Sidra Capital (DIFC) Limited v Preecha Narula [2016] CFI 040

Claim No: CFI 040/2016

THE DUBAI INTERNATIONAL FINANCIAL CENTRE COURTS 

In the name of His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Ruler of Dubai 

IN THE COURT OF FIRST INSTANCE

BETWEEN 

SIDRA CAPITAL (DIFC) LIMITED 

                                                                                                            Claimant

and 

PREECHA NARULA 

                                                                                                Defendant

Hearing:          2-3 March 2015

Judgment:       7 October 2015

JUDGMENT OF H.E. JUSTICE SHAMLAN AL SAWALEHI

Summary of Judgment

 This summary is not part of the Judgment and should not be cited as such 

ORDER

UPON reviewing the Appellant’s Appeal Notice dated 18 September 2016 and the supporting documents filed against the Judgment of SCT Judge Natasha Bakirci dated 29 August 2016 (the “Judgment”)

AND UPON reading the submissions and evidence filed and recorded on the Court file

AND UPON reviewing the correspondence thereto

AND UPON reviewing Parts 44 and 53 of the Rules of the DIFC Courts (“RDC”)

IT IS HEREBY ORDERED THAT:

1. The Appeal against the Judgment is dismissed.
2. There is to be no order as to costs.

Issued by:

Maha Al Mehairi

Judicial Officer

Date of Issue: 16 January 2017

At: 10am 

REASONING

1.This is an appeal from the Judgment of SCT Judge Natasha Bakirci dated 29 August 2016 (“the Judgment”). The Judgment arose out of a case filed in the DIFC Courts’ Small Claims Tribunal (“SCT”) on 14 June 2016 by the Respondent, Mr Preecha Narula, an investment customer of the Appellant company. The Respondent sought damages as against the Appellant company for the incorrect purchase of an investment product.

2. Before the SCT Judge was the question of whether the Respondent was owed damages or reimbursement for the failure by the Appellant to provide the correct reverse convertible investment product (hereafter the “Product”). The SCT Judge found in favour of the Respondent in paragraph 90 of the Judgment, which stated:

“Therefore, under Article 37 of the DIFC Contract Law, the contract made between the parties via email on 18 December 2015 is void as for a mistake made by the Defendant. The parties agreed on a Product materially different than the one actually purchased and the Defendant failed to provide a prompt remedy. Therefore the contract is deemed void.”

3. Another question before the SCT Judge was the relevant remedy, regarding which the Judgment states in paragraph 93 that “the Claimant is entitled to receive his full USD $ 80,000 investment back from the Defendant in restitution of the Defendant’s mistake, but such restitution must be adjusted for the coupon amounts and redemption amount already received by the Claimant.”

4. The Appellant filed its appeal notice against the Judgment on 18 September 2016. The grounds of appeal were as follows:

“[1] The findings of the judgment where [sic] the result of a misapplication of the DIFC Contract Law to the facts of the case as the relevant facts do not suggest that there was any implication of invalidity for mistake because the contract was fully constituted. The facts rather raise a question of whether there has been a breach on the executed contract which calls for a different legal test and analysis.

[2] The judgment failed to apply the true legal effect of the remedial offer which was presented by the Defendant which would have essentially restored the Claimant to his original expected position under the contract. The effect of the Claimant’s refusal of the offer was not given its suitable weight taking into account the totality of the circumstances.

[3] There is no direct link between the remedy granted to the Claimant and the alleged breach of the Defendant. The Claimant’s loss was by no means the result of the Defendant purchasing the shares at the 9 December 2015 prices (which had only resulted in a $3,200 variation in the Claimant’s position) as the structured financial product did not achieve the intended profits due to the regular market movement which was a risk that was fully assumed by the Claimant.”

5. Although I initially dismissed the application for permission to appeal via an Order of 19 September 2016, the Appellant sought reconsideration of that decision at a hearing. After hearing the Appellant for reconsideration on 3 November 2016, I granted the Appellant’s application for permission to appeal via the Order of 6 November 2016. In this Order, I required the Appellant to pay the Judgment amount of AED 224,930 into the DIFC Courts as security in order to continue with the appeal. I also granted permission to appeal only as to “the issue of the application of the DIFC Contract Law.” The Appellant subsequently complied with the requirement to provide security into the DIFC Courts and thus the appeal proceedings moved forward on the merits. The parties have agreed for the appeal to be decided on the papers, without a Hearing.

