Claim No: CFI 002/2016
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
BEFORE DEPUTY CHIEF JUSTICE SIR DAVID STEEL
BETWEEN
DAS REAL ESTATE OWNED AND REPRESENTED BY MUSSABEH SALEM MUSSABEH HUMAID ALMUHAIRI
Claimant
and
FIRST ABU DHABI BANK PJSC (FORMERLY NATIONAL BANK OF ABU DHABI PJSC)
Defendant
Hearing: 7-9 March 2017
Counsel: David Thomas QC and Jim Delkousis instructed by DLA Piper for the Claimant
Yacine Francis and Christopher Mainwaring-Taylor of Allen & Overy for the Defendant
Judgment: 10 August 2017
JUDGMENT OF DEPUTY CHIEF JUSTICE SIR DAVID STEEL
Summary of Judgment
| The main issue in this case is to establish whether the Defendant’s termination of a loan facility to the Claimant was lawful.
By a Facility Agreement between the Claimant and the Defendant (Facility Agreement), the Defendant had agreed to provide a loan facility to the Claimant up to AED 708,000,000 to cover 100% of the construction cost of a five-star hotel and residential apartment building on a plot in Jumeirah. The Parties have agreed various preliminary issues to determine whether NBAD’s demand for acceleration and payment of the loan was valid or whether the bank was in breach of the Facility Agreement. If it was valid, that would be the end of the proceedings; if it was not, the Court will have to determine the Defendant’s liability in damages. The first issue was whether the Defendant’s notice dated 21 May 2015 was a valid and lawful exercise of its rights under Clause 23.13 of the Facility Agreement (on Acceleration). Justice Sir David Steel considered that the terms of Clause 23.2 of the Facility Agreement were clear and unambiguous and that there was no basis for treating the ordinary meaning of the clause as excluding the need for a notice if non-compliance was not capable of remedy. If failure to complete the project by 31 March 2015, which was common ground, was to be an Event of Default, the clause could simply have so stated. The judge held that there was no event of default arising from the failure to achieve completion by 31 March 2015 and to the extent that the Defendant’s notice of 21 May 2015 relied upon such an event of default it was invalid. The second issue related to compliance with various Conditions Subsequent. The judge held that the Claimant had failed to comply with Conditions 1, 2 and 4 of the Conditions Subsequent in Schedule 2 to the Amendment Agreement (“ARA” – executed on 28 September 2014 and reflecting an increase in the Facility) timeously or at all. As regards the Claimant’s reliance on Article 135 of the UAE Civil Code which provides that “(i) a person who remains silent shall not be deemed to have made an utterance but silence in the face of need is tantamount to a statement and shall be regarded as acceptance,” when arguing that the Defendant had waived any right to rely upon the non-provision of documents, the judge emphasized that the case did not concern principles of waiver as a matter of English law. The starting point had to be the question whether there was “silence” within the meaning of Article 135. The judge accepted the Defendant’s evidence that the Claimant was repeatedly told that non-compliance with the Conditions Subsequent would lead to the halt of payments with all other rights reserved. In any event there was the secondary question whether there was a “need” to speak. The terms of Article 135 of the UAE Civil Code are not easy to operate in the present context. Silence in the face of “need” amounts to “acceptance”. It was not made out that there was a need in the sense that otherwise it was accepted that compliance with the Conditions Subsequent was conceded or rendered unnecessary. Indeed given the terms of Article 30 of the ARA it is difficult to accept that any reservation or right or other oral or written warning was “needed.” Ultimately the judge found Article 135 of the UAE Civil Code to be inapplicable to the circumstances of this case. As for the Claimant’s invocation of Article 246 of the UAE Civil Code which provides that: “(i) the contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith,” the judge found no basis for a complaint of want of good faith. The third issue related to Clause 23.11 of the ARA which provides that there is an event of default of circumstances where “in the reasonable opinion of the Lender there is a Material Adverse Effect”. In determining whether it could be held that the Defendant formed the requisite opinion, the starting point was the factual circumstances in which the loan was accelerated. The judge found that the conclusion that there had been a material adverse change could be readily accepted as honest and rational. It would further be right to infer that it was not just reasonable but inevitable that any competent bank would form the opinion that there had been a Material Adverse Effect. Consideration of all the circumstances and the advice being received by the bank led to the conclusion that the decision to terminate the loan was taken against the background of the bank having formed the requisite opinion. The judge was not persuaded that the Defendant was precluded from relying on Clause 23.11 by reason of its absence from the list of events of default in the demand letter or that any such allegation had been waived. This rendered it unnecessary to consider the allegations of bad faith in failing to call evidence of the relevant opinions. It was held that the Defendant had made good the contention that it was entitled to accelerate the loan by reason of Material Adverse Change. In sum, the judge decided that: there was (i) no event of default under Clause 23 of the Facility Agreement as a result of the Claimant’s failure to achieve Development Completion by 31 March 2015, pursuant to Clause 22.5 and 23.2 of the Facility Agreement; (ii) there was a material adverse change pursuant to Clause 23.11 of the Facility Agreement; (iii) there was an event of default as a result of the Claimant’s failure to comply with Conditions Subsequent in Schedule 2 to the Amendment Agreement; and finally that; (iv) the Defendant was not precluded from relying upon its rights under Clause 23.13 by reason of the matters pleaded by the Claimant in certain paragraphs of its Particulars of Claim and Amended Reply. |
This summary is not part of the Judgment and should not be cited as such
ORDER
UPON hearing Counsel for the Claimant and Counsel for the Defendant from 7-9 March 2017
AND UPON reading the submissions and evidence filed and recorded on the Court file
IT IS HEREBY ORDERED THAT:
1.There was no Event of Default under Clause 23 of the Facility Agreement as a result of the Claimant’s failure to achieve Development Completion by 31 March 2015, pursuant to Clause 22.5 and 23.2 of the Facility Agreement.
2. There was an Event of Default under Clause 23 of the Facility Agreement as a result of a material adverse change pursuant to Clause 23.11 of the Facility Agreement.
3. There was an Event of Default under Clause 23 of the Facility Agreement as a result of the Claimant’s failure to comply with any Conditions Subsequent in Schedule 2 to the Amendment Agreement.
4. Further to paragraphs 3 and 4 above, the Defendant was not precluded from relying upon its rights under Clause 23.12 by reason of the matters pleaded by the Claimant at various points of its Particulars of Claim and/or the Amended Reply, as set out in the agreed preliminary issues.
5. Costs reserved.
Issued by:
Lema Hatim
Assistant Registrar
Date of Issue: 10 August 2017
At: 2pm
Introduction
1.This judgment follows a trial of certain agreed preliminary issues as regards liability. The purpose of the determination is to establish whether the Defendant’s termination of a loan facility to the Claimant was lawful.
2. The Claimant (“Das”) is a proprietorship establishment solely owned by Mussabeh Salem Mussabeh Humaid Almuhairi (“Mr Almuhairi”). DAS is the developer of The Langham, a property being built on plot number #C-03 Sector Plot # 31, situated on the Crescent, Palm Jumeirah, Dubai, a plot owned by Mr Almuhairi.
3. The Defendant (“NBAD”) is a bank based in Abu Dhabi, UAE.
Documentary chronology
4. By a Facility Agreement between DAS and NBAD dated 4 June 2008 (the “Facility Agreement”) NBAD agreed to provide a loan facility to DAS up to AED 708,000,000 to cover 100% of the construction cost of a five-star hotel and residential apartment building on the plot.
5. By a mortgage deed dated 9 October 2007, Mr Almuhairi had mortgaged the Plot (inclusive of any constructions thereon) to NBAD to a value of AED 708,000,000. The original expiration date of the Mortgage was 30 June 2015 but was extended by agreement on 1 October 2014 until full repayment was made.
6. In 2007, a building permit was issued for construction of the project. Construction works commenced in early 2008 and piling works were completed by a specialist contractor in August 2008. However, in April 2009, and in the circumstances of the global financial crisis, the project was halted and a construction contract for the main works was not awarded at that stage.
7. In 2010, the Project was restarted and redesigned as a five star, 323 room, luxury hotel only. At this stage, it was to be known as the Seaview Club. The Facility Agreement was amended on 28 February 2010 to the effect that the loan was reduced to AED 444,000,000 in line with the revised and scaled down development.
8. On 22 May 2010, DAS entered into a contract (the “Construction Contract”) with Intermass Engineering and Contracting Company LLC (“Intermass”) to complete the civil works, the mechanical, electrical and plumbing works and fit out of the corridors and lobbies necessary for the construction of the Project, together with all coordination with other contractors on the site. The commencement date for the Works was 15 July 2010 and the completion date 16 May 2012. The (original) contract price was AED 266,983,950.19. The Employer’s Representative under the Construction Contract was, at all relevant times for the purposes of this proceeding, Arif & Bintoak (“Arif”). Hepher Quantity Surveying (“HQS”) were the cost consultants.
9. However, the works were delayed (and the costs mounted). Indeed, the works were not anywhere near finished by September 2012 and continued into 2013 and 2014. In this period, in late 2013, NBAD required DAS to appoint EC Harris International Ltd (“EC Harris”) as project monitoring surveyors. In accordance with the terms of the Facility Agreement, EC Harris were to report to NBAD.
10. Their first report was dated December 2013. In the summary, it was stated as follows:
“Progress Overview
The project is around 65% completed and the on-site productivity is at a very low ebb. Only 220 workers are present and we would expect at least 600 at this stage. We understand that the August valuation was paid in September but no further valuations have been certified or paid.
The contractor was unable to produce a reasoned critical path programme to completion and whilst the most recent extension of time now states the date for completion as 31 March 2014 our high level assessment would not anticipate full completion prior to the fourth quarter of 2014. Thus there is an unresolved period circa 9-12 months during which a commercial agreement must be found with either the current contractor or others to complete the scheme.”
