October 28, 2020 court of first instance - Judgments
Claim No. CFI 042/2019
THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
IN THE COURT OF FIRST INSTANCE
BETWEEN
(1) MARIN
(2) MARITA
Claimants
and
MARKKU
Defendant
JUDGMENT OF JUSTICE SIR RICHARD FIELD
JUDGMENT ON DEFENDANT’S APPLICATION TO STRIKE OUT CLAIM FOR BREACH OF FIDUCIARY DUTY
1. The background to the captioned application is set out in the Perfected Ex Tempore Judgment given on 6 October 2020 (and issued on 28 October 2020) immediately after the hearing of a number of applications made by the Claimants and the Defendant. The names assigned to the parties in that judgment are adopted in this judgment.
The pleaded claim for breach of fiduciary duty in the Claimants’ Points of Claim (the “PoC”)
2. Paragraph 11 of the PoC relates how under GRIA 1 and GRIA2 MARITA came to acquire 66.7% of the shares in Missi and advanced $30 million by way of a shareholder loan (“the Investment”) and Markku Capital was appointed Investment Manager under the Mistu.
3. Paragraphs 12, 13, 21, 22, 23 and 38 plead as follows:
12. The functions of an investment manager (i.e. the day-to-day management of the funds invested in Grey Reach) for the Investment were in fact carried out by Markku DIFC. MARITA, and in turn Marins and LOLC, placed trust and confidence on Markku DIFC to carry out such transactions in good faith and with a reasonable duty of care.
13. Markku DIFC, through its actions (as set out in the subsequent averments), acted on behalf of MARITA in relation to its investments in Grey Reach in a manner which gave rise to a relationship of trust and confidence, thereby resulting in a fiduciary relationship between MARKKU DIFC and MARITA.
21. As more fully pleaded below, it is averred that Markku DIFC acted as a fiduciary of MARITA due to, among other things, the following:
21.1. Markku DIFC handled transactions concerning Marin, Sunbird, MARITAand LOLC including the opening of bank accounts and the appointment of one of its director as a signatory to at least one such bank account;
21.2. Markku DIFC carried out all such functions through its offices at the DIFC and utilized its employees for such activities; and
21.3. MARITA placed its trust and confidence on Markku DIFC to handle its Investment diligently, with the assurance that Markku DIFC was a DFSA regulated entity.
22. In the circumstances, Markku DIFC can properly be deemed a fiduciary of MARITA in terms of Article 158 of the DIFC Law of Obligations, which provides as follows:
Article 158(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.
23. As a fiduciary of MARITA, Markku DIFC owed express and implied obligations, including (but not limited to) the following:
23.1. The fiduciary duty to act with loyalty in terms of Article 159 (1) of the DIFC Law of Obligations
23.2. The fiduciary duty to act in good faith in terms of Schedule 3 (1) of the DIFC Law of Obligations
23.3. The fiduciary duty to exercise the care, skill and diligence which would be exercised in the same circumstance by a reasonable person in terms of Schedule 3 (5) of the DIFC Law of Obligations.
38. It is averred that Markku DIFC, by reason of the wrongdoing as set out in Part V above, has breached its obligations as a fiduciary, resulting in a direct loss of USD 658,000 to MARITA.
4. Mr Miut submitted that at the core of a fiduciary relationship properly so called was an obligation on the putative fiduciary to subordinate his interests to those of the putative beneficiary. He argued that whilst certain of the aspects of a fiduciary relationship were to be found in the IMA, such as a duty to exercise reasonable skill and to act in good faith, Markku Capital as the Investment Manager was not under a duty to subordinate its interests to those of other co-investors in Grey Reach. In his submission this was fatal to the fiduciary duty plea. He took the Court to a passage in Snell on Equity where it is stated that the reason for fiduciary duties not normally arising in commercial settings outside the settled categories of fiduciary relationships is that it is normally inappropriate to expect a commercial party to subordinate its own interests to those of another commercial party.
5. Mr Miut also relied extensively on the judgment of Leggatt LJ in Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Neyhayan v Kent [2018] EWHC 333 (Comm). In the course of his judgment Leggatt LJ said:
157. In considering this submission [that there existed a fiduciary relationship between the parties], I bear in mind that it is exceptional for fiduciary duties to arise other than in certain settled categories of relationship. The paradigm case of a fiduciary relationship is of course that between a trustee and the beneficiary of a trust. Other settled categories of fiduciary include partners, company directors, solicitors and agents. Those categories do not include shareholders, either in relation to the company in which they own shares or to each other. While it is clear that fiduciary duties may exist outside such established categories, the task of determining when they do is not straightforward, as there is no generally accepted definition of a fiduciary. Indeed, it has been said that a fiduciary “is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary”: see Finn, Fiduciary Obligations (1977), p2, cited with approval by Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, 18. If this is right, it simply begs the question of how to determine when a person is subject to fiduciary obligations if not by analysing the nature of their relationship with the person to whom the obligations are owed.
