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You are here: BAILII >> Databases >> The Dubai International Financial Centre >> Normand v Nathaniel [2024] DIFC SCT 125 (24 September 2024) URL: http://www.bailii.org/ae/cases/DIFC/2024/DSCT_125.html Cite as: [2024] DIFC SCT 125 |
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Normand v Nathaniel [2024] DIFC SCT 125
September 24, 2024 SCT - JUDGMENTS AND ORDERS
Claim No: SCT 125/2024
THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS
IN THE COURT OF FIRST INSTANCE
BETWEEN
NORMAND
Claimant/Respondent
and
NATHANIEL
Defendant/Applicant
ORDER WITH REASONS OF JUSTICE RENE LE MIERE
UPON the judgment of SCT Judge Maitha AlShehhi (the “Judge”) dated 15 August 2024 (the “Judgment”)
AND UPON the Defendant’s Appeal Notice dated 29 August 2024 seeking permission to appeal the Judgment (the “PTA Application”)
AND UPON considering the documents and submissions filed by both parties and recorded on the case file
AND UPON hearing and considering the oral submissions of the Defendant/Applicant and the Claimant/Respondent made at a hearing held on 11 September 2024 (the “Application Hearing”)
IT IS HEREBY ORDERED THAT:
1. The PTA Application is granted.
2. The costs of the PTA Application shall be costs in the appeal.
Issued by:
Delvin Sumo
SCT Judge and Assistant Registrar
Date of Issue: 24 September 2024
At: 8am
SCHEDULE OF REASONS
Summary
1. The Claimant is a limited liability company registered in in the UAE. It presently owns the Niles and other hotels.
2. The Defendant is an individual institution company registered in the UAE. It carries on business as a tour operator in the UAE.
3. By an agreement dated 1 October 2015 and executed on 30 June 2016, “Naayil operated for and on behalf of Naveed ” as Owner and the Defendant as Concessionaire entered an agreement (the “Concession Agreement”), by which the Owner agreed to permit the Concessionaire to provide travel and tourism services to the hotel guests in return for a monthly payment of AED 17,160.
4. The Concession Agreement provides that the agreement is entered into by Manager for and on behalf of Owner as Owner’s authorised agent. The manager is Nat
5. The Claimant says the Defendant defaulted in paying the fees due under the Concession Agreement.
6. The Claimant brought proceedings in the UAE (the “UAE Court”) for the appointment of an expert to determine whether the Defendant owed any amount, and if so what amount, to the Claimant.
7. The Commercial Case Management Office at the UAE Court appointed an expert. The expert concluded that the Defendant owes the hotel owned by the Claimant an amount of AED 371,212.95. The Court received the expert’s report. The Claimant requested the UAE Court to dismiss the case and refer it to the competent court, that is the DIFC Courts. The UAE Court dismissed the case.
8. On 21 March 2024, the Claimant filed its claim (the “Claim”) claiming the amount of AED 371,212.95
9. The Defendant filed a defence on 7 June 2024. The Defendant states that the Concession Agreement is between the Defendant and Norwood and not with the Claimant.
10. The Defendant further submits that it entered into a settlement agreement with Norwood (“Norwood”) dated 13 September 2022 for payment to be made in the amount of AED 125,000 in favour of the Defendant (“Settlement Agreement”) and as a result, the Claimant is not entitled to recover or file anything further against the Defendant as all matters with Nat have been concluded by virtue of the Settlement Agreement.
11. A hearing took place before SCT Judge Maitha AlShehhi on 5 August 2024, with the Claimant’s representative and the Defendant’s representative in attendance (the “Hearing”)
12. The Claimant and the Defendant made further submissions dated 5 August 2024.
13. On 15 August 2024 the Court ordered:
(1) The Defendant shall pay the Claimant the amount of AED 371,212.95.
(2) The Defendant shall pay the Claimant the DIFC Courts’ filing fee int the amount of AED 18,560.63.
(“the Judgment”)
14. On 29 August, the Defendant filed an appeal notice seeking permission to appeal against the Judgment. The Defendant raises two broad grounds of appeal. First, the Defendant denies the Claimant is a party to the Concession Agreement or that there is any contractual relationship between the Claimant and the Defendant. Second, the Defendant says the Claimant’s Claim is covered by and barred by the Settlement Agreement.
15. The Claimant opposes the grant of permission to appeal on the ground that the Defendant has failed to present any credible grounds for appeal.
