DIFC Court dismisses AED 200m banking claim against DIFC Investments

In DIFC Investments Ltd v Dubai Islamic Bank [2022] DIFC CFI 024 (13 June 2022), Justice Sir Jeremy Cooke granted the Claimant immediate judgment on its claim for declaratory relief and refused the Defendant permission to amend.

The judgment is one of the first in the DIFC to deal with assignments under the DIFC Contract Law and their proper analysis where assignments are used as security in receivables-based financing. The DIFC Court also gave further guidance on the circumstances in which a stay is appropriate, pending a determination by Dubai’s Joint Judicial Committee of a conflict of jurisdiction between the courts of the Emirate.

Background

The Claimant, DIFC Investments Ltd (“DIFCI”), is the DIFC Authority’s investment vehicle. The claim arises out of a construction contract DIFCI entered into with a contractor, BIC Contracting LLC (“BIC”), to construct Gate Avenue.

BIC had obtained finance from the Defendant, Dubai Islamic Bank (“DIB”). As security for the sums owed, BIC entered into an “assignment” agreement with DIB and sent a notice to DIFCI asking it to pay sums due under the construction contract to a designated account at DIB. DIFCI did so, paying AED429 million. A dispute arose between DIFCI and BIC, which was settled during an arbitration under the construction contract.

DIB commenced proceedings in the onshore Dubai Courts asserting that DIFCI was liable to pay it AED191 million under the construction contract as a result of the “assignment”. DIFCI commenced proceedings in the DIFC Court seeking declaratory relief that no sums were due to DIB. DIFCI issued an application for immediate judgment and DIB filed a defence and counterclaim and subsequently applied to amend its defence. Before the hearing before Justice Cooke on 7 June 2022, the Dubai Court accepted jurisdiction but dismissed DIB’s claim.

A conflict of jurisdiction?

At the hearing of the cross-applications, DIB’s primary position was that the Court should stay the proceedings under Dubai Decree No. 19/2016 because there were parallel proceedings before the DIFC and Dubai Courts amounting to a conflict of jurisdiction.

Justice Cooke held, citing Lakhan v Lamia [2021] DIFC CA 001, that the mere existence of parallel proceedings did not give rise to a conflict of jurisdiction. A positive act by both courts was required. As DIB had conceded the DIFC Court’s jurisdiction, the DIFC Court had not been required to make a positive determination yet. Decree No. 19/2016 could only be engaged if the Court entered a judgment that conflicted with a judgment of the Dubai Court.

In the event, Justice Cooke found that DIFCI had no liability to DIB under the construction contract. This was consistent with the Dubai Court’s judgment.

Effect of assignments in breach of contractual provisions

The construction contract prohibited assignments without DIFCI’s “prior consent”. The primary issue was whether any purported assignment of receivables by BIC to DIB was in breach of that clause and, if so, whether that prevented a transfer of the receivables.

The Judge accepted DIFCI’s submission that DIFC law governed that issue, because the construction contract was expressly governed by DIFC law. The Judge confirmed that DIFC law follows English conflicts of law principles, namely that the law governing the rights being assigned governs the question whether the right is capable of assignment and under what conditions such an assignment could affect the obligor.

This meant that Article 94 and 95 of the DIFC Contract Law were relevant to determine the effect of the contractual prohibition on assignment. This is the first judgment of the DIFC Court on that part of the DIFC Contract Law dealing with assignments.

The Judge rejected DIB’s submission that the effect of Article 95(2)(b) is that an assignment remains valid notwithstanding that it was made in breach of a contractual prohibition. The Judge held that the effect of Article 95 mirrors that under English law; an assignment agreed in breach of a contractual prohibition is effective between the assignor and assignee but ineffective as regards the obligor, who is still entitled to render performance to the assignor.

As the contractual prohibition was effective, any assignment did not alter DIFCI’s obligation to render its performance to BIC (not DIB), as the Judge found that DIFCI had never given its prior consent. As a result, DIFCI had been entitled to settle its liabilities with the contractor and render payment in accordance with the contractor’s instructions.

When is an assignment not an assignment?

The Judge also accepted DIFCI’s alternative case that the “assignment” concluded between BIC and DIB was not a true assignment in the sense of a transfer of rights from one to the other. Although headed “assignment”, the instrument in fact described itself as a “pledge” and contained terms that were inconsistent with a transfer of title.

Although a pledge of receivables does not exist in English law, under the DIFC Security Law (and under onshore Dubai law), it is possible to create equivalent security interests that attach over receivables without transferring title. The Judge concluded that, on its proper analysis, the instrument executed by BIC and DIB was not a true assignment but merely created a security interest over receivables, title to which remained with BIC.

For all these reasons, the Judge concluded, DIFCI had no liability to DIB and had been free to deal, and compromise, with BIC.

Tom Montagu-Smith QC and Matthew Watson acted for DIFC Investments Ltd, instructed by Michael Turrini, Aimy Roshan and Khadija El-Leithy of White & Case.