11. Presentation of this report to NBAD as to delay and want of productivity led to the following letter from NBAD to DAS dated 25 December 2013 focusing on the cost overrun and the potential failure to meet instalments as they fell due:
“Subject: Sea View Club Hotel Project Palm Jumeirah, Dubai
We refer to the subject project and to our regular discussions covering the various aspects and issues related to the project, and in particular the total cost to completion.
We have repeatedly expressed our concerns and worries about the sufficiency of the budget to bring up this development to full completion and expressed our worries of developing element of cost overrun. However, we were always assured by your side that the total development cost of the project would be well contained within the original budget of AED 444 million. We now observe from the report of EC Harris that your budgeted forecast for the development cost that you shared with them incorporates an increase of AED 93 million over and above the budget known to us of AED 444 million presenting a new total development cost of AED 537 million and that this new budget is still excluding pre-opening expenses, piling claims and bank finance charges.
This material change was not disclosed or shared with us previously during any of our meetings or discussions as well as during any of site visits of engineers from Abu Dhabi National Properties.
Accordingly, we seek your kind cooperation in providing the full information breakdown on the project cost to completion highlighting areas that were subject to increased cost and incorporating your detailed action plan and identified sources of funding to meet the reported increase in development cost as well as any possible future variations.
Equally important that you please provide us with the detailed updates on the progress of your negotiations with the potential buyer(s) on your intended sale of the hotel, appointment of lead consultant and hotel operator.
Meanwhile, please note that the Availability Period and first instalment date of the subject project term loan facility of AED 444 million is currently in past due since 30/11/2013 in line with Facility Amendment Agreement dated 12/09/2013.
Please share with us urgently your action plan to remedy this past due status to enable us to approach higher management with comprehensive report and satisfy banks concerns.”
12. A revised version of the EC Harris report was prepared on 8 January 2014 and was no more encouraging. It stated:
“Summary
…
It is stressed that the project is in a very poor state with unresolved commercial claims, an unclear programme, no development budget and an incomplete design. In particular the lack of a development budget has prevented us from completing a formal commercial due diligence and we are only able to compare the stated costs against benchmarks.
High Level Commercial Overview
Based on our review of the information provided to date, it is our opinion that Sea View Club Hotel is suffering from under investment in line with similar 5 Star hotel developments of this nature.
- Current DAS Forecast Budget AED 537 million (excluding Bank Charges, piling claim, pre-opening expenses)
- EC Harris Estimated Budget AED 650 million (based on a 5 star hotel cost rate)
- Variance of circa 17%
There is the risk that the owners’ costs could increase if further variations are required and if other substantiated contractors claims are made. We believe that this is a high risk.”
13. Both versions assessed the achievability of the completion date as follows:
“Discussions and synopsis
The contractor’s projection of September 2014 excluding commissioning (a further 8 week allowance should be made) is not however considered unreasonable based on the available information and apparent work required however this date is at risk since it would appear that crucial information is absent. In order to be able to give a clearer projection and formulate a target programme it would be necessary to undertake a full design coordination review (see section 5) and then consider outstanding procurement requirements and from this build a master schedule at level 3 detail. This exercise is not a task that is within the scope of any one of the consultant team currently.”
14. It is of some further note in connection with NBAD’s letter of 25 December 2013 that at a meeting between Mr Almuhairi (and his Finance Director Mr Jean-Sebastian Block) with representatives of NBAD two days earlier on 23 January 2014, the minutes of the meeting prepared by NBAD records that Mr Almuhairi explained that the amendment to the Facility Agreement in February 2010 had been “signed by them in haste and was not properly reviewed”. In the result, the due date of the first instalment of 30 November 2013 was not “appreciated” and was in fact “unacceptable”. Mr Almuhairi was not disposed to accept the accuracy of that record but I see no reason to doubt it.
15. NBAD wrote to Mr Almuhairi again on 4 February 2014 spelling out its concerns as to the management of the project and drawing attention to the fact that the first instalment was already 2 months overdue:
“It remains critical for us to understand your action plan with respect to putting the project back on track and settling the past due payments. In this regard we note, amongst other things, the following concerns/irregularities:
- Significant cost overrun of more than AED 200 million as indicated in the EC Harris report
- Continued delays in execution with no certain date of competing and no independent project manager
- Absence of identified hotel operator leading to added uncertainty with respect to the end state of the project, the completion date and the final cost
- Absence of a clear action plan to finance the cost overrun and settle the bank’s past dues
- Recent indication that you might not be interested in completing the project and are exploring a possible sale of the property with no time frame stipulated
- …
- I would like to bring to your attention the fact that if AED 42 million instalment is now more than 60 days past due. This puts us in a situation where we would have no choice but to classify the account as substandard if past dues persist based on our internal policies and Central Bank regulations.
The Bank reserves all of its legal and contractual rights under the DAS Real Estate Financing…”
16. A yet further version of the EC Harris report was produced in April 2014 which repeated the recommendations made in December. The summary read as follows:
“1.2 Summary of Findings and Next Steps
The commercial management of the development does not exist in one place and this has made compilation of the development budget challenging. The following items summarise the position and recommend a way forward for the project. There remain some items that still deserve some clarity and also a number of risks:-
1.The commercial assessment demonstrates that the anticipated spend is closer to our benchmark data excluding abnormal costs such as bank charges, claims and pre operating costs.
2. There remains a significant quantum of claims from the contractor which may yet be submitted and verified which could increase this figure significantly.
3. The confirmation of the stage design coordination from the design consultants is helpful but there is still a lack of complete ownership by one party as to design completeness and hence there remains a risk. The only way to close this risk down is to undertake a full design check however it may not be found to be an economical exercise bearing in mind the stage of the project. The lack of identifiable ownership of the design is also a risk in relation to design defects where it may be difficult to apportion liability.
4. The design for external works and landscaping appears to be absent and none of the design consultants took responsibility for it. The allowance in the client’s budget of AED 1.6m we believe is likely to be insufficient. This is a risk which will require further clarification and probably a design that should be procured. Once we can understand the scope of this part of the works then a budget can be apportioned accordingly.
5. Our recommendations in our report dated 19th December otherwise still stand as follows:-
a. Appointment of a project management consultant to manage the consultant team and contractor, establish a project programme and report to the client and funder, establish a project controls environment, document control etc.
b. Full design scope check by a design management team to resolve scope gaps in the existing issued for construction design and determine which future packages are outstanding compared to the scheme concept brief.
c. Resolve the contractual and commercial arrangement with the main contractor to agree completion dates for the current work scope and the further scope required. This will include outstanding time based claims and also re start of the work productivity which has almost halted. This will also include resolution of outstanding payments and a procurement strategy for outstanding works.
d. Transfer responsibility for the full development budget to the commercial cost managers rather than only the main contract works to enable holistic commercial management.
e. Complete the procurement of outstanding works (external works, landscaping, balance of fit out).
f. Produce a report on the approvals and NOC record for the project covering Trakhees, Nakheel, DTCM, FCA, DEWA and EmCool to determine where the risks are and identify a strategy to resolution.”
17. Despite the difficulties with the project on 27 May 2014, NBAD approved an increase and restructuring of the facility including in particular an increase from AED 444,000,000 to AED 669,000,000 coincident with the need for the appointment of a project manager (which led to the appointment by DAS of Messrs Hill International (Middle East) Ltd. (“Hill”) on 15 June 2014. The terms were accepted by Mr Almuhairi on 29 May 2014. At this stage, it is to be noted that the contract price covered by the Facility included about AED 43,000,000 in the form of extension of time applications by the contractor which were under negotiation.
18. On 5 August 2014, EC Harris called for a meeting between DAS, Hill, NBAD and EC Harris. The meeting took place on 10 August 2014. At the meeting Hill presented a paper. This reported amongst other things:
“(a) Intermass had submitted a revised schedule with a completion date of 1 March 2015 excluding testing and commissioning. Since testing and commissions had previously been estimated at 4 months that indicated development completion of 1 July 2015 which was unacceptable.
(b) Later information from a progress meeting meant that the projected completion date was now 1 August 2015. This reflected the fact that front-loaded critical schedule issues not being addressed thus causing day-for-day delays. Furthermore the labour force on site fluctuated between 200-250 / day rather than the estimated requirement of 750-1000 / day.
(c) Various options for dealing with Intermass were under review including termination. However as regards the possibility of termination this was approached with caution because an incoming contractor would be delayed by the same unresolved design issues together with complications relating to the status of existing contractors.
(d) It was recommended that there be an award of EOT to 1 March 2015 with costs to be determined later. It was also recommended that there be a design freeze accompanied by contractual notices to Intermass regarding lack of resources, lack of coordination and lack of due diligence.”
19. On 28 September 2014, an Amendment and Restatement Agreement (“ARA”) reflecting the increase in the Facility was executed. A revised version of the Facility Agreement was annexed.
20. The relevant provisions of the revised Facility Agreement were as follows:
“1.1 Definitions …
“Default” means an Event of Default or any event or circumstance specified in Clause 23 (Events of Default) which will (with the expiry of a grace period, the giving of notice, the making of any determination under the Finance Documents or any combination of any of the foregoing) be an Event of Default.
“Development” means the development, construction and operation of a five star hotel and three private residential apartments known as “The Langham Dubai, Palm Jumeirah” built on the Property.
“Development Completion” means completion of the Development as evidenced by the practical completion certificate issued by the Consultant under the Construction Contract and “Development Completion Date” means the date on which such certificate is issued.
“Event of Default” means any event or circumstance specified as such in Clause 23 (Events of Default)
“Facility A Commitments” means AED 444,000,000…
“Facility B Commitments” means AED 225,000,000…
“Finance Document” means this Agreement, the 2014 Amendment and Restatement Agreement, each Security Document, each Fee Letter and any other document designated as such by the Lender and the Borrower.
“Material Adverse Effect” means a material adverse effect which will materially impair the ability of the Borrower to perform or observe any of its repayment or other material obligations under any of the Finance Documents.