16. For the reasons which follow, the permission to appeal is granted to the Defendant.
17. The costs of the application for permission to appeal will be costs in the appeal.
The Concession Agreement
18. The Concession Agreement states that it is made “between the following parties:
(1) The Party identified in, and whose details are set out in, Part 1 of schedule 1 (“Owner”) which expression shall when the context requires include its assigns; and
(2) The Party identified in, and whose details are set out in, Part 1 of schedule 1 (“Concessionaire”).”
19. Part 1 states that the full legal name of the Owner is “Naayil for and on behalf of Naveed”.
20. Part 2 states that the full legal name of the Concessionaire is “Nathaniel”
21. Recital (A) states that Owner is the owner of the Hotel identified in Part 4 of Schedule 1. Part 4 of Schedule 1 states that the hotel trading name is “Naayil operated for and on behalf of Naveed”.
22. Recital (B) states that Owner has appointed the party identified in Part 3 of Schedule 1 (“Manager”) to operate the Hotel as Owner’s duly authorised agent. Part 3 of Schedule 1 states that the full legal name of a manager is Nat
23. Clause 1.10 provides:
“all obligations of Owner specified in the agreement shall be solely those of Owner and not obligations of Manager; and
all rights of Owner specified in the agreement may be exercised by Owner or by Manager as its authorised agent.”
24. Therefore, the Concession Agreement is a contract between the Defendant and the owner of the Naveed (“Naveed”).
25. I pause to observe that the parties to a contract are not ambulant in the way provisions of a contract may be ambulant. If a contract is made by “X, the owner of the hotel,” and X sells the hotel to Y, Y does not automatically become a party to the contract in place of X. The contract remains with X unless there is a specific assignment clause in the contract that provides for the assignment or transfer of rights and obligations to the buyer upon the owner of the hotel selling the hotel to the buyer. Without such a clause, the original owner would need to formally assign the contract to the buyer. Further, that would not assign an accrued debt owing under the contract unless it was specifically assigned.
26. I return to considering the provisions of the Concession Agreement.
27. Clause 3 provides that the agreement shall come into force on the Commencement Date (July 1, 2016) and Continue for the Initial Period (the period from and including the Commencement Date to and including 30 June 2017) unless terminated earlier in accordance with clause 16.
28. Clause 24 provides that Owner or Manager shall be entitled to assign the agreement. I pause to observe that that clause gives the Owner the right to assign the agreement, it does not effect an assignment of the agreement automatically on the Owner selling the hotel to a buyer.
29. Clause 24 provides that the agreement does not confer any rights on any person or party other than the parties to the agreement except that the parties intend and agree that Nivas may enforce the provisions of the agreement that are expressed to extend to Nivas.
30. Clause 27 provides that the agreement shall constitute the entire agreement between the parties.
31. Clause 28 provides that the agreement is governed by the laws of the United Arab Emirates.
32. Clause 28 also contains dispute resolution provisions which provide that if a dispute is not resolved by negotiation the dispute shall be referred to the DIFC Courts which shall have exclusive jurisdiction to hear any and all disputes arising out of or in connection with the agreement.
The UAE Judgment
33. On 20 November 2023, the Commercial Case Management Office at the UAE Court appointed an accounting expert (the “Expert”) to peruse the documents and state the relationship between the Claimant and the Defendant and to indicate whether the Claimant owes the Defendant any amounts, the reason for that indebtedness and the balance owed.
34. The Expert received statements from the parties as well as reviewing documents.
35. The Expert presented his report to the UAE Court. The Expert found, after reviewing the correspondence and statements provided by the parties, that the Defendant was dealing with several companies affiliated with the management of Naadir, and that the relationship between the parties is based on settling the account between the Defendant and the companies affiliated with the management of Nivas through email correspondence, and that these companies are:
“1- Niles "any hotel owned by the [Claimant] and known in correspondence as "Nestor " and later "Naayil "
2- Nash" known as Nash" and later as "Norwood" known in correspondence as "Norwood".
3- Nabhan, a company affiliated with the [Claimant], according to the statement of the [Claimant’s] attorney.”
36. The Expert concluded:
“1. …the existence of a contractual relationship between the hotel owned by the {Claimant] under the management of Naadir and the Defendant under the Concession Agreement. … the Defendant company was providing tourism services to the guests of the hotel owned by the {Claimant], and the deal between Naadir (that is, the manager of the hotel owned by the [Claimant]) and the defendant was based on settling the account between the defendant company and several companies affiliated with the management of Nivas by email correspondence.
