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Claim No: CFI 017/2009

THE JUDICIAL AUTHORITY OF THE DUBAI INTERNATIONAL FINANCIAL CENTRE

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

IN THE COURT OF FIRST INSTANCE

Between

SHIHAB KHALIL

Claimant/Respondent

-v-

SHUAA CAPITAL psc

Defendant/Applicant

Hearing Date: 21 October 2009

Counsel: Mr Tony Maalouli (ProConsult Advocates & Legal Consultants) for ClaimantMichael Black QC and Mr Ashad Ghaffar (instructed by Hadef & Partners) for Defendant

REASONS FOR JUDGMENT

Introduction

1. This is an application to strike out a claim for breach of the Defendant's duty of care pursuant to Art 18. of the Law of Obligations 2005 and/or for breach of the Defendant's fiduciary duty pursuant to Art.159(2) of The Law of Obligations 2005. The Claim is also put on the basis of breach of a contract dated 7 February 2008.

2. It is submitted on behalf of the Defendant that the Court has no jurisdiction over the claim on whatever basis it is put. It is further submitted that the claim ought to be struck on the ground that it has no realistic prospect of success, whether in respect of breach of duty of care or breach of fiduciary duty. It is further submitted that the claim is an abuse of process and ought to be struck out on that ground alone.

3. Although the factual background is somewhat complex, the essential parts of it can be refined down to the following.

4. On 7 February 2008 various owners of shares in Orion Holding Overseas Ltd ("OHO"), a holding company which makes investments in financial services companies, and which was registered in the DIFC, entered into a Subscription and Share Purchase Agreement ("SSPA") and a Shareholders Agreement ("SHA") with the Defendant, a company not registered in the DIFC. The effect of the SSPA and SHA was that the Defendant acquired 20 per cent of the issued share capital of OHO. Further, the Defendant was given management control of OHO. The SSPA contained detailed provisions giving effect to such management control by means of provisions as to representation on the board of directors of OHO and as to how voting was to be conducted upon different kinds of management resolutions and in particular as to the minimum number of the Defendant's appointed directors required to constitute a quorum. A new subsidiary of OHO, known as Orion Capital ("OCL") was to be created and registered within the DIFC as a management hub company.

5. In April 2008 the Claimant entered into a so-called Swap Agreement with OHO under which the Claimant was to exchange shares in Orion Trade Soft FZC ("OT"), of which he was the beneficial owner, to the value of US$5.24 million for 2 per cent of the share capital of OHO. Pursuant to the Swap Agreement the shares in OHO were transferred to the Claimant on 28 August 2008.

6. The Defendant's management control of OHO was effected through the persons of its Chief Executive Officer, one Mohammad Khalil ("MK") and its Chief Financial Officer, both of whom were appointed by the Defendant.

7. It is apparently alleged that in breach of a duty of care owed by the Defendant to the Claimant as a minority shareholder, the Defendant caused or permitted the following acts of mismanagement of OHO and thereby caused the directors and officers to fail to act in such manner as to ensure that the objects of OHO were fulfilled:-

11. On the grounds that the conduct of the Defendant relied upon demonstrated deliberate and egregious behaviour in the running down of the business of OHO it is submitted that an order for triple damages should be made under Section 40(2) of the DIFC Law of Damages and Remedies (Law No. 7 of 2005).

12. Finally, there is a claim based on the failure of the Defendant to transfer to OHO 7 percent of the issued shares in SHUAA Securities in breach of the SHA. It is submitted that since the value of that number of shares was US$12million, the Claimant, as a 2 per cent shareholder in OHO, has suffered loss of US$240,000.

13. The Defendant submits that this whole claim should be struck out because:

17. Since neither the Claimant nor the Defendant company are one of the Centre's Bodies or Establishments, Article 5(A)(1)(a) cannot found jurisdiction.