“Mortgage” means the first degree mortgage over the Property entered into by Mussabeh Salem Mussabeh Hamid Almuhairi (as mortgagor) the “Mortgagor”) in favour of the Lender (as mortgagee) as Security for the obligations of:
(a) The Borrower under the Finance Documents; and
(b) The Mortgagor under facility letters dated 2 November 2008, 24 March 2010, 26 April 2011, 26 April 2011, 10 May 2012 and 23 June 2013, each between the Mortgagor and the Lender.
With reference number 1623/2008 filed with the Land Department under Receipt No. 3693/2008 dated 21/12/2008 as may be (with agreement of the Lender) amended, supplemented and replaced from time to time.
…
2.1 The Facility
Subject to the terms of this Agreement the Lender makes available to the Borrower:
(A) An AED term loan facility (“Facility A”) in an aggregate amount equal to the Facility A Commitments
(B) An AED term loan facility (“Facility B”) in an aggregate amount equal to the Facility B Commitments
(C) A multicurrency revolving letter of credit sub-facility forming part of Facility A and Facility B (the “L/C Sub-Facility”) in an aggregate amount equal to the L/C Sub-Limit.
…
5.4 Advance of Loan
… if the conditions set out in this agreement have been met the Lender shall make Facility A and Facility B available…
..
22.5 Development Completion
(A) The Borrower shall procure that Development Completion occurs no later than 31 March 2015
(B) Development Completion shall occur upon the issue by the Consultant of a certificate confirming the occurrence of the practical completion of the Development.
23. Events of Default
Each of the events or circumstances set out in Clause 23 is an Event of Default.
23.1 Non-payment and other obligations
(A) The Borrower does not pay on the due date any amount payable pursuant to a Finance Document at the place at and in the currency in which it is expressed to be payable unless such failure is caused by technical or administrative error and is remedied within five (5) Business Days of such due date.
23.2 Other obligations
The Borrower does not comply with any of its other obligations…under the Finance Documents and such non-compliance is capable of remedy and is not remedied within fifteen (15) Business Days of the Borrower receiving notice of such failure from the Lender requiring the same to be remedied.
…
23.11 Material Adverse Change
(A) The Borrower ceases to carry on or abandon the Development
(B) In the reasonable opinion of the Lender there is a Material Adverse Effect.
23.13 Acceleration
On and at any time after the occurrence of an Event of Default the Lender may, and shall if so directed by the Lender, by notice to the Borrower:
(A) Cancel the Available Commitment whereupon it shall immediately be cancelled:
(B) Declare that all Utilisations, together with accrued interest and all other amounts accrued or outstanding under the Finance Documents, be immediately due and payable, whereupon they shall become immediately due and payable;
(C) Declare all of the Utilisations be payable on demand, whereupon they shall immediately became payable on demand of the Lender; and/or
(D) Declare that cash cover in respect of each Letter of Credit is payable on demand at which time shall immediately become due and payable on demand by Lender.
…
30. Remedies and Waivers
No failure to exercise nor any delay in exercising on the part of the Lender any right or remedy under the Finance Documents shall operate as a waiver nor shall any single or partial exercise of any right or remedy prevent any further or other exercise or the exercise of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.
- Amendments and waivers
31.1 Required Consents
Any terms of the Finance Documents may be amended or waived only with the consent of all Parties.
…
33. Governing Law
This agreement is governed by and shall be construed in accordance with, the laws of Abu Dhabi and the applicable federal laws of the United Arab Emirates.”
34. Enforcement
34.1 Jurisdiction
(A) The courts of the Dubai International Financial Centre (the “DIFC Courts”) have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) (a “Dispute”).
(B) The Parties irrevocably submit to the jurisdiction of the DIFC Courts and waive any objection they may have to any Dispute being heard in the DIFC Courts on the grounds that it is an inconvenient forum (forum non conveniens).
(C) The Parties agree that the DIFC Courts are the most appropriate and convenient courts to settle Disputes and accordingly no Party will argue to the contrary.
(D) This Clause 34.1 is for the benefit of the Lender only. As a result, the Lender shall not be prevented from taking proceedings against the Borrower relating to a Dispute in any other courts with jurisdiction. To the extent allowed by law, the Lender may take concurrent proceedings in any number of jurisdictions.”
21. Schedule 2 read in part as follows:
| No. | Condition Subsequent | Deadline for Delivery |
| 1. | A duly executed original of the Construction Contract Assignment | 30th September 2014 |
| 2. | A duly executed original of the Contractor’s Insurances Assignment. | 30th September 2014 |
| 3. | Duly executed notices of assignment or security as required under the Construction Contract Assignment and the Contractor’s Insurances Assignment. | 30th September 2014 |
| 4. | A copy of the Construction Contract (as amended), duly executed by all parties thereto, certificate as true, complete and accurate by a duly authorised officer of the Borrower. | 30th September 2014 |
22.The ARA contained the following provision:
“5.3 Conditions Subsequent
(a) The Borrower shall deliver each of the documents and other evidence listed in Schedule 2 (“Conditions Subsequent”) to the Lender (in form and substance satisfactory to the Lender) on or before the date set out next to each such document or other evidence.
(b) If any document or other evidence referred to in paragraph (a) above is not delivered by the time limit required under paragraph (a) above, that non-delivery will constitute an Event of Default under the Amended Restated Agreement and no grace period shall apply.”
23. EC Harris’ August 2014 report was issued on 9 October 2014. This delay was the knock-on effect of late delivery of the Hill report and the Eid holiday. A meeting between NBAD, DAS, Hill and EC Harris took place on 1 October 2014. EC Harris’ summary of progress emphasising the lack of resolution of design issues and lack of manpower was as follows:
“The Contractors programme has yet to be accepted by the Project Manager and Engineer, this programme has a completion date of 31st March 2015. Until the outstanding design issues are addressed and the nominated fit-out subcontracts issued, finalisation of the construction programme will not be possible.
The above programme does not include the installation of furniture, fixtures and equipment (FF&E) and operating supplies and equipment (OS&E). The Project Manager has been requested to provide a master programme capturing the above; this will provide NBAD with a realistic overall project completion date.
The manpower of the Main Contractor throughout August fluctuated between 250 to 300 per day which is considerably below the Project Manager’s estimated required amount of 850 workers. The Contractor continues to avoid initiating any acceleration of works or application of additional resource beyond these existing levels.”
24. In the result EC Harris stated in terms:
“Based on the above, it is our assessment that the current reported project completion of 31 March 2015 is not achievable.”
25. Against the background of recommendations made by EC Harris, NBAD summarised the position internally in a memorandum to the Chairman’s office as follows:
| Comments | Update
Key issues:
|
| Strategy and Action plan | The client-contractor dispute is the main hindrance to the project. We intend to mediate between the client and contractor for a resolution. |
26. The dates are somewhat uncertain but it would appear that in October 2014 DAS provided NBAD with Amendment No. 1 to the Construction Contract (confirming the appointment of Hill as project manager) signed by itself but not Intermass. Amendment No. 2 (revising the construction contract price) was signed by DAS at some time between 2 October and 14 November 2014. It had been signed by Intermass earlier. However, the basis of DAS’s signature as recommended by Hill was inter alia:
“The amount defined in Contract Amendment No. 2 [being a revision of the Contract price from AED 266,983,950.19 to AED 375,997, 802.11] still remains subject to variation (by either omission or addition) and in signing same DAS are not committed to paying the full amount to Intermass in the event that the aggregate of all such variations results in a less Contract Value. Intermass recorded in a letter dated 31 August 2014: “we have signed the Amendment on the understanding from M/S Hill International that the Bank will not continue to finance the project without this Amendment.”
27. The relationship between Intermass and DAS further deteriorated by December. EC Harris in an e-mail dated 3 December summarised its position as follows:
“The Main Contractor (IME) and its MEP sub-contractor (JLW) has become increasingly assertive and aggressive in nature in order to force the Employer to accept and pay claimed EOT amounts. This involves premature removal of site resources and placing procurement on hold until the EOT is resolved (both could be deemed breach of contract). In order to attempt to progress the project and mitigate the delays associated with the drawn out contractual claim determination process, the project team arranged a project principals meeting on 17 November 2014 with both IME and JLW senior management present. At this meeting, JLW verbally advised that it required closure on EOTs prior to committing to close out the project.”
28. Attempts to resolve the EOT disputes continued with little success. By mid-December 2014 Intermass were claiming about AED 69 million and DAS counter-offered about AED 36 million. The gap was never bridged. Furthermore, Mr Almuhairi had concluded that an apparent restriction on Intermass’s licence in regard to a seafood restaurant would prevent them from completing the project and was thus not disposed to treat with Intermass at all.
29. In the EC Harris report for December 2014 progress was described as follows:
“The Project Manager has provided an updated master programme showing an anticipated project completion date of 29th September 2015, this is a slip of one month from the November status (27th August 2015. There is significant risk that the anticipated completion date will continue to slip due to the ongoing limited procurement and progress from the main contractor, the ongoing EOT issues and variations, and the continued lack of close out of the identified outstanding design issues by the consultant team.
Limited progress has been made throughout December. When the completion percentage is based on the value of certified work complete, the total completion is 62% in comparison to the reported 81.31% by the Contractor. Despite unsuccessful attempts to conclude the EOT claims, the Main Contractor is continuing to delay expenditure on the procurement of long lead MEP items. This is in breach of the contract and the Engineer must continue to issue such notifications.”
30. On 29 January 2014 Arif served a notice under Clause 63 of the Construction Contract to the effect that given Intermass’s breaches of contract DAS were entitled to terminate by giving 14 days’ notice.
31. In an internal note dated 5 February 2015, NBAD’S understanding and consequent approach was set out as follows:
| Update |
|
| Strategy And Action plan | We clearly explained to the client that NBAD does not recommend termination of Intermass and that this will lead to stopping our finance, however, he seems to be moving towards termination of Intermass and Hill Int’l. This, along with the reports that he met with Nights Frank last week, lead to the conclusion that he is probably heading also to sell the project.
