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You are here: BAILII >> Databases >> The Dubai International Financial Centre >> Nest Investment Holding Lebanon SAL & Ors v Deloitte & Touche (M.E.) [2018] DIFC CA 011 (13 March 2019) URL: http://www.bailii.org/ae/cases/DIFC/2018/ca_011.html Cite as: [2018] DIFC CA 11, [2018] DIFC CA 011 |
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March 13, 2019 Court of Appeal - Judgments
Claim No. CA-011-2018
THE DUBAI INTERNATIONAL FINANCIAL CENTRE (1) NEST INVESTMENTS HOLDING LEBANON S.A.L.
(2) JORDANIAN EXPATRIATES INVESTMENT HOLDING COMPANY
(3) QATAR GENERAL INSURANCE AND REINSURANCE COMPANY P.J.S.C.
(4) GHAZI KAMEL ABDUL RAHMAN ABU NAHL
(5) JAMAL KAMEL ABDUL RAHMAN ABU NAHL
(6) TRUST COMPASS INSURANCE S.A.L.
(7) TRUST INTERNATIONAL INSURANCE COMPANY (CYPRUS) LIMITED
(8) HIS EXCELLENCY SHEIKH NASSER BIN ALI BIN SAUD AL THANI
(9) FADI GHAZI ABU NAHL
(10) HAMAD GHAZI ABU NAHL
(11) KAMEL GHAZI ABU NAHL
Claimants/Appellants
and
DELOITTE & TOUCHE (M.E.)
ORDER
UPON reviewing the Appellant's application for permission to appeal dated 8 March 2018
AND UPON reviewing the Respondent's submissions to dismiss the appeal dated 25 September 2018
AND UPON hearing Counsel for the Appellant and Counsel for the Respondent on 19 February 2019
AND UPON reading the submissions and evidence filed and recorded on the Issued by:
Ayesha Bin Kalban
Assistant Date of issue: 13 March 2019
Time: 11am
JUDGMENT
JUSTICE SIR JEREMY COOKE:
Introduction
1.This is an appeal from a decision of Justice Roger Giles dated 12 February 2018 in which he held that the Court had no jurisdiction under RDC 20.7 (2) to order the joinder of the Second Defendant ("Mr Al Fadl") by the Claimants, where the claim against that Defendant did not otherwise fall within the parameters of Article 5 (A)(1) (a)-(d) of the 2. There is no appeal from the 3. There is equally no appeal from his decision on 12 February 2018 refusing the First Defendant (DTME)'s application for strikeout or immediate judgement on the claim against it. He thus decided that the Claimants had a good arguable case against DTME in respect of its alleged breaches of duty to the Claimants who were 24% minority shareholders in the Lebanese Canadian Bank SAL ("LCB") when it, or its agent Deloitte & Touche in Lebanon ("DTL"), carried out audits of that bank and its subsidiary LCB Investment (Holding) SAL ("LCBIH") in the years 2007-2010. LCB went into liquidation in 2011 with resultant extensive losses to the shareholders in respect of the value of the shareholdings and dividends which, it is alleged, would have been received had that not occurred. It is said that if the audits had been correctly carried out, then the minority shareholders could have taken steps to correct the management failures in running the business and the liquidation and ensuing sale of LCB's assets would not have occurred. The claim is for approximately USD 128 million. The Claim 4. LCB is a company based in Beirut, formerly conducting a banking business. It is now in liquidation. The Claimants acquire their minority shareholdings shares in the years 2006 and 2007. The First Defendant, Deloitte & Touche (ME), ("DTME") is a general partnership registered in accordance with the laws of Cyprus. It is an accounting firm operating through branches in a number of countries in the Middle East including Dubai and it is a registered auditor in the DIFC, which is what gives rise to jurisdiction against it under Article 5(A)(1)(a) of the JAL. The putative Second Defendant, Mr El Fadl is a partner in DTME and is also the Managing Partner of Deloitte & Touche ("DTL") a civil company registered in Lebanon and carrying on an accounting business in that country. 5. The claims in the proceedings are for breaches of duties as auditor in relation to the audits of the financial statements of LCB for the financial years ending 31 December 2006, 2007, 2008 and 2009. The audits were performed by DTL under letters of engagement with LCB, for which it is alleged that DTME are responsible. Mr Fadl was the Managing Partner at DTL as well as a partner in DTME and was the senior individual responsible for the audit. There is also a claim in relation to the audits of what is said to be effectively a subsidiary of LCB, Tabadul Company for Shares and Bonds LLC ("Tabadul") which is pursued only against DTME, although its impact on the audits of LCB is reflected in the claims against Mr El Fadl also. 6. Although the audits were performed by DTL, the Claimants allege that DTL was in truth an extension of DTME, that they were both part of a single economic unit with DTL a branch of DTME, whereby DTME is liable for the acts and omissions of DTL and of Mr El Fadl as the responsible partner in DTME. He is said to be personally liable and DTME is liable for his acts and omissions, either vicariously or as his principal. 7. The causes of action are framed in the Particulars of Claim under 8.1 Mr El Fadl is a registered general partner of DTME and a managing partner of DTL (paragraph 28). 