Claim No. CFI 071/2020
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
(1) ABDULRAHIM ABDULLA JAFFAR AL ZAROUNI
(2) SAIF ABDULRAHIM ABDULLA JAFFAR AL ZAROUNI
JUDGMENT OF JUSTICE LORD ANGUS GLENNIE
UPONhearing Counsel for the Claimants at the hearing on 9 June 2021
AND UPONconsidering the relevant documents on the Court file
IT IS HEREBY ORDERED THAT:
1. It is hereby declared that the Share Purchase Agreement between the Claimants and the Defendant dated 25 March 2020 has been validly terminated by the Claimants by reason of the Defendant’s repudiatory breach of contract.
2. The Defendant must pay the Claimants the sum of AED 3.6 million as damages for its repudiatory breach of the Share Purchase Agreement.
3. The Defendant must pay interest on that sum from 13 September 2020.
4. The Defendant must pay the Claimants’ costs of the action, to be assessed by the Registrar if not agreed.
Date of issue: 17 June 2021
1. By a Sale and Purchase Agreement dated 25 March 2020 (the“SPA”), the first Claimant agreed to transfer to the Defendant its 270 registered shares in Ocean Mills LLC (the“Company”), a company involved in the business of milling, for a price of AED 9 million. It is the Claimants’ case that the Defendant was in repudiatory breach of the SPA and its obligations thereunder, a breach which they accepted by bringing the contract to an end and claiming damages. The Defendant denies liability.
2. The action came on for trial before me on 9 June 2021. The Claimants were represented by Ms Sarah Malik. Despite having (i) served a Defence in the action, (ii) attended (through counsel) the Case Management Conference on 17 January 2021 at which the trial date was fixed, (iii) served a witness statement on 28 March 2021 in accordance with the agreed timetable and (iv) agreed to a Consent Order on 6 April 2021 varying the date for service of witness statements in reply, the Defendant did not appear at the trial and was not represented. I was told that communications to the Defendant from the Registry and from the Claimants’ lawyers in the period after April 2021 have gone unanswered. No explanation for its non-attendance at the trial was forthcoming from the Defendant. In those circumstances the trial proceeded in the absence of the Defendant. I was satisfied that the Defendant had had proper notice of the trial date and had had every opportunity of communicating with the court if it wanted to apply for any reason to seek an adjournment of the trial.
3. One consequence of the failure by the Defendant to appear at the trial was that the evidence was substantially curtailed. The Claimants called the second Claimant, Mr Saif Abdulrahim Abdulla Jaffar Al Zarouni, the son of the first Claimant, who confirmed that his two witness statements lodged in process in accordance with the agreed timetable comprised his evidence and were true. In the absence of the Defendant he was not cross-examined, though I asked him some questions about the Claimants’ quantification of their damages claim. He struck me as a careful and honest witness and I accept his evidence. The Defendant had lodged a witness statement of Mr Naeem Ahmed, its Corporate Strategic Manager, but in the absence of the Defendant at the trial he was not called to give evidence; and accordingly, though it was useful (along with the Defence) in helping to identify the points sought to be made by the Defendant, his witness statement did not form any part of the evidence at the trial.
4. My findings below are taken from the documents lodged in process and from the evidence of Mr Saif Al Zarouni.
5. The existence and terms of the SPA were not in dispute. As at the date of the SPA the Company had an issued share capital of AED 300,000. The first Claimant (referred to in the SPA as the“Seller”) was the owner of 99% (i.e. 297) of those shares while the second Claimant, Mr Al Zarouni (referred to as“the Shareholder”) owned the remaining one percent (3 shares). In the recitals in the SPA, under the heading “Background”, it was stated that the Seller wished to sell to the Defendant (the“Buyer”) 90% (i.e. 270) of the shares in the Company. For legal reasons some of those shares were to be held by the Buyer legally and the rest beneficially.
6. In terms of clause 2 of the SPA, the Seller agreed to sell and the Buyer agreed to buy those shares for an agreed price AED 9 million (AED 2 million of which was to be funded by a Loan Agreement with the Seller). I need only mention a few of the other clauses. Clause 3 set out various Conditions Precedent, including an obligation on the Buyer to obtain or complete all forms, documents, etc required of it in connection with the execution of the SPA. Completion was to be on a Closing Date to be agreed between the parties (clause 5). Clause 7 contained various Warranties by the Seller (clause 7.1) and by the Buyer (clause 7.2), in terms of which (amongst other things) the Buyer warranted (clause 7.2(B)) that it had funds available to pay the full Initial Consideration (the AED 7 million not funded by the Loan Agreement). Clause 9.1 provided that the aggregate liability of the Parties for any Claims should not exceed AED 400,000 (“Claim” being defined in clause 1.2 as “a claim for breach of any of the Warranties”). Clause 10 set out certain Termination Rights, including a right for either party to terminate the SPA if “there is a Material Adverse Change” on or before the Closing Date. Clause 17.1 provided for the SPA to be governed by the laws of the DIFC; and in terms of clause 17.3 each party submitted to the exclusive jurisdiction of the DIFC Courts if mediation proved unsuccessful in resolving the dispute.