We will meet with client this week to stress the bank’s stance against termination of the main contractor and project manager given the advanced stage of the project (60% completed) and to get some visibility on the potential sale through Knights Frank. |
32. EC Harris made further report for January 2015. A strong warning was given against terminating the Construction Contract:
“Terminating any contract is not a step to be taken lightly, it is normally recommended to be avoided where possible. It is appreciated that there are many historical issues associated with the project however the Project Manager confirmed in January that the Contractor had started to procure previously withheld MEP items. Should the Employer terminate the Contractor, it will have to engage a replacement contractor to complete, usually at a premium to the price agreed with the first Contractor, and it is inevitable that there will be some additional delay to completion and therefore the date when the Employer sees a return on the investment. It is recommended, taking into account the status of the project, that commercial settlement with the existing Contractor be further pursued rather than termination.”
33. The report also added:
“It is also understood that the Owner is not extending the services of the project manager beyond February 2015. There is considerable concern that without a Project manager, co-ordination of the project, the project team and all directly nominated contractors will be severely impacted.”
34. As regards progress the position was described as follows:
“The project team has not provided any programme which identifies the anticipated completion date should the Owner terminate the Main Contractor. The impact of proposed termination on the programme should be provided to NBAD by the Owner and the project team.”
35. A meeting took place on 23 February 2015 between NBAD and Mr Almuhairi. An NBAD internal note of the meeting recorded (the accuracy of much of which was challenged by Mr Almuhairi) read in part as follows:-
“On 23.02.15’, we met with Mr Mussabeh Al Muhairi in the presence of Mr Samer Abdul Haq (GGC). Client insisted that Intermass and Hill Int’l must be replaced to complete the project. He stated that The Dept. of Planning and Development (Trakhees) has suspended Intermass’ license rendering them unable to obtain the required permits to complete the work. We asked him to revert back with evidence supporting this statement as this would be a breach by the contractor.
Mr Samer explained that a Notice of Termination would provoke Intermass to obtain an injunction through the court of 1st Instance and engage in arbitration. The legal proceedings to revoke the injunction / obtain a favourable arbitration verdict could take a long time. Meanwhile, this would bring the project to a complete standstill and admitting a new contractor will be impossible. Therefore, an amicable resolution with the contractor is recommended.
We reiterated that the existing delays and pending CSs constitute a breach of the restructure agreement and stressed that loan drawdowns are at a halt till a clear strategy forward is in place.”
36. Despite the restriction on drawdown referred to NBAD did release further sum out of the original loan on 9 March 2015. However, on 8 March 2015 Intermass had suspended all work for non-payment. Meanwhile Hill’s appointment had expired on 28 February 2015 and as anticipated by EC Harris was not renewed by DAS.
37. A further meeting between the parties took place on 14 March 2015. NBAD’s note of the meeting read as follows:-
“Synopsis of the discussion:
1.Mr Mussabeh briefed us on meeting between him and Mr Alex Thursby (NBAD GCE) on 11.03.15’. He stated that he had advised the GCE that there is no potential reconciliation with Intermass (main contractor) given their numerous breaches of the construction contract, the expiry of their license since 2013 and their international sabotage of the DEWA site inspection by pouring water in the electric generators room.
2. We explained to the client that the options now are as follows:
(a) Status quo situation: If no resolution with Intermass is reached and no tangible progress on site is achieved, this may lead to the A/C being classified as per UAECB and NBAD taking all necessary actions to safeguard its rights which usually would include foreclosure on the project.
(b) Sale: Mr Mussabeh advised that he had several buyers, however, the offer price was around AED 865m whereas he was looking at AED 1B. He believes that potential buyers are aiming at a discount given the semi-completed status of the project, accordingly, sale of the hotel isn’t an option that can be entertained at this stage and he will consider it upon completion.
(c) Termination of the main contractor: Client insisted that he is unwilling to continue with Intermass and is looking to terminate their contract because of the ongoing historical dispute, delays (intentional delays as per his claim) in completing the project and the recent evidence obtained that their license had expired since 2013; a fact which they intentionally did not disclose. He alleged that Intermass intentionally sabotaged the DEWA site inspection by pouring water in the power generators room right before the visit of the DEWA inspectors. He stated that he is in talks with a new contractor namely “Modern Building Contracting Co.” to complete the main and MEP works under project. He advised that the new contractor has agreed in principle within the same contract value and is currently evaluating the MEP remaining work and the negotiating the PBs of the existing sub-contractors. He promised to submit to the Bank a full proposal inclusive of a project program and a development budget. The appointment of the new contractor will be subject to NBAD’s approval.
We reiterated our earlier concerns regarding the change of the main contractor at this juncture of the project (61% completed) and the issues that might entail on site however, he insisted that he will be taking the appropriate measures to mitigate all said issues.
We explained that the delays have increased the financing cost and will probably result in an escalation of the construction cost. He disagreed about the construction cost increase and insisted that the new development budget will be within the originally approved budget.
(d) Appointment of an independent Project Manager: We reiterated our concern that Hill Int’l contract had not been renewed, accordingly, there is no project manager to oversee the execution noting that the site is currently at halt. We added that whatever the way forward agreed it will require reverting back to the ongoing approval condition to have a project manager with a clear mandate to execute the project.
Mr Mussabeh doesn’t wish to have Hill Int’l on board again claiming that they were not adding value to the project in terms of their recommendations to move forward and insinuated that he will approach EC Harris to take over the project manager role. We reiterated that in case EC Harris agrees this will have to be under a clear mandate.
(e) Project payments: We explained to Mr Mussabeh that it will be difficult to permit utilization of the BL to continue given the absence of a clear project strategy. He confirmed that he has instructed the project engineer Arif and Bintoak not to certify any project payments till an agreement is reached with NBAD.
Conclusion and Action Plan:
We requested to have a final action plan to be submitted by client by Mar. 19th. Mr Mussabeh confirmed that he will submit his plan by this target date and reassured that he wants to finish the project as soon as possible.”
38. Shortly thereafter NBAD sought to set up a meeting between themselves, DAS and Intermass. But Mr Almuhairi refused to participate in any meeting with the Contractor. In response, on 18 March 2015, NBAD wrote to Mr Almuhairi as follows:
“We note your email dated 16th March, 2015 from M.S Almuhairi msalmuhairi@mailme.ae to Antoine Sokhn (MD & Head, Group Credit Risk) with subject reference: Das Real Estate – The Langham Dubai Project declining the invitation to the proposed meeting and accordingly we will cancel the same . We note that we requested this meeting as an attempt to engage in a dialogue with all relevant parties in order to get the Development back on track. This is in the best interest of both DAS and NBAD.
We would like to take this opportunity to point out that under the Amended and Restated Facility Agreement NBAD has certain consent rights in relation to the appointment of the Contractor and the Project Manager. Accordingly, we do not accept your position that NBAD has no rights with regards to the Contractor. Indeed, if the consent rights are not observed by Das this will be a breach of the Amended and Restated Facility Agreement. We also note that you recently terminated the appointment of Hill International (Middle East) Ltd as Project Manager without obtaining NBAD’s prior written consent which is a breach of the Amended and Restated Facility Agreement.
Furthermore, the Construction Contract is assigned to NBAD under the Construction Contract Assignment and if this security becomes ineffective for any reason a further breach will occur.
As you know, NBAD has committed full support to DAS and the completion of the Development. Nevertheless, we have significant concerns over the lack of progress on site following the restructuring of your facilities and entry into the Amended and Restated Facility Agreement. Our understanding is that the Development is currently at a standstill which we understand is likely to lead to a further Event of Default given the obligation in the Amended and Restated Facility Agreement to procure Development Completion by March 31st, 2015.
Based on the above, we urge you to comply with the terms of the Amended and Restated Facility Agreement. In particular, please review your obligations under Clause 21.4 and Clause 21.5 and ensure you are supplying NBAD with all the requisite information and notifications.”
The letter went on to reserve all rights arising from any “events of default.”
39. In response by letter dated 19 March 2015 Mr Almuhairi said:
“3. The key difference between DAS and NBAD at this point is NBAD’s apparent position that the current Contractor is integral to “a comprehensive plan to put the Development back on track” DAS disagrees. It is apparent, as NBAD should be aware, that the current delays to the project have been caused by the Contractor, whose conduct has ranged from a continuing failure to have in place the necessary licence to undertake construction of the project (which the Contractor has deliberately concealed from DAS) to holding DAS and the project to ransom in pursuit of unjustified demands for money to which the Contractor has no legal entitlement I shall elaborate further below.
4. NBAD has been informed via a letter issued by the Government of Dubai (a copy is enclosed for your reference) that the Contractor has been working illegally since 8 October 2013 and has been misleading all parties involved on the project, including NBAD. We were unaware of this position until receipt of the attached letter. The Contractor has deliberately deceived all parties, particularly DAS, in relation to this issue. It is difficult to imagine a more serious breach by the Contractor of its obligations under the construction contract. The result is that the Contractor is unable to lawfully carry out the construction contract nor can the Contractor obtain the necessary approvals to complete the project. The Contractor has known of this since 8 October 2013, but has nevertheless decided to withhold this information from all relevant parties, choosing instead to engage in unlawful building work in defiance of Dubai law.
5. Further, as NBAD is aware, on 29 January 2015, the Engineer on the project has issued a certificate of non-performance of the Contractor taking into account the lack of any performance since June 1, 2014. (The Contractor has forwarded the same letter to NBAD and NBAD has taken certain actions in the form of blocking payments to the Contractor, thus having the effect of converting its own non-performance to a default by DAS).
6. Part of the conduct relied upon by the Engineer in issuing the certificate of non-performance was the Contractor’s deliberate tactic of refusing to place orders for equipment and supplies unless its demands for payment of amounts the Contractor was not entitled to (claimed as extension of time) were met. This conduct on the part of the Contractor was not entitled to (claimed as extension of time) were met. This conduct on the part of the Contractor was not only a repudiation of the construction contract, but also demonstrates the lengths to which the Contractor will go in order to achieve its obligations.