8.2 DTME is liable as principal, or alternatively vicariously, for the acts or omissions and faults of its agent DTL and/or DTL is a "mandatory" of DTME under the law of Lebanon, which is equivalent to a principal/agent relationship under the Law of DIFC (paragraph 34) 8.3 Within his role at DTME, Mr El Fadl was responsible for the audits of LCB and its subsidiary LCBIH, which were conducted by DTME, through DTL. At all material times Mr El Fadl acted as the agent of DTME and the latter is vicariously liable for his acts and omissions and/or is liable by virtue of the principles of agency. He was the main auditor in personam of LCB and LCBIH, or alternatively had supervisory control of the audits conducted for those entities (paragraphs 36 and 42). He is referred to as the "partner in charge, Middle East" on the Deloitte & Touche global website which states that he "leads the Global financial services group of Deloitte in the Middle East" (paragraph 43). It is also the Claimants' case that Mr El Fadl was aware of all material auditing decisions relating to Tabadul, a licensed financial brokerage company trading in 8.4 DTME/DTL, in breach of applicable corporate auditing standards was the sole auditor of LCB from 1995 to 2010 and Mr El Fadl was the audit partner responsible for all of that time. DTME, through him, was familiar not only with LCB's management with whom it met and communicated regularly, but also with LCB's business and with the anti-money laundering and counterterrorism financing risks ("the AML/CTF risks"), the constitution of LCB, its board and shareholders, the internal audit department, the creation of the Internal Audit Committee at the instance of 10. LCB's Management controlled the Compliance Unit. The Internal Audit Department reports were ignored as were Internal Audit Committee requests to the Board and Management and recommendations from both were put aside with reliance upon the DTME Audits in the relevant years. No provision was made for a claim against LCB in New York in which allegations were made that the latter held bank accounts, intentionally or negligently, for entities which were an integral part of Hezbollah and constituted part of Hezbollah's financial arm. The claim alleged that LCB had enabled, facilitated and proximately caused wire transfers to be made into those accounts, allowing Hezbollah to plan, prepare for and carry out rocket attacks on Israel (paragraphs 120 - 125). 11. DTME failed to produce an AML/CTF report in 2008 in respect of 2007 but on 24 March 2009 and 21 April 2010 Mr El Fadl, on behalf of DTME, wrote to LCB's Board with DTME's opinion as to LCB's compliance with Lebanese AML/CTF regulations in accordance with International Auditing Standards. The audit opinions gave LCB a clean bill of health with only minor infractions noted, expressing no cause for regulatory intervention or meaningful external concern, despite DTME's knowledge or constructive knowledge that LCB was engaged in systemic international money laundering with consistently lax AML/CTF controls with cumulative breaches involving many millions of dollars (paragraph 117 - 152). 12. In a US Financial Crimes Enforcement Network Notice of 10 February 2011, as a result of an analysis of evidence obtained during an extensive criminal investigation, the conclusion was reached that LCB had been routinely used by drug traffickers and money launderers operating in various countries in Central and South America, Europe, Africa and the Middle East. One of those drug traffickers was a supporter of Hezbollah and another was a known individual who provided support to Hezbollah. Between January 2007 and early 2011, LCB and three other banks were involved in money laundering to the extent of USD 329 million and some USD 230 million had been transferred from accounts held at LBC after January 2008. The investigation found that the General Manager and his deputy and a number of managers of key branches had daily dealings with members of the drug trafficking and money laundering networks and personally processed transaction on their behalf. LCB had intentionally poor money laundering controls and it knowingly conducted business with Hezbollah-controlled entities and individuals linked to (inter-alia) African diamond smuggling, money laundering and drug trafficking. 13. The allegation is made that there was a money laundering scheme perpetrated by LCB under the control of its management, which led to LCB's collapse because the effect of these findings in the USA was to cause other banks to cease doing business with it. Proper auditing would have revealed this. 14. In Part 6 of the Re-amended Particulars of Claim, the breaches of duty on the part of DTME are set out for each of the 2006 - 2010 audits. At paragraph 251, in respect of 2008, repeated at paragraph 255 for 2009, it is alleged that DTME had no genuine belief in the truth of its audit opinions and deliberately sought to limit the scope of AML/CTF Audits to exclude any verification of the adequacy of LCB's money laundering controls in breach of its AML/CTF obligations in Lebanese law. The alternative case is put in negligence or "faute". 