Plantation Holdings (FZ) Llc v Dubai Islamic Bank PJSC

This is an application by the Claimant for summary judgment against the Defendant and an order for an interim payment of damages.

The Claimant was the developer of a polo and equestrian facility in Dubai. The polo fields were to be surrounded by villas, a hotel, rented flats and business units. The land had originally been leased to Mr. Fitzwilliam but he assigned his interest to the Claimant in December 2004. Mr. Fitzwilliam owned 70% of the shares in the Claimant and Mr. Cornelius and Mr. Ridley each owned 15%. I shall refer to the facility to be developed as the Plantation Project.

In June 2007 a Dubai law known as Law No.8 was passed. Its purpose was to protect those who purchase “off-plan”. A regulator, RERA, was created and developers were required to be registered. They were also required to open an escrow account into which payments made by off-plan purchasers were to be deposited.

In mid-2007 the Bank learnt that money it had provided to certain companies for trade finance transactions had been fraudulently diverted into long-term capital projects, including the Plantation Project. It is said that Mr. Cornelius and Mr. Ridley were involved in this fraud. The Bank entered into negotiations with the trade finance companies, the individuals said to be involved in the fraud, the Claimant and Mr. Fitzwilliam. They resulted in a Restructuring Agreement (the “RSA”) dated 19 August 2007, though its effective date was 2 October 2007. The RSA provided for payment to the Bank of US$501 million (the “Rescheduling Amount”) and for the Bank to have a conditional assignment of the lease which could be perfected in certain circumstances.

On 9 June 2008 the Bank alleged that the Claimant had committed four breaches of the RSA and required the breaches to be remedied within 15 days. On 20 July 2008 the Bank perfected the assignment of the lease and thereby took control of the development.

The Claimant contends in these proceedings that the Bank had no right to take that action and that as a result of the Bank’s actions the Claimant has suffered substantial losses. It is said that in July 2008 the lease was worth between US$1 billion and US$2 billion.

This application for summary judgment has been made because, the Claimant says, the Bank has no real prospect of establishing at trial that its actions were justified by the terms of the RSA. An interim payment of damages in the sum of some US$440 m. is also sought.

The basis of the Claimant’s case is that the four events of default relied upon by the Bank in June 2008 were not in fact events of default under the RSA and accordingly the Bank was not entitled to enforce the security to which it was entitled under the RSA. It is therefore necessary to consider each of the alleged events of default.

The notice of default (or as the Bank preferred to call it, the cure notice, because it required the alleged defaults to be cured within 15 days) alleged that in breach of clause 7.2(d) of the RSA the Claimant had failed to pay all Plantation Villa Proceeds to the Bank. I was told the sum of the proceeds was about US$4 million.

Clause 7 of the RSA provided as follows:

7.1

Subject to the provisions of clauses 7.2 and 7.3 the Company and the Parent will repay the Rescheduling Amount to the Bank in instalments on each Repayment Date. The amount that shall be repaid to the Bank on or before each Repayment Date is the amount set out in Schedule 2 (Repayment Schedule) corresponding to such Repayment Date and in the case of the Parent limited to the Parent Advances.

7.2

The Guarantors shall take reasonable steps to procure that all of the following proceeds and any proceeds derived from the following sources (in each case net of any associated transaction costs including without limitation necessary and incidental amounts payable to third parties) shall be applied forthwith upon receipt and in mandatory prepayment of the Rescheduling Amount:

(a)

the CCH Collection Accounts (subject to amounts redrawn in accordance with clause 4.3);

(b)

the CCH Agency Receivables (subject to amounts redrawn in accordance with clause 4.3);

(c)

any part of Ryan Cornelius’ (whether direct or indirect) ownership interest (including any dividend or other related asset) in the Bahrain Project;

(d)

the Plantation Villa Proceeds so far as they exceed US$150,000 per month provided that such sum has been disbursed or committed to the purposes of the development of Plantation Project;

(e)

any part of Ryan Cornelius’ ownership interest (whether direct or indirect) including any dividend or other related asset in the Pakistan Project save as (i) reasonably required by any purchaser/financier to be applied in the Pakistan Project and/or (ii) as provided for in relation to 10% of the said ownership interest under the Fitzwilliam Cornelius Agreement;

(f)

any sale proceeds from Material Assets not reasonably required for ordinary living expenses; and

(g)

any Proceeds Assets.