7. Given the above circumstances, NBAD will understand why DAS does not consider the current Contractor can play a role in the “comprehensive plan to put the Development back on track”. The Contractor is the problem, not part of the solution. No doubt NBAD will agree that it cannot and should not seek to persuade DAS to continue with the Contractor in full knowledge of the above conduct including deliberate violations and disregard for Dubai laws.”
40. In a letter dated 24 March 2015 NBAD again pressed Mr Almuhairi to meet with both the bank and the Contractor. Following a further warning of steps to be taken by NBAD to protect its position in a letter dated 22 April 2015 to which Mr Almuhairi commented that no specific breach of the facility had been identified, NBAD gave notice by letter dated 30 April 2015 as follows:
“You have requested information on the Defaults that currently exist under the Amended and Restated Facility Agreement. Noting your obligations under Clause 21.5 (Notification of Default) of the Amended and Restated Facility Agreement, we highlight the following as non-exhaustive examples of current Defaults (references are to the Amended and Restated Facility Agreement: Clause 5.3 (Conditions Subsequent) (noting in particular Clause 5.3(b) in relation to the items listed in rows 1, 2 and 4 of Schedule 2 (Conditions Subsequent) and Clause 22.5(A).
We note and continue to wait for information on how you propose to move forwards with the Development.”
41. NBAD terminated the facility by a letter dated 21 May 2015. NBAD relied on two events of default:
(a) Failure to deliver three of the conditions subsequent as already identified.
(b) Failure to procure completion by 31 March 2015.
42. On 4 June 2015, Intermass gave notice of termination of the Construction Contract by reason of failure by DAS to pay interim payment certificates. This was accepted by DAS on 11 June 2015 as constituting a repudiatory breach of the agreement.
43. On 7 June 2013, DAS wrote to NBAD requesting withdrawal of their demand and acceptance of Al Jaber LEGT Engineering Contracting (ALEC) as main contractor in place of Intermass. NBAD’s response in a letter dated 17 June 2015 was a request of the details of the arrangements with ALEC.
44. DAS signed a Pre-Construction Services agreement with ALEC on 23 June 2015. Clause 2 of this agreement provided as follows:
“For the avoidance of doubt, we are not bound to enter into an Agreement for the Main Contract Works with you, and our commitment at this stage is strictly limited as set out in this Pre-Construction Services Agreement. However this document details the parameters for entering into the Main Contract between ourselves and ALEC.”
45. On 25 June, DAS wrote to NBAD to state that there would be an “undertaking” from DAS to cover “any shortfall over and above the loan amount that may result from selecting ALEC” though whether that undertaking had any financial substance was another matter. ALEC established a presence on the site in June but stated that construction would only commence after all financing requirements were in place. In the event by letter dated 25 November 2015 ALEC gave notice that it would demobilize on 30 November 2015 given the continuing absence of any agreement.
46. By the end of 2015, there was a shortfall of at least AED 150 million on funding requirements over and above NBAD’s facility. On 31 December 2015, by a letter headed “Final Notice of Demand” NBAD demanded payment of AED 535,675,282.99 within seven days, reserving all right to enforce any part of the security furnished by the ARA failing payment. A thirty-day Notice of Enforcement by way of sale of the plot was served by NBAD on 7 January.
Proceedings
47. The present proceedings were commenced by DAS on 18 January 2016 accompanied by an application for interim injunctions requiring NBAD to make the balance of entire facility available and restraining NBAD from enforcing the security. These applications were refused by an order dated 8 February 2016 on the basis that damages were an adequate remedy if NBAD were held to be in breach. The reasons for that order go on to explain some of the considerations that would arise in regard to any claim for damages advanced by DAS. In particular it was pointed out that any claim for damages in respect of the loss of an opportunity of completing the project faced the difficulty that there was a substantial shortfall in funding over and above the agreed loan for which DAS had no suggested availability.
Preliminary issues
48. It is against that background that the parties have sensibly agreed various preliminary issues so as to determine whether NBAD’s demand for acceleration and payment of the loan was valid or whether the bank was in breach of the Facility Agreement. If it was valid on any ground, that is the end of these proceedings: if it was not, the Court will have to determine NBAD’s liability in damages. The preliminary issues are these:
“1. Was the Defendant’s notice dated 21 May 2015 a valid and lawful exercise of its rights under clause 23.13 of the Facility Agreement?
(a) Was there an Event of Default under Clause 23 of the Facility Agreement as a result of:
(i) The Claimant’s failure to achieve Development Completion by 31 March 2015, pursuant to Clause 22.5 and 23.2 of the Facility Agreement?
(ii) A material adverse change pursuant to Clause 23.11 of the Facility Agreement?
(iii) The Claimant’s failure to comply with any Conditions Subsequent in Schedule 2 to the Amendment Agreement?
(b) If the answer to any of the above questions in (a) above is “yes”, was the Defendant precluded from relying upon its rights under Clause 23.13 by reason of the matters pleaded by the Claimant in its Particulars of Claim at paragraphs 43.1, 43.4, 43.5, 43.6, 43.7, 44.2, 44.4, 44.5 and/or paragraphs 10, 13, 16, 17, 18, 19, 20, 21, 22 or 23 of the Amended Reply?”
Witness evidence
49. The parties served a number of witness statements:
(a) DAS provided witness statements from:
(i) Mr Almuhairi
(ii) Mr Sunil Kuma Sukumaran, Managing Director of Hepher Quantity Surveying
(b) NBAD provided witness statements from:
(i) Mr Antoine Sokhn, Senior Vice President and Head of Group Credit Risk to February 2015 and thereafter Managing Director and Chief Risk Officer, Global Commercial Risk
(ii) Mr Allah Mohamed Talaat Al Shokka, Director, Group Risk Management
(iii) Mr Samer Abdelhaq, Senior Managing Director and Group General Counsel
Each of these witnesses (except Mr Abdelhaq) were called to give oral evidence on 8 March 2017 and were cross examined.
50. The scope of the witness evidence was limited given that much of the argument focused on issues of law and construction. Furthermore, as noted above there was a mass of contemporary documentation on which the Court could legitimately rely, together with its assessment of the motives of the parties and the overall probabilities: see Grace Shipping v. Sharp & Co [1997] 1 Lloyd’s Rep. 207 at 215.
51. That said I am grateful to the witnesses for their assistance in establishing an accurate and complete account of the relevant events where within their first-hand knowledge. However, I must confess that where their accounts differed I felt I could place more confidence in the NBAD witnesses as being more consistent with the contemporary correspondence. It was also more balanced and coherent in contrast to some of the startling allegations advanced by Mr Almuhairi (albeit not pursued by his legal representatives).
Completion by 21 May 2015
52. It is of course common ground that the project was not completed by 31 March 2015. It was at the forefront of NBAD’s case that the failure to complete by that date was a failure to comply with Clause 22.5(A) of the ARA and thus a breach of the ARA subject to the argument advanced by DAS that completion by that date was impossible from the outset (or alternatively had become impossible because of Intermass’s lack of an appropriate licence). But it was further contended that such constituted an event of default within the meaning of Clause 23.2 whereby NBAD was entitled to declare all loan monies due and payable.
53. Whilst accepting that there had been non-compliance with the obligation to complete the project by the contractual date, DAS contended that such did not fall within Clause 23.2 because by its very nature the failure to complete by the prescribed date was not capable of remedy. This is because there was no breach requiring remedy before 31 March 2015 and by the time of that failure to comply it was not capable of remedy. Accordingly, so the argument ran there was no Event of Default and thus no basis for accelerating repayment of the loan.
54. NBAD sought to escape from this analysis by contending that on its true construction, where non-compliance with the obligation is incapable of remedy in the sense described, there was nonetheless an event of default but for which no notice to remedy was required. The proposition was pleaded in this way: on the true construction of the ARA the requirement to give notice to remedy only applies to obligations capable of remedy.
55. I am unable to accept this argument. The terms of Clause 23.2 are clear and unambiguous. There is no basis for treating the ordinary meaning of the clause as excluding the need for a notice if non-compliance was not capable of remedy. I accept that it is somewhat surprising that failure to complete by the contractual date is not as such an event of default. But the drawing of a distinction between remediable and non-remediable breaches is commonplace. If failure to complete by 31 March 2015 was to be an Event of Default the clause could simply have so stated, a solution which would have been readily apparent to NBAD and its legal advisers.
56. In the alternative, it was NBAD’s case that the requisite 15 days’ notice of non-completion could be and was given thus activating the relief available upon an event of default. In this respect NBAD rely on their letter of 18 March 2015 but this letter involves overwhelming difficulties in terms of treating it as a notice under Clause 23.2:
(a) It was given 9 business days before the specified completion date;
(b) Accordingly, it was given well before non-compliance with the obligation; and
(c) Further, it contained no requirement for remedial action.
57. It is not surprising that NBAD did not give notice under the clause requiring remedial action by virtue of the letter of 18 March 2015 as it was plain to all that the obligation to complete by the contractual date was not achievable and had not been for some time. Indeed, the EC Harris report issued six months earlier on 9 October 2014 had made it clear that the March date was not viable.
58. It follows that there was no event of default arising from the failure to achieve completion by 31 March 2015 and to the extent that NBAD’s notice of 21 May 2015 relied upon such an event of default it was invalid. This conclusion makes it unnecessary to consider various arguments relating to the validity and lawfulness of the notice relying upon non-completion as an event of default.
59. I should add that in the course of their written reply submissions NBAD sought to rely in the alternative on a further event of default namely that DAS had repudiated the ARA or evidenced an intention to repudiate it within the meaning of Clause 23.20 of the ARA. Such an unpleaded submission is not open to NBAD.
Conditions Subsequent
60. NBAD contend that DAS failed to deliver items 1, 2 and 4 in the list of documents at Schedule 2 by the due date of 30 September 2014. NBAD’s pleaded case in regard to failure to deliver a number of other items on the list was not pursued.
61. DAS’s pleaded case was in summary as follows:
(a) Item 1 – a duly executed copy of the Construction Contract Assignment. The Construction Contract (dated 22 May 2010) was provided to NBAD in or around July 2010 together with an assignment.
