant’s conduct justified summary dismissal for gross misconduct or for cause was to be determined objectively.
Orders
78. The parties had agreed on the Claimant’s damages at USD 487,114.47 plus interest. I propose the orders-
1. The appeal is allowed.
2. The trial judge’s orders made on 6 November 2013 shall be set aside.
3. Judgment is allowed for the Claimant for USD 487,114.47 plus interest from 26 January 2012.
4. The counterclaim shall be dismissed.
5. The Defendant shall pay the Claimant’s costs of the trial and the appeal, to be assessed if not agreed.
Michael Hwang, Chief Justice:
1. I agree with the Judgment of Giles J and the conclusions reached in it. However, I wish to add some remarks to supplement the decisions contained in paragraph 75 of the Judgment.
2. The Respondent relies on the Appellant’s alleged breach of Article 53 and/or Article 54 of the DIFC Companies Law to justify summary dismissal of the Appellant. In the alternative, the Respondent relies on Articles 157 and 159 of the DIFC Law of Obligations. The pleadings raise a number of interesting issues on the interpretation of the DIFC Companies Law and Law of Obligations. Although it is not necessary to come to any conclusion on these matters for the purpose of this Court’s judgment, I would like to highlight the nature of the arguments made by Counsel for the edification of the DIFC legal community.
3. Article 53 of the DIFC Companies Law reads:
“A Director or other officer of a Company, in exercising his powers and discharging his duties, shall:
a. act honestly, in good faith and lawfully, with a view to the best interests of the Company; and
b. exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”
4. Counsel for the Appellant, Mr Montagu-Smith, made three submissions on the interpretation and application of Article 53. First, he argued that Article 53 contained a fiduciary duty. Second, he submitted that directors only owed fiduciary duties when they exercised powers to dispose of the company’s property, citing Chadwick LJ’s judgment in J J Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 at [25] in support of his proposition:
“I start with four propositions which may be regarded as beyond argument…
…
(iii) that the powers to dispose of the company’s property, conferred upon the directors by the articles of association, must be exercised by the directors for the purposes, and in the interests, of the company; and
(iv) that, in that sense, the directors owe fiduciary duties to the company in relation to those powers and a breach of those duties is treated as a breach of trust…” (emphasis added)
5. Third, treating the Appellant’s relevant conduct as submission of the expenses claim, Mr Montagu-Smith contended that:
“When submitting an expenses claim, a director does not exercise a power to dispose of company property. Nor does he exercise any other power vested in him as a director. His position is equivalent to any other employee. He submits a claim; the company decides whether he is entitled to reimbursement. He takes no part in that decision. Therefore, fiduciary duties do not apply to expenses claims… ” (emphasis added)
Article 54 of the DIFC Companies Law6. It is also worth highlighting Mr Montagu-Smith’s submissions on Article 54 of the DIFC Companies Law. Article 54 of the DIFC Companies Law reads:
“A Director of a Company who has, directly or indirectly, an interest in a transaction entered into or proposed to be entered into by the Company or by a subsidiary of the Company which to a material extent conflicts or may conflict with the interests of the Company and of which he is aware, shall disclose to the Company the nature and extent of his interest.”
7. Mr Montagu-Smith submitted that this statutory provision was inapplicable to the Appellant’s submission of his expenses claim because the claim did not constitute a “transaction” entered into by the Respondent:
“When [the Appellant] submitted his expenses claim, he did not cause [the Respondent bank] to enter into a transaction with any other entity. He transacted with the Copacabana [Palace] and incurred an expense. This created no legal relationship between the hotel and the Respondent bank…
When submitting the claim, [the Appellant] did not enter into a transaction with [the Respondent bank]. His contract already existed. The board had approved it. [The Appellant] was merely claiming under a pre-existing contractual entitlement. If the contrary were true, every expenses claim submitted by a director would require board approval… ” (emphasis added)
8. I do not think it is necessary to express a conclusive opinion on Mr Montagu-Smith’s arguments set out above, in the light of Giles J’s finding in paragraph 75 of his judgment (with which I agree) that the Appellant’s conduct would not have amounted to a breach of either Article 53 or Article 54 of the DIFC Companies Law, even if those provisions had been applicable. However, I wish to make the point that Mr Montagu-Smith’s arguments are at least plausible and are worthy of future consideration should similar factual circumstances arise in the future.
An Employee’s Fiduciary Duties under Articles 158 and 159 of the DIFC Law of Obligations9. Another point worth noting is that, unlike English common law, Articles 158 and 159 of the DIFC Law of Obligations impose fiduciary duties upon employees generally.