7.3

With the exception of:

(a)

amounts retained for the reasonable working capital requirements of the respective projects; and

(b)

Earmarked Plantation Proceeds,

on the last Business Day of each calendar month:

(c)

Plantation and Arthur Fitzwilliam undertake that all cash received by Plantation in respect of the Plantation Project (save for any cash received in relation to sales made before the date of this Restructuring Agreement; and

(d)

Ryan Cornelius undertakes and shall procure that all cash received by him or others in respect of the Pakistan Project

shall be paid to the Bank to be applied towards the Rescheduling Amount.

The Claimant was one of the Guarantors obliged to make payments to the Bank pursuant to clause 7.2.

Plantation Villa Proceeds were defined as “the proceeds, when collected, of sale of plots in the residential villa element of the Plantation but excluding: (a) Earmarked Plantation proceeds and (b) those Plantation Villa proceeds received in respect of sales of plots made prior to the Effective Date.” Earmarked Plantation Proceeds were defined as “those amounts of Plantation Villa proceeds that are: (a) escrow proceeds; or (b) required by law to be applied for building or other specified purposes.” escrow proceeds were defined as “those amounts of Plantation Villa proceeds required by Law to be retained on escrow, but only for so long as they must remain in escrow or applied in accordance with Law.” Law was defined as “any federal, state, local or foreign law (including common law and equity), statute, code, ordinance, rule or regulation.”

It was common ground (Footnote: ¹) that, on the true construction of the RSA, clause 7.2(d) and the above definitions required the proceeds of sale of villa plots (in excess of the sum of US$150,000) to be paid to the Bank unless they were required by law to be retained on escrow or required by law to be applied for building or other specified purposes.

It was the case of the Claimant that the proceeds of sale were required by Law No.8 to be retained on escrow or to be applied for building or other specified purposes. It therefore followed that the Claimant had no obligation pursuant to clause 7.2(d) of the RSA to pay the proceeds to the Bank. Thus the important allegation of fact that the Claimants had to establish was that, as a matter of Dubai law, Law No.8 applied to the sale of villa plots by the Claimant. In this action the Claimant says that it does and the Bank says that it does not.

Law No.8 provided by article 3 as follows:

“This Law will apply to developers who sell Units off-plan in Real Estate Development projects in the Emirate and who receive payments from purchasers or financiers towards such Units.”

Real Estate Development was defined as “projects for the construction of residential or commercial multiple storey buildings or compounds”. A Unit was defined as “any designated part of the Real Property that the Developer sells to third parties.” Real Property was defined as “anything which is fixed and cannot be moved without damage or alteration of its structure.”

My understanding was that the sales were “off-plan” (in that the number of the plot was identified on a plan) but that what was sold was the bare plot. The construction contract for the villa came later; see the statement of Miss Sutherland, the Claimant’s project development officer, at paragraph 39 and footnote 2.

Counsel for the Claimant submitted that because RERA informed the Claimant and the Bank at a meeting (thought to have been in December 2007) that Law No.8 applied and required Law No.8 to be obeyed it followed that the Claimant was “required by law” either to pay the proceeds into an escrow account or to apply them for building or other specified purposes.

Counsel for the Bank submitted that what was “required by law” depended upon the true construction of Law No.8. In this regard the Bank had adduced evidence from a Dubai lawyer that Law No.8 did not apply to the sale of bare plots of land. He explained: “There is no construction involved in such sale and hence no overriding risk to the purchaser of non-fulfilment of the contractual delivery of the bare land.” The Claimant had also adduced evidence from another Dubai lawyer who was of the opinion that Law No.8 did apply to sales of villa plots by the Claimant. He said “the law applies to the developer who sells “off-plan” units in real estate development projects in Dubai and receives payment from purchasers or financiers in consideration of the sale ……….in the light of the definition of “Unit” (wahda) and “Real Property”…….the word used in Arabic (wahda), the translation of which is “Unit”, could indicate either a bare plot or a plot with construction thereon.” Counsel for the Bank submitted that matters of foreign law were issues of fact for the court to determine and that determination could only take place at trial. The dispute between the parties could not be determined on an application for summary judgment.