15. Justice Roger Giles in his first judgment of 25 August 2017, stated that there was no reason not to exercise jurisdiction if he had it, but concluded that the Court had no jurisdiction over Mr El Fadl, who was named as the Second Defendant in the proceedings, under any of the provisions of Article 5 (A)(1)(e) of the JAL. The Judgments of Justice Roger Giles- The Judgment of 25 August 2017 16. In his first judgement of 25 August 2017 Justice Roger Giles considered the only extant contentions of the Claimants that jurisdiction existed against Mr El Fadl under Article 5 (A)(1)(e) of the JAL by reason of specific provisions in the Law of Obligations and the Regulatory Law. It will be recalled that the Article provides: - "(1) the Court of First Instance shall have exclusive jurisdiction to hear and determine: ................ (e) Any claim or action over which the Courts have jurisdiction in accordance with DIFC Laws and DIFC regulations." 17. Additionally, as recorded by the Judge, the Claimants submitted that there was jurisdiction because Mr El Fadl was "a necessary and proper party" to the claim against DTME. That was put as a ground for present jurisdiction over a Defendant included in the original claim form but, as the judge remarked, when it was unpacked it was something different. The contention was that the Court could order under RDC 20.7 that Mr El Fadl be added as a new party in the circumstances there set out. That rule provides, under the heading "Addition and Substitution of Parties" (and not in terms of "necessary and proper party" or "necessary or proper party") that: - "20.7 the Court may order a person to be added as a new party if: (1) it is desirable to add a new party so that the court can resolve all the matters in dispute in the proceedings; or (2) there is an issue involving the new party and an existing party which is connected to the matters in dispute in the proceedings, and it is desirable to add the new party so that the court can resolve that issue". 18. The Judge held that reliance upon the Rule at that time was misplaced, as was ultimately accepted by the Claimants. The possibility of an order under the Rule did not mean that jurisdiction existed at the time, in circumstances where Mr El Fadl had already been named as an original party to the proceedings when issued, and served as such, followed by his challenge to the jurisdiction. On its own terms, the Rule is only applicable to the situation where a new party is to be added to the existing parties in existing proceedings and the relevant test set out in sub paragraph (1) or (2) is met, whereupon the Court is given a discretion whether or not to add the party in question. 19. Here, the relevant subparagraph is (2) and the criterion is whether or not there is an issue involving Mr El Fadl and the Claimant or DTME which is connected to the matters in dispute in the existing proceedings between the Claimant and DTME which makes it desirable for the new party be added so that the court can resolve the issue. The Judge was not prepared to consider the application of the Rule at that stage, not only because it was a hypothetical situation but more importantly because success in DTME's pending application to Al Khorafi v Bank Sarasin- Alpen (ME) Ltd that it should not stay proceedings to give effect to an exclusive jurisdiction clause relating to only one of two defendants. He referred also to the need for evaluation of the likelihood of unlikelihood of a fair trial in the Lebanese court as a potentially dominant factor, even if the exclusive jurisdiction had applied. In the absence of an effective jurisdiction clause which operated between the parties, he could see no reason not to exercise jurisdiction. 23. If that does not create any issue estoppel, which we consider it may well do, because the Judge specifically had CPR 20.7 in mind when he made the finding and did not change his mind on the point when considering the Rule in his later judgment, we are clear that it is most desirable to hear any claim against Mr El Fadl alongside the claim against DTME because many of the same issues arise in both claims and the terms of Rule 20.7 (2) are plainly satisfied. 24. If the Court has power and a discretion whether or not to order the joinder of Mr El Fadl in the proceedings against DTME, the Court has no hesitation in saying that such an order should be made, for the reasons given hereafter. 25. It is clear that Mr El Fadl is the central character in the case made against DTME, not least because he wrote the letters of 24 March 2009 and 21 April 2010 giving the opinion that LCB was in compliance with Lebanese AML/CTF Regulations, when, on the Claimants' case, he knew that was not the case. He was the individual responsible for the audits as the relevant partner and it is his actions which are those for which DTME is said to be liable vicariously or as principal. 