18. In order to bring himself within Article 5(A)(b) the Claimant would have to establish that his claim arose from or related to a contract that had been executed in the Centre or arose from or related to a transaction that had been concluded in the Centre or from an incident that had occurred in the Centre. In order to establish that the claim "arose from" or "related to" such a contract or transaction the claimant must, in my judgment, be a party to any such contract or transaction and further the contract or transaction must form an essential part of his cause of action. Moreover, in the context of "civil or commercial cases and disputes" the natural meaning of "transaction" is wide enough to include a range of deals including, but not confined to, a contract, and the word "concluded" in that context obviously does not mean "completely performed." So it must therefore mean concluded in the sense of "entered into". Accordingly, the more specific phrase "contract that has been executed" must in, my judgment, refer to a contract that has been performed within the Centre. The words "in whole or in part" separated by parenthetic commas, must be available to qualify "executed" as well as "concluded" and therefore have the effect of covering a claim relating to a contract which has been wholly or partly executed, in the sense of performed, within the Centre.

19. The final eventuality covered by Article 5(A)(1)(b) is "an incident that has occurred in the Centre". This takes one outside the scope of "contract" or "transaction" and into the ambit of tort. What is clear is that the incident relied upon must provide at least one of the essential foundations for the claim. Take, for example, the tort of negligence. The claimant can make good a cause of action only if he pleads and proves both (i) want of due care in the defendant's conduct and (ii) that such carelessness has caused loss to the claimant. If he omits (ii), his claim can be struck out. The impact on the Claimant of the defendant's negligent conduct is thus as essential a part of the cause of action as the conduct itself.

20. In construing this part of Article 5(a)(1)(b) it is pertinent to observe that it uses the word "incident" and not "tort" or "wrong". The concept of an "incident" or "event" imports, no more than that an essential part of the cause of action occurred within the DIFC. It matters not which part. By "essential" I refer to a part which would have to be pleaded if the pleading were not to be struck out. In the context of the tort of negligence it can be either the defendant's conduct or the claimant's resulting damage. As a basis for founding jurisdiction this is a matter of practical good sense and one finds it deployed in the English CPR at Part 6.20(8) ? leave to serve proceedings outside the jurisdiction of the English Courts can be given when a claim is made in tort where ? (a) damage was sustained within the jurisdiction; or (b) the damage sustained resulted from an act committed within the jurisdiction."

21. Does the claim fall within Article 5(A)(1)(b)? The only connection which any of the corporate entities have with the DIFC is that OHO is the holder of a DIFC licence as well as its subsidiary, Orion Capital Ltd. They are therefore within DIFC for jurisdictional purposes. However, neither company brings any claim in these proceedings. It is the claimant as a shareholder in OHO who deploys the damage to that company and its subsidiary said to have been caused by mismanagement of it as the basis for his own loss and damage. But the claimant is a distinct legal person from OHO in which he is a shareholder. His claim is brought only in his personal capacity. Although the loss which he claims to have suffered is derived from the fall in value of shares in a company within the DIFC, it is he alone who claims damages to the extent to which that fall in value has caused loss to him personally, as distinct from the loss to the company as a whole.

22. The contracts under which the Defendant acquired management control over OHO and its subsidiaries, namely the SSPA and SHA, were entered into on about 7 February 2008 between the then shareholders and owners of 20 per cent of the share capital of OHO and the Defendant. The Claimant was not such a shareholder and indeed did not become a registered shareholder in OHO until the execution of the Swap Agreement in August 2008. However, the Swap Agreement and its execution by the transfer of shares to the value of US$5.24 million did not amount to, and is not said by the Claimant to have constituted, an assignment to him of any interest in the SSPA or the SHA. It follows that at no relevant point of time was he a party to either contract or entitled as an assignee to enforce either contact against the Defendant. His closest relationship with the Defendant was as 2 per cent shareholder in OHO. It further follows that, even if the managerial activities in relation to OHO over which the Defendant assumed control under those contracts could be said to have been carried out in the DIFC, they could not amount to breaches of any contract to which the Claimant was a party and on the basis of which the Claimant was entitled to found a cause of action against the Defendant.