The question for the court on this application is whether there is a real, as opposed to a fanciful, prospect that the Bank may succeed in its defence at trial. Reference to TFL Management Services Limited v Lloyds Bank PLC [2014] 1 WLR 2006 shows that this means the defence is not merely arguable but that it carries some degree of conviction.

In my judgment it is, at the very least, arguable and with a real sense of conviction, that what is “required by law” depends upon the true construction of the law in question, in this case, Law No.8, rather than upon what RERA says is required by Law No.8. Indeed, the Claimant’s expert on Dubai law was asked: “Is the certification of the project by RERA conclusive of the fact that Law No.8 applied to Plantation?” He replied: “The certificate of accreditation of a project by Dubai’s Real Estate Regulatory Agency (RERA) only means that a developer filed an application to register with RERA and RERA has determined that Dubai Law No.8 of 2007 applies to the project. It is proof of compliance.” Although he was not asked whether the alleged statement by RERA in December 2007 that Law No.8 applied to the Plantation Project and RERA’s requirement that the Claimant therefore comply with it was conclusive of the fact that Law No.8 applied to the Plantation Project his answer to the question put to him does not give confidence that he would reply in the affirmative.

As to the application of Law No.8 to sales by the Claimant of villa plots in the Plantation Project I am unable to say that it is fanciful that the court may at trial accept the opinion of the Bank’s expert on Dubai law. His opinion that Law No.8 does not apply to the sale of bare plots of land can be said to derive some support from the purpose of Law No.8. The expert said that the intention had always been to protect purchasers who have paid sums towards purchase of the off-plan units in construction projects to ensure that those sums are protected, isolated and earmarked for the continuation of the construction of the project. For this reason his opinion carries with it a degree of conviction. Further, I was told by counsel for the Claimant in the course of his reply that in 2007 Mr. Fitzwilliam himself put forward to RERA the opinion that Law No.8 did not apply “because they were plots which he was not going to build the villas on”. Counsel accepted that this was the same argument as the Bank is now advancing. Mr. Fitzwilliam is not a Dubai lawyer but he was closely involved with the Plantation project and the fact that he in 2007 apparently put forward the same argument as the Bank is now putting forward that Law No.8 did not apply gives some further support to the opinion of the Bank’s expert.

The Claimant’s expert relies not only upon textual points to say that there is no distinction between bare plots of land and plots of land upon which there is or will be construction but also upon what he describes as the rationale of Law No.8 which was “to guarantee the execution of a whole project by making sure that monies received by the developer (from purchasers or financiers) for the project, or any part of it, are only spent for the purposes of developing the project.” Further, as was very heavily relied upon by counsel for the Claimant, there is evidence that the Bank appears to have conducted itself in 2007 and 2008 on the basis that Law No.8 applied to the Plantation Project. That gives support for the opinion expressed by the Claimant’s expert. There is therefore a real and substantial dispute as to the true construction of Law No.8 and whether or not it applied to the sales of villa plots on the Plantation project.

Counsel for the Claimant said that the evidence of the Bank’s views and actions in 2007 and 2008 (as set out in Miss Sutherland’s witness statement and the documents to which she referred) “demonstrated beyond doubt that Law No.8 was applied to Plantation and specifically to villa plot sales”. Counsel submitted that the strength of the Claimant’s case is “overwhelming”, that the Bank is “incapable of mounting a consistent or credible defence”, and that “any factual defence advanced by the Bank is purely fanciful and incapable of being sustained as it is contradicted by every available piece of contemporaneous evidence, much of which emanates from the Bank itself.”