2. … the final balance owed by the defendant company in favour of the hotel owned by the [Claimant] as on 30/6/2017 is AED 419,039.92 …, and that Nabhan, a subsidiary of the [Claimant] (according to the [Claimant’s] attorney), owes an amount of AED 47,82 6.97 in favour of the defendant … thus the net amount owed by the defendant in favour of the hotel owned by the [Claimant] is AED 371,212.95.
3. … there is no relationship between the hotel owned by the [Claimant] or the [Concession Agreement] … with the Settlement Agreement.”
37. I pause to note that the Expert referred to the Defendant owing money to the Naeem. The Naeem is not a legal entity. The Concession Agreement was made by the company that was, and was described as, the owner of the hotel at the time the contract was made.
38. The Expert sent his draft report to the parties. The Defendant objected to the Expert's report stating first:
“The absence of any capacity of the company that filed the case and there is no relationship with it and has nothing to do with the agreements concluded with the hotel and the Naef, and that the latter is a limited liability company and enjoys a legal personality and financial liability independent of the persons of its partners and their financial liability, and it is not legally permissible for the [Claimant] company - a limited liability company - to own a limited liability company, which means that the [Claimant’s] company has no capacity in the contracts concluded or in filing this case.”
39. In his report the Expert responds to this objection as follows:
“The subject of the relationship between the plaintiff Normand (one person) and issued by the UAE, Naef, owned by Normand (a copy of which is provided by the plaintiff) is a legal subject and therefore the goodness is left to the justice of the esteemed court, which is the subject of deciding whether the [Claimant] has the right to initiate the present case or not.”
40. The Expert concluded that the amount owed by the Defendant to the hotel owned by the Claimant is AED 371,212.95 and left to the UAE Court to decide whether the Claimant has the right to initiate the present case or not.
41. The UAE delivered its decision on 28 December 2023. The Court stated that the Claimant’s attorney requested to dismiss the case and refer it to the competent court, while the defendant's attorney submitted a statement of objection to the expert report, and the judge supervising the case management decided to refer the case to the competent court, that is the DIFC Courts. The Court ordered:
“First: Dismissing the case against the Defendant.
Second: Obliging the Claimant to pay the expenses and an amount of one hundred Dirhams as attorney's fees.”
The Judgment
42. The Judge first considered whether the Settlement Agreement applies to the Claimant.
43. The Judge found that the Settlement Agreement does not extend to the Claimant and is unenforceable in this case for two reasons:
“First, the Settlement Agreement is entered into between the Defendant and Norwood which is owned by Neveah as confirmed in the Letter. Therefore, neither the Claimant nor its subsidiaries are relevant to the Settlement Agreement.
Secondly, the Settlement Agreement states that the Defendant shall release and discharge the Hotel and its affiliates from all liabilities and not the other way around. Therefore, the Settlement Agreement does not extend to the Claimant and is unenforceable in this case.”
44. The Judge then considered whether the Claimant has the legal capacity to file the Claim and request for payment.
45. The Judge observed that the UAE Judgment did not give its opinion on whether the Claimant is eligible to file this claim on behalf of Naeem, instead, it referred the matter to the Court for determination on the basis it is a legal principle. Nonetheless, the Judge noted that the UAE Judgment states that the Defendant is obligated to pay the outstanding amount to the Claimant.
46. The Judge observed that the Defendant acknowledged that it is liable to pay Naeem.
47. The Judge referred to Article 1.10 of the Concession Agreement, which reads as follows:
“This Agreement is entered into by Manager for and on behalf of Owner, as Owner’s authorized agent. All obligations of Owner specified in this Agreement shall be solely those of the party identified in Part 1 of Schedule 1 as Owner shall not be obligations of Manager; all rights of Owner specified in this Agreement may be exercised by Owner or by Manager as its authorised agent, and Concessionaire shall recognize and abide by all such instructions of Manager; all directions, notices and communications given by Manager to Concessionaire shall be treated as given by Owner, and all notices and communications given by Concessionaire to Manager shall be treated as having been given to Owner. Wherever this Agreements calls for a consent or approval of Owner, such consent order approval may be given by Manager on Owner’s behalf and shall have the same effect as if given directly by Owner.”
48. The Judge then said that given that Nat does not manage Naeem anymore and the Claimant does, the amount can be claimed by the Claimant as the owner of Naeem and authorised legal representative and the Defendant is liable to pay the Claimant.