10. Article 158 of the DIFC Law of Obligations reads:
(1) “A person is the fiduciary of another if he has undertaken (whether or not under contract) to act for or on behalf of another in a matter in circumstances which give rise to a relationship of trust and confidence.
(2) It is presumed unless demonstrated to the contrary that persons acting in the following capacities are fiduciaries:
(a) an attorney, as to his clients;
(b) an employee, as to his employer…” (emphasis added)
11. Article 159 of the DIFC Law of Obligations reads:
(1) “A fiduciary acting in his capacity as such is under an obligation of loyalty to his principal.
(2) A fiduciary’s obligation of loyalty comprises such of the duties as set out in Schedule 3 as are appropriate in all the circumstances of the relationship between the fiduciary and his principal.
(3) A fiduciary may exclude or restrict his obligation of loyalty under this Article by contract with his principal, subject to the Implied Terms in Contract and Unfair Terms Law.”
12. The effect of Article 158(2)(b) is that an employee is presumed to be a fiduciary. This is a departure from traditional English common law, which takes the position that employees do not generally owe fiduciary duties to their employers.
13. Mr Montagu-Smith submitted that the Appellant had not been exercising directorial powers during the material time at which he submitted the expenses claim. I do not wish to express a definitive opinion on this issue but, if we were to accept Mr Montagu-Smith’s submission for the sake of argument, the corollary would be that the Appellant must have, at the very least, been acting in his capacity as an employee. The result would then turn on whether the Appellant had breached his fiduciary duties owed as an employee under the DIFC Law of Obligations.
14. Again, I do not find it necessary to make any decision on this particular point, in view of Giles J’s finding (with which I also agree) that the Appellant’s conduct would not constitute a breach of the fiduciary duties set out in Articles 157 to 159 of the DIFC Law of Obligations. However, in view of the general academic interest that the DIFC legal community may have in these points of law, I would like to share some of my own observations on the fiduciary duties of employees under the DIFC Law of Obligations.
15. What is the scope of the fiduciary duties owed by an employee under Article 159 of the DIFC Law of Obligations? Schedule 3 to the DIFC Law of Obligations sets out the following fiduciary duties:
(1) Loyalty
A fiduciary must act in good faith in what he considers to be the interests of the principal without regard to his own interests.
(2) Conflict of interest
(a) A fiduciary must not place himself in a position where his own interest conflicts with that of his principal.
(b) If there is a conflict between an interest or duty of a fiduciary, and an interest of the principal in any transaction, he must account to the principal for any benefit he receives from the transaction.
(c) A fiduciary does not have to account for the benefit if the interest or duty has been disclosed to and approved by the principal.
(3) No secret profits
A fiduciary must not use the principal's property, information or opportunities for his own or anyone else's benefit unless his principal has consented or the use has been fully disclosed to the principal and the principal has not objected to it.
(4) Confidentiality
A fiduciary must only use information obtained in confidence from his principal for the benefit of the principal, and must not use it for his own advantage or for the benefit of any other person.
(5) Care, skill and diligence
A fiduciary owes the principal a duty to exercise the care, skill and diligence which would be exercised in the same circumstance by a reasonable person having both:
(a) the knowledge and experience that may reasonably be expected of a person in the same position as the fiduciary; and
(b) the knowledge and experience which the fiduciary has.
16. Though worded in language reminiscent of the fiduciary duties owed by directors, I think that the fiduciary duties owed by employees and directors cannot be exactly identical.
17. As Lord Browne-Wilkinson astutely pointed out in Henderson v Merritt Syndicates [1995] 2 AC 145 at 206, “[t]he phrase ‘fiduciary duties’ is a dangerous one giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances…[t]hat is not the case.” This was accepted by the English Court of Appeal in Ranson v Customer Systems plc [2012] EWCA Civ 841 at [24], where Lewison LJ cautioned that “[s]ince fiduciary obligations are not ‘one size fits all’, it is…dangerous to reason by analogy from cases about company directors to cases about employees”.
18. I consider that the fiduciary obligations owed by directors should be more onerous than those owed by employees, given the unique position of directors. Of course, this is only a general rule, and there may be special circumstances where employees owe duties that are either as onerous as, or more onerous than those owed by directors . For example, where an employee holds property on behalf of its employer, or is otherwise dealing directly with its employer’s assets, he may be held to the same standard of conduct as that expected of a director.
Conclusion19. In view of the principles discussed above, I wish to reiterate my concurrence with Giles J’s conclusions in paragraph 75, and hope that the observations that I make in this supplementary judgment will provide some form of future guidance to members of the DIFC bar.
HE Justice Omar Al Muhairi:
1. I agree with the Judgment of Justice Roger Giles and have nothing further to add.
Issued by:Mark BeerRegistrarDate of issue: 21 August 2014At: 4pm