(b) Item 2 – a duly executed original of the Contractor’s Insurances Assignment. This was not provided but because NBAD was an additional assured under the contractors’ cover (and – it was contended – the sole loss payee) the document would have been of no practical consequence. In the result NBAD had acquiesced in the non-provision.
(c) Item 4 – a copy of the Construction Contract (as amended) duly executed by all parties hereto. As above the Construction Contract had been provided in July 2010 and there had been no amendment.
62. DAS pleaded in the alternative that NBAD waived any right to rely on the non-provision of the documents by virtue of the provisions of Article 135 of the UAE Civil Code. In the further alternative it was contended that reliance upon any non-provision would be in bad faith and thus contrary to Art. 246 of the UAE Civil Code.
63. The thrust of DAS’s case underwent something of a sea-change at the trial.
(a) As regards Item 1, it was submitted that, if it was to be treated as referring to the Construction Contract “as amended” (as opposed to the original contract executed in 2010), the parties had entered into an agreement by way of amendment of the ARA to the effect that Messrs. Clifford Chance were to produce and provide the assignment of the amended contract. Absent a form of assignment drafted and tendered by Clifford Chance there was no failure to comply.
(b) As regards Item 2, the same point was taken.
(c) As regards Item 4, it was submitted that the condition was complied with only shortly after 30 September in that Amendment No.2 to the Construction Contract was supplied to NBAD signed by Intermass on 1 October. Further on 16 November, NBAD was itself able to supply a copy of Amendment No.2 signed by both Intermass and DAS (furnished to EC Harris) together with Amendment No.1 signed by DAS only.
64. DAS maintained its case on waiver based primarily on the point that no written complaint in regard to non-compliance was made by NBAD until April 2015 against a background of further drawdowns through to March 2015. DAS also maintained its case on want of good faith asserting inter alia:
(a) That the decision to issue the demand notice was motivated by DAS’s unwillingness to continue with Intermass and not by any potential failure to complete by March or failure to comply with the conditions subsequent.
(b) That Mr Almuhairi was never warned that the failure to satisfy the conditions precedent would lead to NBAD declaring an event of default.
NBAD placed some reliance on the extent to which DAS trespassed outside its pleaded case but no objection was taken and I shall seek to deal with the arguments as they were raised.
65. Condition Subsequent No. 1 referred to a “duly executed original of the Construction Contract Assignment” as regards this condition there is a threshold issue as to whether it referred to the original construction contract only or also to any amendment to it. It was it appears common ground that an assignment of the Construction Contract had been furnished to NBAD in about July 2010. Such was acknowledged in NBAD’s letter of 18 March 2015. The question arises as to whether, in the event the Construction Contract was amended, a further or revised assignment was required.
66. For this purpose, I proceed on the assumption that an amendment in the form of Amendment No 2 was entered into at some date between 1 October 2014 and 16 November 2014, a topic discussed in the content of Condition No. 4 below. It is clear however that no revised or supplementary assignment was executed.
67. In support of the argument that Condition Subsequent No. 1 did not require delivery of a further or amended assignment, it was submitted as followed by DAS:
(a) The list of conditions expressly identified those which called for documents “as amended”: see for instance Condition Subsequent No. 6.
(b) Given that they were conditions subsequent non-compliance with which constituted an event of default with no grace period, it is right to construe them strictly.
(c) In the run up to NBAD’s notice of default and acceleration of the loan, NBAD recognised that the existing assignment was effective and furnished appropriate security.
(d) Whether or not a further or revised assignment would have provided enhanced security is not material.
68. The difficulty is that it makes no sense for DAS to be required to provide the very same assignment as at the date of the ARA as that already provided four years earlier. In these circumstances, I am persuaded that the only commercially sensible construction of the term called for an assignment of the Construction Contract as amended to be provided. Amendment No 1 provided for the appointment of EC Harris as Project Manager and Amendment No 2 amended the construction contract price. Both were accordingly fundamental as to the performance and scope of the works to be undertaken by Intermass thereafter. A fully executed Amendment No 1 was never provided and a fully executed Amendment No 2 was not provided until well after the due date.
69. DAS had a supplementary argument that, even if the condition referred to the contract “as amended”, there was no breach because there had been an amendment to the agreement to the effect that NBAD’s lawyers were to provide draft assignments for execution by DAS. Since, the argument ran, no such draft was furnished accordingly no breach on the part of DAS occurred. I reject this submission (which I also deal with in the context of Condition Subsequent No. 2 to which I will turn next). It is not remotely surprising that no draft was prepared. Leaving aside the uncertainty of the finality of Amendment No 2, Amendment No 1 was never fully executed and Amendment No 2 was not fully executed until well after the deadline. It follows if it be relevant that Clifford Chance were not in a position to prepare the relevant drafts even if instructed to do so. Condition Subsequent No I was not satisfied.
70. Condition Subsequent No. 2 related to “a duly executed original of the Contractor’s Insurances Agreement.” On this topic DAS abandoned its pleaded case that it had been satisfied by NBAD’s inclusion as a co-assured. It was accepted that no assignment compliant with the condition had been delivered. As indicated already the thrust of DAS’s argument became the unpleaded proposition that the parties had agreed an amended procedure for production of the draft assignment.
71. The argument ran as follows:-
(a) The parties adopted a procedure whereby NBAD’s lawyers (Messrs. Clifford Chance) would prepare the relevant assignment in draft.
(b) This procedure amounted to the consent of the parties for the purposes of Clause 31.1 of the ARA which stated: “Any term of the Finance Documents may be amended or waived only with the consent of all Parties.”
(c) DAS would only have been in breach of Condition Subsequent No. 2 if it had refused to execute and return the draft prepared by Clifford Chance but NBAD failed to activate the agreed procedure.
72. I am unable to accept this analysis which is put forward as arising from an agreed amendment to or a waiver of the obligation on DAS to comply with the Conditions Subsequent. I accept the evidence of Mr Almuhairi (which in this respect was supported by that Ms Shokka) that Clifford Chance were responsible for preparing the documents recording the compliance with the Conditions Subsequent. If and to the extent that Mr Almuhairi went further in his evidence to assert consent by both parties to an amendment it is right that the relevant passages were not challenged. But given the absence of any pleaded case on the suggested amendment that is not surprising. In any event, it must be doubtful whether Mr Almuhairi had any direct involvement in the arrangements. Those matters were in the hands of Mr Blot.
73. The contemporary record of the arrangements as set out on Clifford Chance’s table dated 14 September 2014 was to the effect that Clifford Chance were to circulate a draft “once Contractor’s insurances are available.” This latter requirement involved the need for an endorsement of the relevant policy rendering NBAD the sole loss payee. Such was never accomplished. The fact remains that Condition No. 2 was never satisfied and if relevant Clifford Chance were not in a position to prepare the draft. Such was attributable to non-compliance by DAS.
74. In brief, DAS has fallen a long way short of establishing an intention of the parties to amend the Facility Agreement to substitute NBAD’s legal advisers in place of DAS as the party responsible for arranging compliance with the conditions subsequent.
75. Condition No. 4 calls for a copy of the Construction Contract as amended – duly executed by the parties. Again, DAS has abandoned its pleaded case to the effect that the original Construction Contract had been furnished in 2010 and had not been amended since. In fact, there were two amendments considered by the parties. Amendment No 1 made provision for the appointment of Mess Hill International as project manager (in which capacity they had been acting since June 2014). Intermass objected to the draft on a number of grounds and suggested that Hill be the Employers Representative. Quite when it was supplied to NBAD is not clear but on any view, it was not signed by Intermass and it terms were still the subject of negotiation albeit Hill was treated as appointed under it.
76. Amendment No. 2 revised the contract price from AED 266,983,950 to AED 373,997,802. It appears that this was signed by Intermass on 31 August 2014. This was supplied to NBAD on 1 October 2014 but at that stage still only signed by Intermass (thereby giving rise to the inference that DAS were only too aware of the 30 September deadline). Hill urged DAS to sign the amendment by letter dated 2 October 2014.
77. There was in this connection a dispute as to whether, as NBAD submitted, Amendment No. 2 was not final and binding. The starting point was that both parties took the line that it had not been amended. In due course, it became DAS’s position that, although there was no need to furnish a copy of any amendment to NBAD, it had been in fact amended on two occasions. NBAD accepted that there had been negotiations to amend the contract but the proposed Amendment No. 1 was never executed by both parties and that although in due course signed by both parties Amendment No. 2 never had contractual effect because of the parties’ express reservations.
78. If there was any amendment (and such needed to be provided by way of compliance with the Conditions Subsequent) the relevant amendment was not supplied in time. Amendment No 1 was never signed by Intermass. Amendment No. 2 was not signed by DAS until an unidentified date between 2 October and 14 November 2014. However, I should deal with the point raised by NBAD case that no binding agreement had been reached even then. For this purpose, reliance was placed on the letter from Intermass dated 31 August 2014 to the effect that without the amendment it was Intermass’s understanding from Hill that NBAD would not continue with the project. More to the point reliance was placed by NBAD on the letter from the Project Manager dated 2 October 2014 to the effect that the amount provided for in the amendment was “subject to variations” and that DAS was not committed to pay the full amount to Intermass.
79. I am not sure that this is anything other than an arid debate which adds nothing to the points at issue. But the difficulty from the perspective of NBAD is that although further amendments 03 and 04 were being circulated by definition the fact remained that Amendment No. 2 was the only amendment signed by both parties. Whatever the subjective view of the parties it is somewhat difficult to view as other than a legally binding amendment (although the same cannot be said about Amendment No. 1 which only DAS signed). Nonetheless the “agreement” was somewhat uncertain and likely to give rise to disputes. In that respect, it must be doubtful whether it was “in form and substance satisfactory to the lender” although it is fair to say that there was no contemporary complaint.
80. Although NBAD were able to supply EC Harris with a copy of Amendment No 2 signed by both Intermass and DAS on or by 16 November 2014 (accompanied by a version of Amendment No. 1 signed by DAS only), the short point is that Amendment No. 1 was never provided and Amendment No. 2 was provided late.