49. The Judge concluded that the Claim shall succeed, and the Defendant shall pay the Claimant the amount of AED 371,212.95 and the Court filing fee in the amount of AED 18,560.63.
Claimant’s rights under Concession Agreement
50. The doctrine of privity of contract is part of UAE civil law. The principle is that the rights and obligations in a contract are enforceable only between the parties to the contract. Third parties cannot exercise or enforce rights under the contract: See Federal Law No. (5) of 1985 On the Civil Transactions Law of the United Arab Emirates Articles 125, 129, 141.
51. On the face of it, the Claimant cannot exercise or enforce rights under the Concession Agreement because it is not a party to the agreement.
52. The Claimant asserts it is entitled to recover the outstanding amounts owing by the Defendant under the Concession Agreement directly from the Defendant because it owns Naeem and is its legal representative.
53. The Claimant may have the legal right to stand in the shoes of Naveed and recover the debt under the principles of assignment or subrogation.
54. The Judgment did not find, the Claimant did not allege, and there is no evidence, that Naveed assigned to the Claimant its rights under the Concession Agreement, or any accrued debt owed to it by the Defendant.
55. A contractual right of subrogation may arise from a contract that explicitly provides that a company can pursue the debt owing by a person to another company. Such a contract must be clear and legally binding under the governing law of the contract.
56. In some cases, courts may allow Company A to recover a debt owing by a debtor, D, to Company B, based on principles of equitable subrogation. This may apply for example when Company A has paid off a debt that D owed to Company B, and it would be unjust to allow D to avoid repayment.
57. The Judgment did not find, the Claimant did not allege, and there is no evidence, that the Claimant has a contractual or equitable right of subrogation to any debt owing by the Defendant to Naveed.
Appeal has real prospect of success
58. Permission to appeal may be given only where the Court considers that the appeal would have a real prospect of success or there is some other compelling reason why the appeal should be heard: Rule 53.91 of the Rules of the DIFC Courts (the “RDC”).
59. The Court will allow an appeal where, amongst other things, the decision was wrong: RDC 53.87.
60. I find that the appeal would have a real prospect of success on the grounds that the decision was wrong in the following ways.
61. First, the Judge noted that the UAE Judgment states that the Defendant is obligated to pay the outstanding amount to the Claimant. I have not found, and the Claimant has not identified, a statement in the UAE judgment to that effect.
62. Secondly, the Judge observed that the Defendant acknowledged that it is liable to pay Naeem. The Defendant denies that it made such an acknowledgement, and it was not demonstrated on the Application Hearing that the Defendant made such an acknowledgement. Further, the Claimant is not Naeem, notwithstanding that it may now be managing or the owner of the Naeem.
63. Thirdly, the Judge said that given that the Claimant manages Naeem, the amount can be claimed by the Claimant as the owner of Naeem and authorised legal representative, and the Defendant is liable to pay the Claimant.
64. That finding is on its face wrong in law. A company cannot recover a debt owed under a contract to which it is not a party notwithstanding that it is now the manager or owner of the hotel to which the contract relates, or that it is in some sense an “authorised legal representative” of the contracting party to which the debt is owed.
65. Fourthly, there is a substantial case that the Claimant is not a party to the Concession Agreement and has no contractual or other right to recover from the Defendant any amount owing by the Defendant to a party to the Concession Agreement.
Claimant’s supplementary submissions
66. My conclusion in the preceding paragraphs is sufficient to grant the Defendant permission to appeal. However, at the Application Hearing, I granted the Claimant, at its request, permission to make supplementary submissions concerning the Claimant’s right to enforce the Concession Agreement. Out of respect for the Claimant and to assist the parties in the conduct of the appeal, I will set out my provisional views of the Claimant’s supplementary submissions.
67. In its supplementary submissions filed 18 September 2024, the Claimant asserted that it has the right to recover from the Defendant any amount owing by the Defendant to Naveed under the Concession Agreement on four bases. I will refer to each basis.
Separate legal personality
68. The Claimant refers to UAE Federal Law No. 2 of 2015 on Commercial Companies Article 8 - Definition of a Company, which provides:
“A company is a contract under which two or more persons are committed to participate in an economic enterprise with the objective of profit realization by contributing a share in capital or work and dividing between themselves the profit or loss resulting from the enterprise.”
69. The Claimant submits that, as the parent company of Naveed, it is entitled to enforce any rights or obligations arising from the Concession Agreement.