6. The appeal, as it is an appeal from the Small Claims Tribunal, has limited scope and, in particular, attention must be drawn to Rule 44.143 of the Rules of the DIFC Courts (“RDC”), which read as follows:

“The Court of First Instance will allow an appeal from a decision of the tribunal where the decision was:

(1) wrong in relation to a question of law;

(2) unjust because of procedural unfairness or miscarriage of justice and/or;

(3) wrong in relation to any other matter provided for in or under the DIFC law.”

7. Considering that I have granted permission for a limited appeal, the only grounds against the decision of the Small Claims Tribunal must be that it gave rise to an error as regards a question of law. Any factual questions should be considered erroneous grounds of appeal and the parties have not made any arguments regarding procedural unfairness or miscarriage of justice and thus I shall not address these.

8. The Appellant’s grounds of appeal, which shall be discussed in further detail below, relate to the DIFC Contract Law in that the Small Claims Tribunal Judge erred in law by applying the law as relevant to mistake rather than as relevant to breach of contract. As the above relates exclusively to the application of the DIFC Contract law, I find that the appeal correctly falls under the scope of RDC 44.143.

9. I had the benefit of reading the submissions of both parties in reference to this appeal and have reviewed the case file and have decided the matter on the basis of the papers only. 

The Appellant’s Arguments

10. The Appellant argues in its initial submission in the appeal that the SCT Judge misapplied the provisions of the DIFC Contract Law relevant to mistake when the provisions relevant to breach of contract were instead appropriate given the facts of the dispute.

11. The Appellant contends that the facts of the case do not trigger application of the law of mistake, pursuant to Article 37 of the DIFC Contract Law, as there was a meeting of the minds between the Appellant and Respondent and thus the formation of a valid contract for purchase of the Product with prices of 18 December 2015. The Appellant then failed to honour the terms of that valid agreement by purchasing the Product with prices of 9 December 2015.

12. The Appellant continues that the Judgment is contradictory; the Judgment finds that a valid contract was formed pursuant to Articles 14 and 15 of the DIFC Contract Law relevant to offer and acceptance and then concludes that there was a legal mistake, which is a defect of formation. If a legal mistake had been made by either party, there would be no valid contract as the contract would be void for mistake.

13. The Appellant argues that the circumstances of the case are more appropriately analysed under Article 77 of the DIFC Contract Law which defines non-performance as “a failure by a party to perform any one or more of its obligations under the contract, including defective performance or late performance.” The Appellant contends that it failed to perform the contract as agreed. As neither party had a mistaken belief when forming the contract, the change in price is a defect of performance rather than formation.

14. Following from the application of Article 77 of the DIFC Contract Law, the Appellant argues that the remedial offer given to the Respondent on 26 January 2016 qualified as a valid offer to cure under Article 80 of the DIFC Contract Law. Article 80 provides:

“The non-performing party may, at its own expense, cure any non-performance, provided that:

(a) Without undue delay, it gives notice indicating the proposed manner and timing of the cure;

(b) Cure is appropriate in the circumstances;

(c) The aggravated party has no interest in refusing cure; and

(d) Cure is effective promptly.”

15. As the Appellant contends is mentioned in the Judgment, the Respondent only rejected this offer to cure for failure to address two elements of the Product that the SCT Judge found irrelevant to the dispute: purchase on the secondary market and inclusion of the three-stock barrier rule. This is not a valid reason to refuse the offer to cure. Furthermore, the delay in providing the offer was due to necessary investigation and was reasonable in the circumstances.

16. The Appellant argues that the Respondent should have accepted the Appellant’s offer to cure and he only failed to accept it due to his second thoughts about the risk level of the investment as a whole. This is not a valid reason to reject a valid offer to cure and furthermore, notice of termination of a valid contract for non-performance does not preclude the Appellant’s right to offer valid cure pursuant to Article 80(2) of the DIFC Contract Law. Thus, the Appellant’s valid offer to cure should have been accepted by the Respondent, effectively remedying any non-performance by the Appellant under the contract.