26. It is clearly desirable, if he is to be sued anywhere, for him to be sued at the same time and in the same jurisdiction as DTME. Whilst there is no necessity for him to be joined as there is room for DTME to be found liable without liability being established against Mr El Fadl personally, the crux of the Claimant's case is that, if he is found liable, DTME is, by reason of his relationship to it, liable also and, moreover, he is alleged to be the key figure who conspired with the management and majority Lebanese shareholders in LCB to make statements in the form of opinions which were intended to avert suspicion of involvement of LCB in money laundering and terrorist financing. The Judgments of Justice Roger Giles- The Judgment of 12 February 2018 27. The Judge described the Claimants' position thus: "the Claimant said that there was an issue involving the new party, Mr Fadl, which was connected to the matters in dispute in the proceedings, being the claims against DTME: and that the desirability lay in having all claims determined together, and in avoiding what they alleged were, for them, impediments to a just resolution in the Lebanese Courts". He described Mr El Fadl's position as saying that the requirements of the Rule were not satisfied but, regardless of that, "he could not be joined pursuant to the Rule when, as had been decided, the Court did not have jurisdiction to hear and determine the claim against him". 28. The Judge expressed his conclusions succinctly. He noted that RDC 20.7(2) reproduced the English rule CPR 19.2(2) but noted that in England there was no overriding jurisdictional fetter because jurisdiction over a party could be founded simply on service, whether within the physical jurisdiction or outside it with the permission of the court. He stated that, by contrast, the 30. The Judge did not accept that the wording of RDC 20.7(2) could give rise to a freestanding "gateway of jurisdiction", because he regarded the Rules of Court as procedural only and as not providing for jurisdiction above and beyond the JAL. He referred to the definition in Article 2 of the JAL, which states that the Rules are "rules regulating litigation procedure before the Courts" and the provision in Article 4(II)(b) of the JAL that the 31. He then went on to grapple with the question which appears to this Court to lie at the heart of the argument between the parties, despite the extensive submissions made in both parties' skeletons. Article 5(A)(1), by subparagraph (e) provides that the Court shall have exclusive jurisdiction to hear and determine "any claim or action over which the Courts have jurisdiction in accordance with DIFC Laws and DIFC Regulations". The simple issue is whether or not the Rules of Court constitute a DIFC Regulation and, if they do, whether the terms of RDC 20.7 are apt to confer jurisdiction or merely constitute a procedural provision which can only apply if jurisdictional issues are already satisfied in relation to the claim in question by reference to one of the gateways. 32. Whilst the Judge considered that the Rules of Court did not technically fall within the definition of DIFC Regulations, by reason of his conclusion that they were "issued" by the Chief Justice, as opposed to the President, although "made" by the latter, he recognised that this might be seen as an "over- fine" distinction. The real difficulty, as he saw it, was that when subparagraph (e) referred to jurisdiction "in accordance with DIFC Laws and DIFC Regulations" there had to be found a sufficiently clear conferral of jurisdiction by the relevant Law or Regulation and he did not see that RDC 20.7 could be seen as having that effect. 33. He said that Article 94 (2) of the Regulatory Law was an example of a DIFC Law which did have that effect, and that while the wording there did not expressly confer jurisdiction, it could be seen that this was the purpose. That, however, he considered was not the purpose of the Rules of Court because, in his view, they operated within the jurisdictional limits of the JAL. 34. The Judge did not consider that the Rule was framed in terms of conferral of jurisdiction as opposed to giving the Court a discretionary procedural power. He considered that RDC 20.7 did not purport to confer jurisdiction over a claim or action embodying the issue involving the new party and an existing party (emphasis added). What the Rules did was to give the power to add a new party but only within the Courts jurisdictional limits as set by the JAL. The words "in accordance with DIFC Laws and DIFC Regulations" in Article 5(A)(1)(e) required more than was to be found in RDC 20.7. He therefore concluded that the Rule did not enable the joinder of a new party where the issue involving that party and an existing party was a claim which the court did not, per se, have jurisdiction to hear and determine under one of the other gateways or under some other statutory or regulatory provision falling within subparagraph (e). 35. He noted that the same question could arise in relation to an additional claim against a person not already a party whom it was sought to join under RDC 21 That rule provides for the situation where a defendant wants to join a new party to a counterclaim that it wishes to bring, or as an additional party from whom it seeks contribution or indemnity in respect of the claim made against it. He saw the unsatisfactory nature of a result which made this impossible but considered that the jurisdictional prescription in the JAL could not be satisfied, under RDC 20.7 and that those who drafted the RDC, when adopting rules from the CPR, might not have sufficiently taken into account the jurisdictional limits which applied to the DIFC Courts and their terms. 36. The Judge referred to the absence of any decided authority of the DIFC Courts on the point and considered that reference to other jurisdictions with their different regimes could not assist.