It may well be that the Bank (and the Claimant following the meeting with RERA) did in fact act on the basis that Law No.8 applied to sales from the Plantation Project but that fact does not demonstrate that the opinion of the Bank’s expert on the law of Dubai must be wrong, though it may be. It may lend support to the Claimant’s case but it is only part of the evidence relevant to the question whether law No.8 applies to sales from the Plantation Project. The opinions of the experts are also part, and an important part, of the relevant evidence. In my judgment the dispute between the experts and between the parties as to the application of law No.8 is unsuitable for determination on this application for summary judgment. It is to be noted in this regard that even the Claimant’s expert accepts that the “facts of this matter are complex and that there will be conflict of evidence”.

Counsel for the Bank had a further argument that if, contrary to their primary case, the requirement by RERA that Law No.8 be complied determined the question as to what was “required by law”, RERA did not in fact require compliance with the law until 27 December 2007 (when a grace period for compliance expired) in which case proceeds of sale realised before that date (but after the effective date of 2 October 2007) should have been paid to the Bank in accordance with clause 7.2(d) of the RSA. But in the light of my decision that the Bank’s primary case has a real prospect of success it is unnecessary for me to say anything further about this argument.

Counsel for the Claimant in their Skeleton Argument and in their opening submissions also relied upon the conduct of the Bank in 2007 and 2008 as giving rise to an estoppel by convention and by representation that Law No.8 applied. But the case of estoppel had been pleaded in the most general of terms (with no particulars of the estoppel, the reliance or the detriment) and in any event estoppel is a most unsuitable topic for summary determination. By the end of the hearing counsel had indicated that he was not pursuing the estoppel argument on this application.

Counsel for the Claimant advanced a further case (described as their second primary case) in support of the Claimant’s application for summary judgment. It is pleaded in paragraphs 39-42 of the Particulars of Claim. Paragraph 40 noted that by 29 May 2008 a sum of US$50 million was required to be paid by the trade finance companies in partial payment of the Rescheduling Amount. Paragraphs 41 and 42 then alleged:

“41.

By the relevant Repayment Date in this action ie 29 May 2008 the bank had been repaid the sum of US$60 m which exceeded:

(a)

the total sum received in Plantation Villa proceeds and any other proceeds referred to in Clause 7.2(a-c,e-g) by that time;

(b)

the cumulative repayment by instalments stipulated in Schedule 2 to be paid by that date.

42.

Consequently at the time of the bank’s perfection of the Conditional Assignment and exercise of its rights over the security on 14 July 2008 there had been no Event of Default and therefore no PEE.”

The Bank in its defence admitted paragraph 41 but denied paragraph 42.

There was much debate at the hearing as to precisely what was meant by paragraph 41 which caused Counsel for the Bank to suggest that perhaps they had misunderstood the plea and that it should not have been admitted.

In circumstances where it is accepted that no proceeds of sale were paid over to the Bank (see the transcript for day 3 of the hearing at p.93 lines 9-13) paragraph 41 cannot mean that any such proceeds were in fact paid over to the Bank. There also appears to be no dispute that the proceeds of sale received by the Claimant but not paid to the Bank totalled some US$4m. Thus the Claimant was obliged to pay those proceeds to the Bank pursuant to clause 7.2(d) and assuming Law No.8 did not apply to the sales from the Plantation Project. The mere fact that a much larger sum in excess of the US$50m. payable pursuant to clause 7.1 of the RSA had been paid to the Bank (Footnote: ²) did not excuse the Claimant from paying the US$4m of sale proceeds to the Bank. This was the view of Flaux J. when he determined the fraud action commenced by the Bank against, amongst others, Mr. Cornelius and Mr. Ridley; see [2013] EWHC 3781 (Comm) at paragraphs 144-147. The Claimant is not bound by that judgment but counsel did not challenge the view of Flaux J. as to the true construction of clause 7 of the RSA (see the transcript for day 3 of the hearing at p.73 lines 2-13 and p.77 lines 18-22).

