DIFC court hands down judgments clarifying when it has jurisdiction

1 January 2010


DIFC court hands down judgment clarifying when it has jurisdiction in cases of alleged negligence

On 7 December 2009 Mr Justice Colman handed down his judgment in CFI 017/2009, Shihab Khalil v Shua Capital psc in which a claim alleging breach of a duty of care and of fiduciary duty owed to the Claimant by the Defendant was made. Although the judgment accepted the Defendant’s submission that the claim should be struck out as disclosing no reasonable cause of action, in the course of doing so the Judge made various significant findings as to the extent of the Court’s jurisdiction.

Factual Background

On 7 February 2008 various owners of shares in Orion Holding Overseas Ltd (OHO), a holding company 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. As a result the Defendant acquired 20% of the issued share capital of OHO and was given management control of OHO.

In April 2008 the Claimant entered into a “Swap Agreement” with OHO under which he was to exchange shares in Orion Trade Soft FZC, of which he was the beneficial owner, for 2% of the share capital of OHO. Pursuant to the Swap Agreement the shares in OHO were transferred to the Claimant on 28 August 2008.

In his claim against the Defendant the Claimant alleged, in breach of a duty of care and or of fiduciary duty, various acts of mismanagement of OHO caused or permitted by the Defendant, resulting in a loss value of his shareholding in OHO.

Findings of the Court on Jurisdiction

The Defendant argued that the Court had no jurisdiction to determine the claim. The Judge quoted Article 5A of the Judicial Authority Law (no.12 of 2004) – and in particular Article 51(1)(b) to the effect that “(1) the Court of First Instance shall have exclusive jurisdiction over: …(b) civil or commercial cases and disputes arising from or related to a contract that has been executed or a transaction that has been concluded, in whole or in part, in the Centre or an incident that has occurred in the Centre” – and re-affirmed the decision of Hwang DCJ in Dhir v Waterfront Property Investment Ltd & Another (CFI011/2009, 8 July 2009) that Article 5A is the effective source of the Court’s jurisdiction. The Judge went on to find that:-

“18. In order to bring himself within Article 5(A)(b) [sic] 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 commerical cases and disputes” the natural meaning of “transaction” is wide enought 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 th 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 Atricle 5(Aa)(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) [Note: now paragraph 3.1(9) of Practice Direction 6]: 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 it 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 sahres 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.”

The Judge found that insofar as any of the Claimant’s claims purported to proceed on the basis of breach of contract there was no jurisdiction to hear them and they must be struck out. The Judge then turned to the claims made in tort:

“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) [sic]. 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 Defendant’s 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.”

Moving on to the claim for breach of fiduciary duty, the Judge found that:
“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.”


This decision goes some distance in clarigying the scope of the words used in Article 5(A)(1)(b), a contentious subject amongst commentators for some time. Coupled with the newly agreed Protocol of Jurisdiction between the DIFC Courts and the Dubai Courts (in effect from 7 December 2009) it makes the jurisdictional landscape clearer, giving judicial interpretation to a number of the expressions – “executed”, “transaction” and “incident” – noted by the protocol not to have been defined by law, thus giving rise to challenges of interpretation.

XXIV Old Building’s Michael Black QC and Arshad Ghaffar were instructed by Hadef & Partners on behalf of the Defendant.

XXIV Old Buildings, January 2010