81. Pausing there I find that DAS failed to comply with Conditions 1,2 and 4 timeously or at all.
Waiver
82. DAS’s pleaded case on “waiver” was as follows:
“44.2 The Defendant never, at any time prior to 30 April 2015, raised any complaint of any kind in relation to the purported non-provision of any of the Schedule 2 documents and allowed the Claimant to draw down on the Facility until 9 March 2015. In those circumstances, and in accordance with Article 135 of the UAE Civil Code. . . the Defendant thereby waived any right to rely upon the non-provision if any (or all) of the Schedule 2 documents.”
83. Article 135 reads as follows:
“(i) A person who remains silent shall not be deemed to have made an utterance but silence in the face of need is tantamount to a statement and shall be regarded as acceptance.”
84. NBAD’s response to this plea can be summarised as follows:
(a) Complaints were duly raised regarding the non-provision of the conditions subsequent. The pleaded particulars of this plea were as follows:-
“The outstanding Conditions Subsequent were repeatedly followed up with the Claimant during various meetings between the Claimant, Mr Jean Sebastien Blot (the Claimant’s CFO and Personal Advisor), Mr Sunil Sukumaran of Heffner Quantity Surveyors and Mr Sokhn and Ms Shokka held in about October 2014 to January 2015 at the Defendant’s offices, the Project site and the offices of Hill International. The Claimant advised the Defendant during these meetings that negotiations with Intermass regarding amendments to the Construction Contract were ongoing in this period. The Defendant understood that this was the reason for delay in respect of certain Conditions Subsequent, including Conditions Subsequent No. 1, 2 and 4, and the Defendant repeats and relies upon paragraph 36(b)(ii) below. Further, the Claimant’s failure to specifically comply with Conditions Subsequent No. 1, 2 and 4 was raised in a letter from the Defendant to the Claimant dated 30 April 2015: see para 55 of the Defence.”
(b) No drawdowns were permitted in 2015 save for two drawdowns on 8 March 2015 of AED 9,656,700.35 and AED 7,361,259.01 both of which fell within the limits of Facility A (i.e. the original loan). There was no drawdown on Facility B (i.e. the enhanced loan).
(c) In any event DAS’s submission could not overcome the terms of Clause 30 of the ARA:
“30. Remedies and Wavers. No failure-to exercise, nor any delay in exercising in the part of the Lender, any right on remedy under the Finance Documents shall operate as a waiver, nor shall any single or partial exercise of any right or remedy or any further or other exercise or the exercise of any other right or remedy. The rights or remedies are provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.”
(d) At no time did NBAD make any let alone unequivocal representation that compliance with the Conditions Subsequent would not be required.
(e) In any event DAS are not in a position to establish any “need” for the purposes of Article 135 in the face of which silence should be treated as acceptance that the conditions subsequent could be disregarded.
85. It must be remembered that we are not concerned with principles of waiver as a matter of English law. The starting point has to be the question whether there was “silence” within the meaning of Article 135. Whilst it is common ground that no written complaint was made until 30 April 2015 it is clear that the point was specifically raised no later than in the meetings of 23 February well before the further drawdown. I am unable to accept Mr Almuhairi’s evidence that in this respect the note of the meeting was inaccurate and that there had been no mention of the Conditions Subsequent (let alone that their absence constituted a breach of the agreement). The note was signed by both Mr Sokhn and Ms Shokka over 2 years ago. Consideration of the probabilities and the motives of the parties support the accuracy of the note. Furthermore, NBAD made it plain in correspondence in March and April 2015 that any right or remedy that NBAD might have arising from any event of default were reserved.
86. As regards earlier times Ms Shokka stated in her second witness statement as follows:
“Prior to that meeting I had repeatedly said to Mr Blot that the conditions subsequent in the Restatement need to be satisfied and that Mr Almuhairi’s continuing failure to satisfy them would lead to NBAD halting further payments under the loan. In particular I repeatedly told Mr Blot that Mr Almuhairi needed to agree an amended contract with Intermass and provide NBAD with a copy as soon as possible.”
This evidence was not challenged. Indeed, Mr Blot was not called to give evidence and no explanation was furnished as to his absence. In the circumstances, I see no reason not to accept the pleaded case that these discussions took place. Thus far from silence I accept NBAD’s evidence that DAS was repeatedly told that non-compliance with the Conditions Subsequent would lead to the halt of payments with all other rights reserved.
87. In the event of silence the secondary question arises as to whether there was a “need” to speak. The terms of Article 135 are not easy to operate in the present context. Silence in the face of “need” amounts to “acceptance”. Indeed Article 135(2) identifies the specific example of acceptance of an offer in the context of prior dealing between the parties. The commentary on the UAE Civil Code by James Whelan gives the example of a person who “has the right to prohibit the act by his words is regarded as consenting to it by his deliberately abstaining from saying anything”. It strikes me as a long way from that scenario that any failure to say anything about the conditions subsequent constituted consent to their not being complied with. Indeed, given the terms of Article 30 of the ARA it is difficult to accept that any reservation of right or other oral or written warning was “needed”.
88. The only reservation I have is in regard to Amendment No 2 within Condition Subsequent 4. The signed amendment was provided but late. I am not sure these matters were developed in the evidence. But some response might have been expected to the effect that it was still being treated as non-compliance. In that sense, there may in my judgment have been a need to speak. However even then Amendment No 1 was never furnished in signed form so the point is of little significance.
89. In my judgment, this is not a state of affairs falling within Article 135 of the UAE Civil Code. In this connection, I derive no assistance from the report of Dubai Court of Commercial Appeal Case No. 134/2004.
Good Faith
90. DAS also invokes Article 246 of the UAE Civil Code which reads:
“Article 246
(i) The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.”
91. By way of summary, DAS’s case on this issue was as follows:
(a) The decision by NBAD to rely upon the non-compliance with the Conditions Subsequent was motivated solely by its concern that DAS might terminate its contract with Intermass given that Intermass was in repudiatory breach.
(b) NBAD’s Chairman was in partnership with Intermass and no steps were taken to protect DAS from that conflict of interest.
(c) NBAD’s halting of drawdowns was in breach of the ARA and put illegitimate pressure on DAS.
(d) Mr Almuhairi was not warned that failure to provide the conditions subsequent would lead to NBAD treating the outcome as an event of default.
92. At the outset, I reject the proposition advanced in (b). It was spoken to by Mr Almuhairi in his oral evidence but rightly was never taken up in anything other than a wholly unsatisfactory way. I fear the point did more damage to Mr Almuhairi’s credibility than support for the complaint of lack of honesty and sincerity on the part of NBAD.
93. As for (a) it is plain from the contemporary correspondence that NBAD were genuinely concerned about the impact of the potential dismissal of Intermass and took elaborate steps to try and persuade DAS to meet with and negotiate with Intermass. There is no basis for a complaint of want of good faith.
94. As for (c) the reality is that various drawdowns were permitted post 30 September 2014 albeit reluctantly. Indeed, they are relied upon by DAS in support of its case on “waiver”. It is impossible to categorise NBAD’s discussions with representatives from DAS as outlined above as undertaken in bad faith.
95. As for (d) this has already been dealt with and fails in the facts.
Material Adverse Change
96. Clause 23.11 of the ARA provides that there is an event of default in circumstances where:
“(A) The Borrower ceases to carry on or abandons the Development and/or
(B) In the reasonable opinion of the Lender there is a Material Adverse Effect.”
97. Material Adverse effect is defined as:
“a material adverse effect which will materially impair the ability of the Borrower to perform or observe any of its repayment or other material obligations under any of the Finance documents.”
98. NBAD did not rely on material adverse effect in its notice. Nor was it directly relied upon in the original defence as justifying the provision of the Notices although notably paragraph 57 (d)(ii) read in part as follows:
“(B) From 29 January 2015, in the reasonable opinion of the Defendant the issuance of the certificate of non-performance by the Engineer and/or the subsequent escalation of the dispute between the Claimant and Intermass as set out in paragraphs 52 and 53 above had a material Adverse Effect for the purposes of Clause 23.11 (B) of the Facility Agreement.
(C) From 1 March 2015, in the reasonable opinion of the Defendant the Claimant’s failure to renew the engagement of Hill International as Project Manager and/or appoint a replacement Project Manager had a Material Adverse Effect for the purposes of Clause 23.11 (B) of the Facility Agreement.”
(For completeness sake there was an earlier assertion of a Material Adverse Effect said to arise from the EC Harris report issued in December 2013 recording an increase of AED 93 million over the expressed budget: Para 13(a).)
99. In the Reply there was a response to this plea as follows:
“14.1 At no time prior to receipt of the Defendant’s Defence in this proceeding has the Defendant asserted, in correspondence or otherwise, that the matters set out at paragraphs 52 to 53 of the Defence had a Material Adverse Effect for the purpose of Clause 23.11(b) of the Facility Agreement: and
14.2 The Defendant is not now entitled to rely on the same in an attempt to retrospectively justify its refusal to permit the Claimant to draw down on the Available Commitment during that period.”
100. NBAD served an amended Defence on 24 November 2016. Paragraph 61.2 lists a number of events which individually or together were said amount to an Event of Default and entitled NBAD to exercise its acceleration rights. These ‘events’ were:
(a) The failure to agree an amended version of the Construction Contract that “reflected accurately the circumstances of the Development.
(b) The deterioration in the status of the Project in terms of cost and delay leading to the works coming to a standstill in early 2015.
(c) The issuance by Arif of the Certificate of non- performance entitled DAS to terminate the Construction Contract.
(d) The escalation of the dispute between DAS and Intermass following the purported amendments to the Construction Contract.
(e) The failure to renew engagement of Hill International as project Manager or appoint a replacement.
(f) The refusal of DAS to attend meetings with NBAD and Intermass.
101. DAS submits both as a matter of pleading and as a matter of evidence NBAD has failed to assert and prove that there was any Material Adverse Effect “in the reasonable opinion” of NBAD.