70. Federal Law No. 2 of 2015 on Commercial Companies has been repealed and succeeded by Federal Law No. 32 of 2021 on Commercial Companies. Article 8 of Federal Law No. 32 of 2021 is essentially the same as Article 8 of Federal Law No. 2 of 2015.
71. Federal Law No. 32 of 2021 on Commercial Companies Article 21- Legal personality of the Company - provides:
“1. The Company shall, as of the date of registration in the commercial register with the Competent Authority, acquire the legal personality in accordance with the provisions of this Decree Law and the resolutions issued in implementation hereof.
2. During the incorporation period, the Company shall have legal personality to the extent necessary for its incorporation. ….
3. Upon its dissolution, the Company shall undergo liquidation. During the liquidation period, the Company shall maintain its legal personality to the extent required for the liquidation process. …
4. Subsidiaries of a holding company shall have legal personality and financial liabilities independent of the holding company. This separation provides significant benefits, including limited liability for the owners, meaning they are only liable for the company’s debts up to the amount of their investment. This principle is fundamental to corporate law in the UAE and is crucial for fostering business growth and investment.”
72. Federal Law No. 32 of 2021 recognizes the principle that a corporation is a legal entity separate from its owners. A corporation, such as a limited liability company (LLC) has its own legal personality, separate from its founders and owners. The corporation may own property, enter into contracts, and be liable for its own debts and obligations independently of its shareholders. The principle that a corporation is a separate legal entity from its owners is enshrined in Articles 8 and 21 of the Federal Law No. 32 of 2021. A subsidiary of a company has legal personality and rights and financial liabilities independent of the parent company.
Subsidiaries
73. The Claimant refers to Article 269 of the 2015 Federal Law.
74. The equivalent Article in the 2021 Federal Law is Article 270 which provides:
“1. A Company shall be classified as a subsidiary of a holding company under any of the following conditions:
a. If the holding company holds a controlling interest in the Capital of the Company and controls the composition of its board of directors; or
b. If the Company is a subsidiary of a subsidiary of the holding company.”
75. The Claimant says that the nature of the parent or holding company’s control extends to the execution of agreements, disputes and any legal consequences that may arise from contracts involving the subsidiary and as a result the Claimant can step into the shoes of its subsidiary and enforce claims related to its operations.
76. The rights of a holding company in relation to its subsidiary must be considered in light of Article 21(4) referred to above to the effect that subsidiaries of a holding company shall have legal personality and financial liabilities independent of the holding company.
Doctrine of piercing the corporate veil
77. The Claimant submits that the principle of piercing the corporate veil allows courts to disregard the separate legal personality of a company such as a subsidiary in cases where the parent company exercises control over it, effectively making the parent company liable for its actions and entitled to its legal benefits.
78. Piercing the corporate veil is a legal doctrine that allows the court to hold the shareholders personally liable for the actions of a corporation in certain limited circumstances.
79. I am not aware of any principle, and the Claimant has not referred to any Federal Law, principle, or authority where the doctrine applies to allow a holding company to recover a debt owed to its subsidiary. Such an outcome is not consistent with the rationale underlying the doctrine – to hold shareholders responsible for actions of a company to prevent the misuse or abuse of the corporate form and to serve as a safeguard to ensure that the corporate entity is not used as a shield for wrongful conduct.
The concept of standing
80. The Claimant says that standing refers to the legal right of a person or entity to initiate a lawsuit or claim in court. The Claimant says that in the context of commercial and corporate law, standing is particularly important in cases involving multiple corporate entities, where one company may act on behalf of or in the interests of another entity.
81. The Claimant refers to Article 3 of the UAE Civil Procedures Laws No.11 of 1992 which provides that for a claim to be admissible the claimant must have stood, meaning they must be directly affected by the outcome of the dispute.
82. The Claimant has not provided the text of Article 3, and I have not found a text that says what the Claimant says it says. However, that does not matter. The Claimant’s argument fails for other reasons.
83. Federal Law No.11 of 1992 Concerning Issuance of the Civil Procedures Code has been repealed by Federal Decree-Law No. 42 of 2022 Promulgating the Civil Procedures Code and its amendments (The New Civil Procedures Code).
84. The New Civil Procedures Code applies to onshore UAE courts. It does not extend to the DIFC Courts or the Abu Dhabi Global Market (ADGM) Courts, as these jurisdictions have their own separate legal frameworks and procedural rules.
Conclusion
85. For the reasons stated, the appeal would have a real prospect of success.
86. Therefore, the Defendant will have permission to appeal.