17. The Appellant argues that even under the theory of mistake, the SCT Judge was wrong not to properly consider Article 39 of the DIFC Contract Law, which states that “A party is not entitled to avoid a contract on the ground of mistake if the circumstances on which the party relies afford, or could have afforded, a remedy for non-performance.” The Appellant argues that their offer to cure falls under this provision and this should have been taken into account by the SCT Judge.

18. Finally, the Appellant argues that the SCT Judge misinterpreted Article 43 of the DIFC Contract Law. The Appellant contends that the SCT Judge incorrectly concluded that Article 43(1) requires that the remedial offer be made before the wish to avoid is communicated by the aggrieved party. The correct interpretation regards a situation where the party has changed his position in reliance on the notice of avoidance. In this case, the Appellant argues, the Respondent did not rely on the notice of avoidance as his funds were locked in the investment product and he had agreed to have them locked in for six months.

19. In its Reply submission, the Appellant argues that this appeal is only as regards those issues relating to the interpretation of the DIFC Contract Law as outlined in the Appellant’s application for permission to appeal (see paragraph 4 above). The Respondent should not be allowed to raise any defence seeking an order to alter the reasoning of the Judgment without first filing a Respondent’s Notice, pursuant to RDC 44.99 and 44.103. Thus, the Respondent’s below arguments as to the importance of the Respondent’s understanding that the Product would be purchased on the secondary market and that the three-stock barrier rule would apply as well as the Respondent’s arguments regarding fraud should be excluded from the appeal.

20. In sum, the Appellant seeks an Order overturning the Judgment, dismissing the Respondent’s claim on the merits and awarding the costs of the appeal to the Appellant.

The Respondent’s Arguments

21. As preliminary issues, the Respondent puts the Appellant to strict proof and also objects to the Appellant’s failure to include with its appeal a statement of truth signed by a senior officer. The Respondent points out that the Court may strike out a Statement of Case incorrectly filed without a statement of truth. The Respondent also argues that the scope of the appeal is the application of the DIFC Contract Law, as detailed in my Order of 6 November 2016 and that the Appellant did not raise their arguments regarding non-performance at the Small Claims Tribunal Hearing.

22. The Respondent’s main argument is that the SCT Judge was correct to find the contract for purchase of the Product void for mistake under Article 37 of the DIFC Contract Law. First, a validly formed contract may be set aside once the mistake has been revealed. The Respondent was unilaterally mistaken as to the essential terms of the Product as the Appellant both caused the mistake and was aware of it or should have been aware of it. Second, the Respondent was not satisfied with the offer to cure because he had other complaints about the Product and the offer to cure only addressed price. The Respondent continues that the SCT Judge did not ascribe sufficient weight to the Respondent’s other two concerns regarding the Product: it being purchased on the secondary market and it being subject to the three-stock barrier rule.

23. As my Order granting leave to appeal states that the appeal shall address “the issue of the application of the DIFC Contract Law,” the Respondent argues that the appeal is not limited to consideration of the price variance in light of the rejection by the SCT Judge of the three-stock barrier rule and secondary market issues.

24. In the alternative, the Respondent argues that the SCT Judge can and should apply the provisions of the DIFC Contract Law relevant to fraud, specifically Article 40, as the facts of this case merit application and would allow the Respondent to avoid the contract.

25. Furthermore, in response to the Appellant’s argument that provisions relevant to non-performance are more appropriately applied in this case, the Respondent reiterates that he was under the misconception that the Product was wholly different that it really was. If the Appellant’s argument regarding application of non-performance provisions is successful, the Respondent contends first that the Appellant admits non-performance and second that the Appellant’s offer to cure was not effective pursuant to Article 80 of the DIFC Contract Law. It came too late and was inappropriate given the circumstances.

26. In response to the Appellant’s argument that the SCT Judge misapplied Articles 39 and 43 of the DIFC Contract Law, the Respondent refers back to his own arguments regarding Article 80, stating that the Appellant’s offer to cure fails for the same reasons.