I was therefore not persuaded that the Bank’s admission of the plea in paragraph 41 of the Particulars of Claim meant that there had been no event of default. It seems to me that the Bank has a real prospect of establishing at trial that, notwithstanding the admission of paragraph 41, there was still an event of default.

Counsel for the Claimant, in the course of their reply, raised an argument to this effect. It was submitted that if the Bank’s argument were correct the Claimant would have had “conflicting …..obligations under the same contract.” If Law No.8 did not apply then the Claimant would be bound to pay the sale proceeds to the Bank but since RERA said that Law No.8 did apply the Claimant would be obliged to comply with that statement and pay the sale proceeds into an escrow account pursuant to clause 16.1(f) which obliged the Claimant to “obtain, observe and renew all such authorisations consents and licences which are required in relation to its business.” However, it seems to me arguable, as suggested by counsel for the Bank at the end of the hearing, that the word “required” means “required by law” in which case this further argument adds nothing to the debate.

These breaches are alleged as follows:

2.

Failure to register as a developer with the Real Estate Regulatory Authority of Dubai pursuant to law No.8 of 2007, as required under clause 16.1(f) of the RSA.

3.

Failure to deposit sale proceeds from the Plantation Villas in an escrow account as required under Law No.8 of 2007.

These breaches are connected and both are alleged on the assumption that, contrary to the Bank’s primary case, Law No.8 applied to sales of villa plots on the Plantation Project. If it applied then the Claimant was required to register as a developer and the Claimant was obliged to pay the proceeds of the sale of the villa plots into an escrow account.

It is common ground that the proceeds were not paid into an escrow account. The Claimant’s case is that the Bank had failed to open an escrow account, that the Claimant was therefore unable to pay the proceeds of sale into an escrow account and that in those circumstances the Bank cannot take advantage of the Claimant’s failure to pay the proceeds of sale into an escrow account. The Bank’s response to this is that the Claimant could have opened an escrow account with any other bank but that in any event the reason why the Bank had not opened an escrow account in the name of the Claimant was that, in breach of the Claimant’s obligations under Law No.8 and/or clause 16.1(f) of the RSA, it had failed to obtain a registration in the name of the Claimant but had obtained a registration in the name of “Arthur Fitzwilliam (Plantation)”. The Bank had therefore opened an account in the name of “Arthur Fitzwilliam (Plantation)” but had been unable to open an account in the name of the Claimant. The Claimant’s response to this, supported by the witness statement of Miss Sutherland, was that RERA had required the account to be opened in the name of “Arthur Fitzwilliam (Plantation)” because Mr. Fitzwilliam had been the original lessee of the land which formed the Plantation Project and that in any event the registration which had been achieved complied with the Claimant’s obligations. In this regard reliance appears to be placed on a translator’s note.

The Bank’s case is supported by several contemporaneous emails. The registration was effected on 9 March 2008. It was forwarded to the Bank by Miss Sutherland on 23 March 2008. On 6 April 2008, in an internal email, one officer of the Bank wrote to another as follows:

“There has been a mistake in the approval, which shows Mr. Arthur Fitzwilliam as the owner. In fact the project owner is Plantation Holdings FZ (LLC) and Mr. Arthur Fitzwilliam is only the authorised signatory. This needs to be changed on the NOC (No Objection Certificate) for escrow account opening. ”

On 28 April 2008 the Bank emailed Miss Sutherland as follows:

“Despite our tries, the Land Department has refused to issue an approval for the Plantations Project in the name of Plantations FZ LLC. This because the Sales Purchase Agreement/Land Lease agreement with Dubailand is in Arthur Fitzwilliam’s name.

Therefore, for now, until we can arrange for a revised agreement in Plantations FZ LLC’s name, an account is to be opened in the name styled as

Escrow A/c-Plantations-Arthur Fitzwilliam.”

On 8 May 2008 the Bank confirmed that an escrow account had been opened in that name.

On 2 July 2008, after questions had been asked about paying sale proceeds into an escrow account, the Bank emailed Miss Sutherland as follows:

“Thank you for your emails re plots 70 and 110. You may recall that we have not yet opened an escrow account for Plantation due to [issues with RERA]. As a solution, what we suggest is that we set up a sub-account for Plantation pending the opening of an escrow account.