23. Two consequences follow from this analysis.

24. The claim based on the tort of negligence on the part of the Defendant involves consideration of the applicability of the words "civil or commercial cases and disputes arising from or related to . . . an incident that has occurred in the Centre" in Article 5(1)(b). For the purpose of testing the issue of jurisdiction of this court it is necessary to assume (contrary to the Defendant's submission) that the allegation of a duty of care is at least of sufficient substance not to be struck out. The Claim based on that breach of duty then involves the failure of the Defendant (outside the DIFC) to manage with due care the business of OHO located inside the DIFC in consequence of which that business became unprofitable, possibly insolvent and had to be closed down. Accordingly, the events giving rise to the assumed cause of action are spread between the Defendants' conduct from outside DIFC to the effect of that conduct inside the DIFC. Both the conduct of the Defendant and its effect on OHO would have to be pleaded to make good a viable cause of action. Applying the construction of Article 5(1)(b) in paragraph 20 above, one of the essential incidents therefore occurred within OHO which was within the DIFC. In this connection I am unable to accept Mr Michael Black's submissions that no relevant incident happened within the DIFC, the only occurrence within the DIFC being in the nature of the damage by loss of value of the business. In reality the whole exercise in mismanagement, initiated as it was from outside the DIFC, was brought to bear on the operation of OHO within the DIFC. That latter fact was an essential component of the Claimant's assumed cause of action.

25. I therefore hold that, if there were a duty of care, the claim in negligence falls within the jurisdiction of this court for such claim would be based on an incident or incidents which had occurred within the DIFC.

26. The claim for breach of fiduciary duty is based on the allegation of a de facto partnership between the Claimant and the Defendant in the ownership of OHO.

27. Although the basis for the de facto partnership is not properly pleaded by the Defendant in words which make the Defendant's case on this point readily comprehensible, in the course of argument Mr Maalouli, on behalf of the Defendant, told me that the de facto partnership arose from the negotiations between the Claimant and the Defendant which had led up to the Swap Agreement whereby the Claimant had agreed to exchange his shares in OT for 2 per cent of the share capital of OHO. The breaches of fiduciary duty consisted of some of the Defendant's acts of mismanagement of OHO.

28. If the allegation of a de facto or quasi-partnership is to be made good, regard must be had to the words of Lord Wilberforce, in considering in that case the court's discretion to wind up a company on the grounds that it would be "just and equitable to do so," in Ebrahimi v. Westbourne Galleries Ltd [1973] A.C. 360 at pages 379-380:

29. It has to be said that the Particulars of Claim do not begin to plead explicitly those facts in reliance on which the Claimant asserts that a quasi-partnership exists so as to give rise to a fiduciary duty owed by the Defendant to the Claimant personally, as distinct from the duty which a manager owed to OHO. All one is told is that which is to be found in paragraphs 1 to 16 of the Particulars of Claim. From these pleaded facts it may be that the Claimant seeks to extract a relationship having characteristics sufficient to give rise to a de facto partnership. In the course of argument emphasis was placed on the Swap Agreement and negotiations which preceded it but is unclear where those negotiations took place or where that Agreement was entered into. In paragraph 21.3 of the Particulars of Claim it is pleaded that the breach of the fiduciary duty occurred in the DIFC.

30. In my view, in the case of a claim for breach of fiduciary duty based on a quasi-partnership relationship this court should apply Article 5(1)(b) to the following effect. If the facts from which the relationship was derived occurred within the DIFC they should be treated as a "transaction" concluded in the DIFC. If those facts included as an essential component a specific contract performed within the DIFC, the relationship itself should be treated as falling within Article 5(1)(b), notwithstanding that the cause of action is based not on breach of that contract as such but on breach of the fiduciary duty to which the relevant relationship gave rise.

31. In the present case the negotiations which preceded the Swap Agreement were conducted between the Claimant and Mohammed Khalil and Ziad Abu Jeb, respectively the CEO and Vice Chairman of OHO. It is not pleaded where those negotiations took place. OHO was registered in DIFC, but there is no evidence that the negotiations took place at OHO's premises and I cannot infer that they did. However, the Swap Agreement was partly performed by the transfer of the shares in OHO to the Claimant at the DIFC registry on 28 August 2008. That Agreement and its performance is an essential component of the alleged quasi-partnership and therefore of the fiduciary relationship relied upon. Accordingly, on that assumed basis, this court does have jurisdiction to hear the claim for breach of fiduciary duty.