27. In sum, the Respondent seeks an Order dismissing the appeal and upholding the Judgment. The Respondent also seeks reimbursement of his legal costs relevant to the appeal. Finally, the Respondent seeks transfer of the sum of AED 224,930 being held by the DIFC Courts to him personally as security for the compliance with the Judgment.

Discussion

28. As this appeal relates only to the application of the DIFC Contract Law, the findings of fact in the Judgment below are valid and unquestioned. The only question relevant in this appeal is the interpretation of the DIFC Contract Law given the facts of the case. It is important to note that neither party made legal arguments as to the correct interpretation of the DIFC Contract Law in the below proceedings and instead only made submissions as to the facts of the case.

29. As a preliminary issue, I reject the Respondent’s arguments as to the Appellant’s failure to comply with Part 22 of the Rules of the DIFC Courts and as to the application of fraud to the case at hand. I also reject the Appellant’s argument that the Respondent cannot ask for a variance in the reasoning of the Judgment as I find no instance of the Respondent seeking to vary the below Judgment in the pleadings on appeal. While the Respondent states that the SCT Judge did not ascribe sufficient weight to the secondary market and three-stock barrier rule misunderstanding, the Respondent seeks an Order upholding the Judgment in full.

30. Thus, there remain three main issues to be addressed in this appeal. First, did the SCT Judge correctly apply Article 37 of the DIFC Contract Law to the dispute at hand. If not, a second issue is whether Articles 77 and 80 of the DIFC Contract Law would more appropriately apply in such a way to change the outcome of the Judgment. Third, if the SCT Judge did correctly apply Article 37, did she correctly consider Articles 39 and 43 of the DIFC Contract Law as relevant to the Appellant’s offer to cure.

31. I will address each of these issues in turn, responding to the arguments of both parties.

A. Is Article 37 appropriately applied to the facts in this case?

32. The Appellant states that legal mistake “is prescribed to deal with situations where one or more parties enters into a contract based on a mistaken believe [sic].” The Appellant continues that there is no such mistake in this case, and since the parties had a meeting of the minds via email, mistake cannot apply under the circumstances. As the contract was validly formed, any failure to adhere to the terms of the contract is a defect in performance, not a defect in formation.

33. The Appellant is incorrect in its interpretation of Article 37 of the DIFC Contract Law. In full, Article 37 reads:

“37. Relevant Mistake

(1) A party may only avoid a contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party would not have concluded it at all if the true state of affairs had been known, and

(a) the other party made the same mistake, or was also mistaken, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or

(b) the other party had not at the time of avoidance acted in reliance on the contract.

(2) However, a party may not avoid the contract if:

(a) it was grossly negligent in committing the mistake; or

(b) the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party.”

34. The Judgment explains at paragraph 82 that the ”mistake was that the contract stated the prices would be of 18 December 2015 but the actual Product was purchased with prices of 9 December 2015.” The Appellant continues to claim that as a valid contract was formed, there is no space for the application of legal mistake. However, the wording of Article 37 states otherwise. It includes the phrase “when the contract was concluded” implying conclusion of the contract and furthermore, includes circumstances whereby the parties cannot avoid the contract and thus the contract would remain valid. Legal mistake may only result in avoidance of the contract under certain circumstances as described in Article 37. Failure to meet these circumstances would mean that the party cannot avoid the contract and thus it is a valid contract. It follows then that a valid contract can be formed before it is avoided due to mistake, as avoidance due to mistake is not guaranteed under the Article.

35. Furthermore, although not specifically addressed in either parties’ submissions, I have had sight of the Term Sheet sent to the Respondent on 21 December 2015 detailing the final terms of his purchased Product which states that it was issued on 16 December 2015, well before the parties agreed on 18 December 2015. This provides support to a finding that the legal mistake was in effect before the parties agreed. The Judgment below did not make findings on precisely when the Product was purchased in relation to when the parties agreed on the details of purchase. The parties also did not make submissions as to the exact timing of the purchase, but this Term Sheet evidence was included in the proceedings below. While it is not necessary to make a finding in this regard, this evidence lends support towards application of Article 37 of the DIFC Contract Law.