We can transfer the existing funds to the sub-account (plot 70) and also deposit the cheque for plot 110 into that account.”

Breach no.2 (and in consequence breach no.3) may appear somewhat technical and perhaps beyond the control of the Claimant. But the contemporaneous correspondence suggests that the form of registration was perceived to be a problem in the way of setting up the required escrow account in the name of the Claimant. In my judgment it is impossible to say on this application for summary judgment that the Bank’s second and third breaches are fanciful. There is contemporaneous evidence that the form of registration was perceived by the Bank to be a problem at the time and that representations had been made to RERA by the Bank but to no avail. In those circumstances the Bank must have a real prospect of establishing at trial both the second and the third breaches. I am unable to say, in the face of the contemporaneous correspondence, that such prospect is only fanciful or that the argument does not carry conviction. Thus all questions with regard both to the registration (the second alleged breach) and to the issue of who was responsible for there being no escrow account (which is relevant to the third alleged breach) can only be determined at trial.

The fourth breach is in these terms:

“Failure to supply copies of all sale and purchase agreements entered into by Plantation for the Plantation Project and requested by [the Bank] as required under clause 16.1(e) of the RSA.”

Clause 16.1(e) provided as follows:

“…Plantation ….will (e) provide the bank with such other financial or other information as the Bank may reasonably require from time to time. ”

The Bank’s case is that the relevant request for sale and purchase agreements was made on 5 June 2008, just four days before the default (or cure) notice was sent. None had been received since October 2007 when one sale contract had been provided following a request on 9 October 2007. The Claimant’s case is that sale contracts were not “financial or other information” within the meaning of clause 16.1(e) of the RSA and that, if they were, insufficient time had elapsed between Thursday 5 June (when the request was made) and Monday 9 June (when the default or cure notice was sent). The only working day in between those dates in Dubai was Sunday 8 June and so it could not possibly be said that by 9 June the Claimant was already in breach.

It seems to me arguable, in the context of this case, and with a degree of conviction, that sales contracts may fall within the phrase “financial or other information as the bank may reasonably require.”

With regard to the question of breach I accept that were the only request for these documents that which was made on 5 June it would be difficult to say that the Claimant was in breach of its obligation to provide such documents by 9 June. However, it was not the only request. An earlier request had been made on 9 October 2007. There does not appear to be a dispute that the Company replied to that request shortly afterwards. However, it is common ground that sales continued thereafter and yet no further sale contracts were supplied. It is arguable that it must have been obvious to the Claimant that copies of those sale contracts were required and yet none was supplied. In that context it is possible that the Bank may establish that the Claimant was in breach by reason of not having supplied the sales contracts by 9 June. Even if it could be said that that is a fanciful suggestion or, at any rate, one which does not carry any degree of conviction it would not be appropriate to deal with this single alleged breach on a summary basis in circumstances where the other alleged breaches must go to trial.

In the light of the Bank’s expert evidence from a Dubai lawyer who puts forward an opinion as to Law No.8 which was also put forward by Mr. Fitzwilliam in late 2007 (or early 2008 on the Bank’s case) this court cannot conclude that the Bank’s case on the first alleged breach is fanciful or that it is bound to fail by reason of the actions and conduct of the Bank in 2007 and 2008. If, however, the Claimant’s expert evidence as to the law of Dubai is proved at trial to be correct then the Bank will be able to rely upon its second and third breaches. The Bank’s case on these breaches may to an extent appear opportunistic (in the sense that the Bank seeks to make use of failures by the Claimant which may not have been of the Claimant’s own making and in themselves caused no loss to the Bank) but in the light of the contemporaneous correspondence to which I have referred this court cannot conclude that the Bank’s case is fanciful. For these reasons summary judgment must be refused and the case must go to trial.

In the light of my decision it is unnecessary for me to discuss the question of damages and whether or not an interim payment of damages should be ordered.