158. Despite saying in the Mothew case that a fiduciary is defined by the obligations to which he is subject and not the other way round, Millett LJ did give a general description of a fiduciary as “someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”: see [1998] Ch 1, 18. This description has often since been cited with approval, including by the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250, para 5. To similar effect, in another much quoted statement, Mason J in the High Court of Australia in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 96-97, said:
“The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”
159. Thus, fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person. (Such duties may also arise where the responsibility undertaken does not directly involve making decisions but involves the giving of advice in a context, for example that of solicitor and client, where the adviser has a substantial degree of power over the other party’s decision-making: see Lionel Smith, “Fiduciary relationships: ensuring the loyal exercise of judgement on behalf of another” (2014) 130 LQR 608.) The essential idea is that a person in such a position is not permitted to use their position for their own private advantage but is required to act unselfishly in what they perceive to be the best interests of their principal. This is the core of the obligation of loyalty which Millett LJ in the Mothew case [1998] Ch 1 at 18, described as the “distinguishing obligation of a fiduciary”. Loyalty in this context means being guided solely by the interests of the principal and not by any consideration of the fiduciary’s own interests. To promote such decision-making, fiduciaries are required to act openly and honestly and must not (without the informed consent of their principal) place themselves in a position where their own interests or their duty to another party may conflict with their duty to pursue the interests of their principal. They are also liable to account for any profit obtained for themselves as a result of their position.
6. It would be most surprising, submitted Mr Miut, if the legislative intention behind Article 158 (1) of the DIFC Law of Obligations was to recognise a relationship as a fiduciary relationship where the putative fiduciary did not have a discretion the exercise of which required him to subordinate his interest to that of the putative beneficiary.
7. On behalf of the Claimants, Mr Marin submitted that whether Markku (DIFC) owed fiduciary duties to MARITA depended on the facts and circumstances. He cited this passage from Snell on Equity:
The categories of fiduciary relationships are not closed. Fiduciary relationships may be owed despite the fact that the relationship does not fall within one or the settled categories of fiduciary relationships, providing the circumstances justify the imposition of such duties.
8. This statement made it clear, argued Mr Marin, that in deciding on particular facts whether a fiduciary duty was owed it is not the full panoply of the classic fiduciary relationship or nothing; it is whether particular duties on the putative fiduciary render him a fiduciary to the other party in the relationship.
9. Mr Marin submitted that here, on the facts, Markku (DIFC) was effectively entrusted with and acting as custodian of monies made available by MARITA to Grey Reach as the delegate of Markku Capital who was contractually bound to act in MARITAE’s best interest as the Investment Adviser under the IMA. It was accordingly well arguable that Markku (DIFC) was under a fiduciary duty owed to BCME to ensure that money held in the Grey Reach account was dealt with strictly in good faith in MARITA’s best interest.
10. In my judgment, it is reasonably arguable that the facts before the Court fall within Mason J’s dictum of in Hospital Products Ltd cited in paragraph 157 of the judgment of Leggatt LJ in Al Neyhayan. Markku (DIFC) was entrusted with a power, inter alia, to operate the bank account of Grey Reach the exercise of which power would affect the interest of MARITA in that the money in Grey Reach’s account is derived from the $30 million invested in Grey Reach by MARITA in the form of a shareholder loan repayable to MARITA.
11. Further and in the alternative, and this is what really matters, I consider that the words used in Article 158 (1) of the DIFC Law Obligations should be given their ordinary and natural meaning and that it is well arguable that Markku (DIFC) undertook to act for or on behalf of BCME in the operation of the Grey Reach bank account in circumstances which gave rise to a relationship of trust and confidence between MARITA and Markku (DIFC) as provided for in that Article. Thus it is also well arguable Markku (DIFC) owed the fiduciary duties pleaded in paragraph 23 of the PoC.
12. I am also of the opinion that MARITA can seek to recover damages for its loss resulting from the depletion of Grey Reach’s assets to the tune of $658,000 with the knock-on negative impact on the recoverability of the $ 30 million shareholder loan owed by Grey Reach.
13. For these reasons I refuse Markku (DIFC)’s application to strike out MARITA’s claim for breach of fiduciary duty.
Issued by:
Nour Hineidi Deputy Registrar
Date of issue: 28 October 2020
Time: 4pm