32. The Claim in NegligenceThe proposition that the manager or officer or another shareholder of a company can be sued in negligence by a minority shareholder for negligent mismanagement of the company's affairs which has caused the value of the shares to fall and thereby has caused damage to a claimant is novel, unprecedented and contrary to principle. In Barrett v Duckett [1995] 1 BCLC 243 the English Court of Appeal set out the following general principles:

35. It follows that the remedial regime available to a minority shareholder who alleges that the conduct of another shareholder is unfairly prejudicial to the interests of himself and shareholders of the company generally is to bring a derivative action in the name of and on behalf of the company, a course which can be challenged in court whereupon the priority shareholder has the burden of establishing that he should be permitted to bring proceedings on behalf of the company. This regime has been established for many years.

36. The claimant relies as the basis of his allegation of a duty of care on paragraph 18.1 of the Particulars of Claim:-

38. There appears to be no case in which the English or other Common Law courts have held that the directors or managers of a company owe a duty of care to a shareholder to exercise proper skill and care in managing the affairs of the company. Indeed, in an unreported judgment in Eric Kohn v Graham Meehan and Pettmond Investments Ltd (31 January 2003) Mr L Henderson QC (later Mr Justice Henderson) rejected a submission that a duty of care was owed by one director to a co-director to disclose certain information material to the management of the company. He observed also that he had never heard of such a liability being imposed. That is not surprising. Mismanagement of a company by a co-director would normally be remedied by a minority shareholder by means of a derivative action by the shareholder in the name of the Company itself. Because of the availability of this well-established remedial regime it is virtually impossible to envisage circumstances where it would be fair, just and reasonable for a duty of care to be recognised which would enable minority shareholders to sue members of a board of directors or other officers or managers for negligently damaging the Company. Damage to a company by reason of breaches of duty by directors or managers must be remedied either by a majority of the board members or shareholders taking action or by a minority shareholder bringing a derivative action in the interests of the company as a whole, as distinct from his own personal interest.

39. In the present case the Claimant has not sought to bring a derivative action but invites this court to extend the application of the law of negligence so as to invade a well-established remedial principle of company law in circumstances where the Claimant puts forward no explanation for his failure to take the normal course of a derivative action appropriate to these facts.

40. For these reasons I have no doubt that the claim for breach of the Defendant's duty of care is bound to fail. Although it is clear law that claims involving difficult issues of law should not be struck out, particularly where those issues are fact-sensitive, the fact that a claim attempts to extend the law of negligence into an area far outside anything previously contemplated by Common Law courts does not provide a licence for pursuing heavy commercial litigation in cases where the court concludes that the attempt has no realistic chance of success. That is this case.

41. The claim for breach of the Defendant's duty of care must therefore be struck out.

42. The Claim for Breach of Fiduciary DutyI have already considered the general principles applicable to the existence of a fiduciary duty arising from a relationship describable as a quasi or de facto partnership: see paragraphs 27 to 28 above. Further, as indicated in paragraph 29, the Particulars of Claim do not identify the relationship between the Claimant and the Defendant which is said to give rise to a fiduciary duty. One is therefore left to search amongst the pleaded facts for indicia of such a relationship.

43. The key facts from the Particulars of Claim are that:

44. It is to be observed that at no time did the Claimant have any contractual relationship with the Defendant. Nor, indeed, did he have any relationship in the nature of a joint venture with the Defendant or any relationship otherwise analogous to a partnership. He became an employee of OHO under a contract of employment. He became a minority shareholder in OHO. But that contract and the Swap Agreement resulted from negotiations with the CEO and Chairman of OHO acting on behalf of OHO, not with the Defendant. The fact that the Defendant controlled the management of OHO as from February 2008 could not create any joint venture or any similar kind of relationship between it and the Claimant. It is not suggested that any such relationship began after the Claimant became an employee or after the Swap Agreement.

45. I conclude that the pleaded facts come nowhere near founding a de facto or quasi partnership and that there is no other basis upon which there could exist a fiduciary relationship between the Claimant and Defendant. Accordingly this part of the claim has no realistic prospect of success and must be struck out.

46. It follows that the whole of the claim must be struck out. Accordingly, the Defendant's application succeeds in full.

Justice Sir Anthony Colman

7 December 2009