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Wednesday 16 December 2015

Success in the DIFC Court of Appeal

Rupert Reed QC and Jonathan Chew acted for Damac on it successful appeal in Damac Park Towers v. Ward.  


In this landmark decision, the DIFC Court of Appeal upheld the developer’s right to terminate a ‘reservation agreement’ for purchaser default

In its decision in Damac Park Towers Company Ltd v. Youssef Issa Ward, CA 006/2015, 14 December 2015, the DIFC Court of Appeal overturned a judgment in which a property investor had obtained the restitution of sums paid under a ‘reservation agreement’ terminated by DAMAC for persistent default.

At the core of the dispute was a narrow issue of construction as to how credit transferred from earlier agreements on which the investor had defaulted should be applied to the instalments under the new reservation agreement.  However, the judgment of the Court of Appeal is important in a number of respects.

Validity of reservation agreements

This is the first case in which the Court of Appeal has considered the effect of what are usually called ‘reservation agreements’ in Dubai.  These are the minimal agreements by which developers and purchasers bind themselves to the sale and purchase of a property, but in anticipation of a detailed written agreement that is to be issued by the developer in due course.

Chief Justice Michael Hwang agreed that such ‘open contracts’ are enforceable insofar as they identify the parties, the property and interest to be disposed of, and the consideration or means for its ascertainment.  All other necessary terms, such as the need to complete within a reasonable time, can be implied into the contract.

The fact that such open contracts are entered in the anticipation that they will be superseded by a more extensively drafted contract does not detract from the contractual certainty of the essential bargain between the parties [121].

The judge below had found an implied term that the developer should issue a detailed written agreement of sale within a reasonable time, which the judge found to be six months.  The Chief Justice disagreed, finding instead that a reasonable time for the issue of the sale agreement was at or before completion.  This was because that agreement would not materially affect the purchaser’s payment obligations, for which there was already detailed provision.

In assessing what was a reasonable time for the issue of an agreement of sale, the Court had to consider not only the obvious intention that the developer should have a wide latitude, but also, with the benefit of hindsight, the fact that the investor had never once requested the issue of an agreement of sale [130].

Repudiatory nature of any breach

A question that arises frequently in construction, development and purchase cases, in which there may be an exchange of termination notices and cross claims, is whether any particular breach is repudiatory, in the sense of evincing an intention no longer to be bound.

The Chief Justice, referring to the observations of Diplock LJ in Hongkong Fir Shipping Co v. Kawasaki Kisen Kaisha [1962] 2 QB 26 at 70, emphasised the distinction between an obligation to perform within a reasonable time and an obligation where time was of the essence.  He applied the common law test cited in that decision in asking whether the breach of an obligation to perform within a reasonable time ‘will deprive the party not in default of substantially the whole benefit which it was he intended he should obtain from the contract’.  Given that the purchaser, even without an agreement of sale, had significant rights under its reservation agreement, that test could not possibly be satisfied [135].

Commerciality in construing contracts

The Court of Appeal leant strongly towards construing agreements in accordance with commercial sense.  The English Courts have tended to commence any exercise in construing an agreement by reciting the ‘rule’ acknowledged in Investors Compensation Scheme Ltd. v. West Bromwich BS [1998] 1 WLR 896 that the starting point is the ‘natural and ordinary meaning’ of the words used.  In qualifying that rule, the Chief Justice agreed with Lord Steyn’s extra-judicial view in an article, ‘Contract Law: fulfilling the reasonable expectations of honest men’ 113 LQR 433 at 441, that it is often hard to identify that ‘plain and ordinary meaning’, and that the Court should be guided by the ‘contextual scene’.   Quoting further from the article by Lord Steyn, the Chief Justice continued: ‘[a]nd speaking generally, commercially minded judges would regard the commercial purpose of the contract as more important than niceties of language.’

The Court found that view to be reinforced both by the decision of the UK Supreme Court in Rainy Sky SA v. Kookmin Bank [2011] UKSC 50 at [21], and by the iterative process proposed by Lord Neuberger in Re Sigma Finance [2009] BCC 393 and endorsed by the Supreme Court [2010] UKSC 2 at [12].  That process involves ‘checking each of the rival meanings against other provisions of the document and investigating its commercial consequences’.

On the facts of this case, the investor had already fallen into arrears on previous agreements.  The Court accepted that DAMAC’s objective in agreeing to transfer credit to a new agreement was to secure cash flow by requiring the payment of a number of reduced instalments.  It was not to take further commercial risk by giving the investor immediate credit by dispensing with two instalments.  The Chief Justice noted the ‘surreal quality’ of the suggestion that the developer would have intended to take further risk by delaying the payments of a purchaser given the background of that purchaser’s historical defaults.

Construction by reference to subsequent conduct

The DIFC Contract Law departs from the English exclusionary principle in that its Art 51(c) expressly permits the Court to have regard to the parties’ subsequent conduct in interpreting their contract.  The Chief Justice found that the investor agreed to various extensions, and failed to mount any protest to a termination notice, that were in both cases premised on the developer’s construction of the reservation agreement.  The Court was not persuaded by assertions that the investor had not himself understood the basis of the calculations underlying those extensions and that termination notice [108].

Ability of Court of Appeal to consider new points

The Court of Appeal found that new points could be raised on appeal where their introduction at trial would not have affected the evidence adduced at trial.  Where the new point required no further factual investigation, so there was no complaint of prejudice, the interests of justice required that the point should be considered by the Court of Appeal.

The developer could even raise issues of fact, as long as those issues revolved around an inference to be drawn rather than a question of primary fact [70].  In this case, the references to the investor’s subsequent conduct could be characterised as raising issues of mixed fact and law.  However, because the investor’s knowledge was matter of inference and because the developer relied on limited facts and evidence, it was difficult to see what further evidence the investor would have given to rebut the inference that he knew of and accepted the developer’s construction.  The Court of Appeal was fully entitled under RDC 44.141 to draw that inference for itself [77].

Issues of construction, such as the argument in this case as to a payment schedule, are unlikely to require any further evidence [72].  The developer was therefore not prevented from taking new points of construction.  It was not enough for the respondent to refer in general terms to the factual background or to suggest that witnesses could have been examined differently.

There is some tension between this relatively liberal approach to the taking of new points on appeal and the more restrictive approach taken by the DIFC Court of Appeal in Dattani & Rahman v. Damac Park Towers Company Ltd, CA 007/2014 (10 November 2015).  In that case, Justice Roger Giles declined to consider a new argument as to the invalidity of a termination notice served by reference to a contractual term that made no provision for any right of termination [64]-[65].

Nature of restitution

The Court of Appeal considered the nature of a restitutionary claim in DIFC law, exploring the connection between traditional vitiating factors such as mistake and the necessary finding that the relevant enrichment was unjust [137]-[145].

Click here to download the judgment

Author: Rupert Reed QC

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