102. I am unimpressed with the pleading point. DAS amended their Reply to deal with the various events without seeking any particulars of the clear albeit implicit plea that those events were material adverse effects within the reasonable opinion of NBAD, nor was there any application to strike the plea out. In my judgment, the issue must be decided on its merits as required under the agreed preliminary issues.
103. In this connection my attention has been drawn to the decision of the Privy Council in Cukurova Finance Int. Ltd. v. Alfa Telecom Turkey Ltd [2013] UKPC 2 in which a similar clause was in issue. It is sufficient to quote two paragraphs:-
“54. Turning now to the central issue, namely whether ATT established that it had formed the requisite opinion, it might at first sight seem surprising that ATT be required to prove that it had formed the opinion that the Award had had a “material adverse effect on the financial condition, assets or business” of CH. This could be said to be a fairly obvious conclusion. After all, it had been expressed and explained in a letter written on behalf of ATT and signed by its sole director, and seems really self-evident on the facts.
55. While those points undoubtedly would have made it very difficult indeed to challenge the rationality or honesty of the opinion, they do not meet the point that there must be some admissible evidence at the trial to show that the Board of ATT had formed the opinion described in clause 17.16. The clause virtually entitles one contractual party, ATT, to be judge in its own cause on the issue of whether the clause is satisfied, and, if it is so satisfied, has a potentially drastic effect on the economic position of the other contractual parties, CH and CFI. Accordingly, it is only right that the court has to be convinced by admissible evidence that ATT did in fact form the requisite opinion, as well as being convinced that that opinion was honest and rational.”
104. On the facts Cukurova was fairly straightforward given the existence of a board minute directly in point. Nonetheless I note the threshold requirement of admissible evidence of the formation of the relevant opinion. The question arises to my mind whether in the absence of direct evidence of the opinion it can be inferred from all the circumstances. In this connection, I invited supplementary submissions on the decision in Pan Foods Importers and Distributers Pty Ltd. v. Australia and New Zealand Banking Group (2000) 170 ALR 519 (HCA) which contains the following passage:
“An event of Default within the meaning of 10.1(j) of the General Conditions, occurred. When Pan Foods’ facilities came up for review in 1994, an investigating accountant was appointed to report to the bank. It became obvious that Pan Foods was incurring large losses. The bank officer in charge of the account told his superiors that the company was performing “disastrously”. The accountant expressed the opinion that, if the bank enforced its security there would be a substantial shortfall. The evidence makes it plain that circumstances had arisen which, in the opinion of the bank, had a material adverse effect on the business, assets and financial condition of Pan Foods and on its ability to perform its obligations to the bank. It was submitted that there was no specific evidence of the formation of such an opinion. In truth on the information before the bank, no other opinion was reasonably available, what was said and done by the officers of the bank makes it clear that they held such an opinion.
That entitled the bank, under General Condition 11.1(e) to declare (i.e. to communicate to its customer an expression of its will) that the moneys owning by the customer were due and payable. It did this by giving a notice demanding payment.”
105. The passage contains a reference to the submission that there was no specific evidence of the formation of the relevant opinion. Although not referred to by the High Court my attention has been drawn to the judgments handed down by the Court of Appeal of Victoria where reference is made to the evidence of two witnesses responsible for the relevant account that in their opinion the losses revealed in the trading results constituted a material adverse change. However, the High Court seems to have proceeded on the basis that regardless of the existence of any such direct evidence nonetheless no other opinion was tenable and the actions of the relevant officers in response to the results demonstrated that the appropriate opinion was held.
106. The question that arises is whether there is any (or any adequate) material from which it can be inferred that NBAD formed the requisite opinion bearing in mind that the event of default arises from the circumstances and not from forming the opinion. The starting point must be the factual circumstances in which the loan was accelerated. As pleaded by NBAD the reality was that there had been a substantial overrun of cost from AED 665 million to AED 806 million leaving a large shortfall of funds available for completion. (Indeed, EC Harris put the shortfall at AED 170 million leaving aside EOT). DAS had no available funding for the shortfall or any part of it. There had also been a considerable degree of delay (of around 9 months) with work coming almost at a standstill. There was no project manager and no plans to appoint one. The underlying problem was the level of dispute between DAS and Intermass. There was no agreement on EOT’s. DAS refused even to meet with Intermass. Remarkably the reason later advanced by Mr Almuhairi for not engaging with Intermass before termination of the contract (a process urgently requested after termination) was an allegation that the Chairman of NBAD was a partner in Intermass – a point never made at the time or advanced at the trial. The alternative advanced by DAS of engagement of a new contractor would involve more expense and delay.
107. In my judgment (and I am not sure the proposition is controversial) a view based on that material that there was thereby a material adverse change could be readily accepted as honest and rational. But I would go further and hold that it is right to infer that it was not just reasonable but inevitable that any competent bank would form the opinion that there had been a Material Adverse Effect based on its internal analysis and the advice received from EC Harris in late 2014 and early 2015. That opinion can be readily inferred from the unsuccessful steps taken to seek to resolve the disputes between DAS and the contractors in the face of the potential for failure to complete the project and service the loan.
108. I have not forgotten the absence of any reference to Material Adverse Effect in any document prior to the Defence and the absence of any reference to the topic in any internal minutes or memoranda. But accepting that mere expressions of concern are not enough it would nonetheless be irrational to distinguish the bank’s analysis of the situation taken with the expressions of justifiable and pressing concern by the bank and its advisers as to the ability of DAS to complete the project and service the level of debt from a clear opinion that there was a Material Adverse Effect by the time of the demand by NBAD.
109.In this connection NBAD legitimately placed particular reliance on the following:
(a) Mr Sokhn’s internal email of 7 May 2015 to Mr Yazbek (the group Chief Credit Officer) to Mr Choudhury the Group Chief Risk Officer. As already noted it included the following passage:
“There is no progress on site or any alternative arrangement so far from [Mr Almuhairi] to resolve the issue. I learned he had approached several contractors with no success. Our current exposure is AED 513 million (including 73 million interest) with additional budgeted cost to completion of AED 270 million.
The total cost to completion will probably increase to AED 800 million to which will be added around AED 150 million in finance costs due to the ongoing delays. The property value upon completion on the later BRF valuation is AED 1.28 billion.
Legal action seems to be the last available option so far to protect the bank’s interest or at least to put pressure.”
Mr Sokhn confirmed in his oral evidence that it was Mr Yazbek and Mr Choudhury who made the decision to accelerate the loan.
(b) In his second witness statement Mr Sokhn said this in regard to the concerns of NBAD as at the date of the demand:
“The decision to accelerate Mr Almuhairi’s loan was a collective decision by NBAD’s Risk department with the support of NBAD’s Legal Department. Within the Risk department, I discussed whether to accelerate Mr Almuhairi’s loan with Mr Yazbek and Mr Choudhury. We agreed that Mr Almuhairi was in serious breach of his obligations under the loan and that the situation would continue to deteriorate since the project had effectively come to a standstill without any realistic budget or any programme for completion. Mr Almuhairi had failed to agree an amended construction contract with Intermass or any replacement contractor, the agreed completion date of 31 March 2015 had been missed, and it appeared highly unlikely that any resolution would be achieved by further correspondence and discussions between NBAD and Mr Almuhairi. By 21 May 2015, I and my colleagues in NBAD’s Risk department and NBAD’s Legal Department were concerned that Mr Almuhairi would not be able to complete the project at all and that he would default on his obligations to repay the loan.”
(c) It was suggested to Mr Sokhn in cross-examination that if the project was completed with a value of AED 1.28 billion there was a prospect of the bank being repaid and there being some equity for DAS. The contrary view (which I accept) was expressed by Mr Sokhn:
“And your Honour, if I may elaborate on this point, I see there’s a lot of emphasis being put on collateral value. The way we approached the project financing of this nature is based more on the cash flow rather than the collateral value. And indeed, the collateral value is based actually on discounted cash flow of the project, which is the cash flow which will come from the rental of the hotel after – the income of the hotel after the completion of the project.
This is why when we looked at the restructuring of this case, we had two risks involved. One is the completion risk, the other one was the repayment risk and as long as the completion is not adhered to as per the timelines that we have set, obviously the value of the collateral upon completion, which is 1.28, will not be an actual value, because there is no discounted cash flow coming from the hotel.
This is where our main concern was, from a financial perspective, it didn’t seem feasible any more to add more financing to this project, because simply of the fact that even if it’s completed in terms of construction, the income which will be produced will not be sufficient to deal with the burden of the debt itself.
(d) Mr Abdelhaq said in his witness statement (which was unchallenged):
“One additional default that was within the “Events of Default” at this time, although not mentioned in the “Notice of Demand”, was an Event of Default under clause 23.11 (“Material Adverse Change”) of the amended facility. I say this because by the date of the “Notice of Demand”, I and my colleagues at NBAD had made clear our concern that Mr Almuhairi’s decision to replace Intermass as the contractor would materially impair his ability to complete the project on time, on budget, or at all. I believe that the effects of Mr Almuhairi’s decision came well within the scope of a “Material Adverse Effect” under the loan…”
110. I am not persuaded that NBAD is precluded from relying on Clause 23.11 by reason of its absence from the list of events of default in the demand letter or that any such allegation has been waived. This renders it unnecessary to consider the allegations of bad faith in failing to call evidence of the relevant opinions (albeit as a matter of first impression the point seems hopeless). I conclude that NBAD has made good the contention that it was entitled to accelerate the loan by reason of Material Adverse Change.
Conclusion
111. For all these reasons, I answer the preliminary issues as follows:
- Issue 1(a)(i): No.
- Issue 1(a)(ii): Yes.
- Issue 1(a)(iii): Yes.
- Issue 1(b): No.
Issued by:
Lema Hatim
Assistant Registrar
Date of Issue: 10 August 2017
At: 2pm
The post DAS Real Estate Owned and represented by Mussabeh Salem Mussabeh Humaid AlMuhairi v First Abu Dhabi Bank Pjsc [2016] DIFC CFI 002 appeared first on DIFC Courts.