36. Additionally, the character of the contract made between the parties on 18 December 2015 is for a single investment Product, not for a series of contract terms to comply with. This single product was purchased by the Respondent from the Appellant on 18 December 2015 and it turned out to be materially different than the Respondent understood it to be. This material difference or mistake was caused by the Appellant who either knew or should have known of the mistake and corrected it immediately.

37. Therefore, I find that the Judgment was correct in applying Article 37 of the DIFC Contract Law to the facts of this case for the reasoning included in the Judgment. There is no reason why parties cannot validly form a contract that is later deemed void for mistake. Furthermore, as the contract is for a single Product, the Appellant’s failure to comply with one material provision of the contract when it should have known the full terms of the agreement qualifies as a legal mistake which was caused by the Appellant.

B. Does Article 77 more appropriately apply?

38. I find that Article 77 and 80 of the DIFC Contract law do not appropriately apply due to the nature of the contract being for the sale of one Product, as detailed above, and due to the Appellant’s failure to provide the promised Product, instead providing a materially different product.

39. For arguments sake, even if Article 77 more appropriately applied, the Appellant has not made its case under Article 80 of the DIFC Contract Law as it has not proven, either in the appeal or in the case below, that its offer to cure met the standards provided in Article 80. In fact, the Appellant makes no reference to the need for delay in order to adequately investigate in its pleadings below and instead insisted that the offer to cure was enough in itself.

40. In the evidence submitted below, the Appellant makes no reference to an investigation until 16 January 2016. There was no explanation of the delay or the continual insistence from the Appellant’s side that the Respondent’s transaction was final and could not be undone. Therefore, the proposed cure would fail under Article 80(1)(a) for being provided only after undue delay.

41. Additionally, the proposed cure fails under Article 80(1)(c) whereby the “aggrieved party” did have a legitimate interest in refusing the cure. While the Appellant will argue that the Respondent was using the price variance issue to get out of the investment after having second thoughts, the Judgment clearly found at paragraph 86 that the “Claimant stated during the Hearing that he lost trust of the Defendant company and their personnel and did not wish to do further business with them.” This is reasonable under the circumstances and would justify the Respondent’s failure to accept the Appellant’s offer to cure.

42. Therefore, even under the theory of non-performance, the Appellant fails. Furthermore, under the theory of non-performance the measure of remedy awarded would likely be as per Article 110 of the DIFC Contract Law, which would require an award of both the loss sustained and any gain of which the Respondent was deprived. However, as detailed above, the Judgment was correct in applying the provisions of Article 37 rather than Article 77 and 80.

C. Were Articles 39 and 43 correctly taken into account?

43. The Appellant is correct that the Judgment does not address the possible application of Article 39 of the DIFC Contract law. The circumstances upon which the Respondent relied could have afforded a remedy for non-performance. However, due to the reasoning given for the Appellant’s failure to succeed on its argument under Article 80, application of Article 39 provides no adjustment to the reasoning given in the Judgment. A remedy for non-performance could not be afforded due to the Appellant’s delay and the Respondent’s legitimate interest in refusing the offer to cure.

44. The Appellant also argues that the Judgment misapplies Article 43 by requiring “that the remedial offer [] be made before the wish to avoid [wa]s communicated by the aggrieved party.” However, the Judgment clearly states at paragraph 87 that “The Claimant had repeatedly asked for his money back and seems to have committed his funds elsewhere in reliance on receiving a full reimbursement as evidenced by his WhatsApp messages. Thus, the Defendant cannot rely on Article 43 of the DIFC Contract Law.” Just because the Respondent’s funds were “locked in” does not preclude him from acting in reliance on his notice to avoid the contract. This is apparent and correctly stated in the Judgment below.

45. In conclusion, I find that the Appellant’s appeal must be dismissed, and that there be no order as to costs.

Issued by:

Maha Al Mehairi

Judicial Officer

Date of Issue: 16 January 2017

At: 10am

The post Sidra Capital (DIFC) Limited v Preecha Narula [2016] CFI 040 appeared first on DIFC Courts.