7. On 30 March 2020 the second Claimant, Mr Saif Al Zarouni, emailed Mohammed Said Bakhresa, the Managing Director of the Defendant, referring to the need for there to be a handover to the Buyer’s team and pointing out that the Claimants “still have not received payment for this deal.” Not having had any adequate reply, the second Claimant emailed Mr Bakhresa again on 8 April 2020 pointing out that the Company was in limbo because people had been told about the sale but did not know who to report to – he asked if they could “wrap this up today [or] tomorrow.” Mr Bakhresa replied on 9 April 2020 saying that the “restricted moves”, meaning the restrictions on movement imposed in response to the Covid-19 pandemic, “have restricted our moves”, and urging the Claimants to continue as usual in the meantime. There were further emails from Mr Saif Al Zarouni in response.
8. On 15 April 2020 Mr Bakhresa wrote to Mr Saif Al Zarouni apologising “for failing to set into the FUJEIRAH ocean Mills routine operations timely because of the COVID 19 Pandemic our moves have been affected at global level.” He continued:
“The pandemic which is unprecedented we would like to request you to continue as usual the routine mills operations as before you were handling till the situation comes back to normal.
Applying logic, we are handicapped in the current circumstances, we looked at the situation and we are handicapped to connect for now.
We are greatly sorry that this had to happen. We promise to set in as early as possible the situation gets settled down.
Please accept our apologies for the inconveniences caused to you and the organisation.”
9. This was followed by a further email from Mr Naeem Ahmed to Mr Saif Al Zarouni dated 17 April 2020 to the following effect:
“Thanks for your understanding for below email, as the situation is unprecedented as per the email sent in many ways and we cannot give a tentative date of funding, we have the hope and God will guide us through. We do not know when we can fund due to COVID 19 challenges at global level.
We are also demanding around $6.0 million from a Head quarter which was expected to receive by end March-2020 and payment got delayed because of this Pandemic. Therefore, we could not be able to continue buying the Ocean Mills as we do not wanted to give you a tentative date of funding which till this moment of time were not receiving our payment from our Head Quarter.
We had to give a good faith action so that you will not lose time to sale to someone else as our funds are blocked and become complicated with the pandemic.
But all in all we thank you for giving us the chance to buy ocean mills – but the times and situations dictated otherwise.
10. Mr Saif Al Zarouni replied to this by email of 30 April 2020. He pointed out that the Defendant was late in making payment despite its continued promises to deliver the cheque and asked for confirmation as to whether the funds referred to in clause 7.2(B) – i.e. the funds which the Defendant warranted it had available to enable it to pay the full Initial Consideration – were still available and if not why not. He asked for confirmation on three points, namely:
“1. Does Eastlift intend to make payment for the share capital in accordance with the Agreement?
2. When does Eastlift intend to satisfy payment for the share capital, if at all?
3. Does Eastlift intend on proceeding with the purchase of the share capital in Ocean Mills?”
11. On 6 May 2020 Mr Saif Al Zarouni sent a further email pressing for a response, in particular pointing out that it was not clear to him from the Defendant's email if it was just waiting on funds or if it wanted to cancel the contract. The Defendant fail to respond to either email.
12. In the absence of any reply from the Defendant, the Claimants instructed their lawyers to send a letter to the Defendant setting out its position. That letter is dated 13 May 2020 and is headed “Notice of Dispute”. After rehearsing the terms of the contract and the subsequent correspondence, the Claimants pointed out in paragraph 17 that the Defendant was in breach of its warranty confirming that it had funds available to pay the full initial consideration; and they concluded in paragraph 20 that it was clear from the Defendant's emails of 15 and 17 April 2020 that the Defendant had no intention of fulfilling its obligations under the SPA and had no intention of continuing the purchase of the shares in the company. They said:
“Our client considers this to be a repudiatory breach of contract. In the circumstances, our client has elected to accept your repudiation of the SPA.”
They went on to say that the Claimants had suffered loss and damage for which the Defendant was liable.
13. In this action the Claimants seek a declaration that the SPA has been terminated following the Defendant’s repudiatory breach of its obligations thereunder. In my opinion they are entitled to such a declaration. In its email correspondence, particularly the emails of 15 and 17 April 2020, and by reason of its failure to respond to the Claimants’ request for clarification, the Defendant makes it perfectly clear that it cannot and will not proceed with the share purchase under the terms of the SPA. That is denied by the Defendant in its Defence, but no coherent interpretation of these emails is advanced to support this denial. Subject to any justification for taking this stance, that is the clearest possible repudiation of the contract.
14. In its Defence, the Defendant puts forward a number of defences to the claim. I shall deal with these briefly in the sub-paragraphs below, but should note in advance of doing so the difficulty faced by a party who relies upon the existence of certain facts allegedly excusing it from liability but does not appear at trial to lead evidence to prove those facts.
(1) Completion was to be on the Closing Date (clause 5), and no Closing Date was ever agreed, indeed no Closing Date could have been agreed once the Defendant lost its ability to fund the transaction or to determine when it would have that ability. It is not said, as I understand it, that the SPA was subject to a Closing Date being agreed, but rather this is the foundation for other arguments which I outline below.
(2) The effect of a failure by the Defendant to have funds available to pay the Initial Consideration at the Closing Date was to release both parties from the transaction. This argument cannot be right – if it were, it would completely emasculate the express representation and warranty in clause 7.2(B) that the Buyer had funds available to pay the full Initial Consideration. Reliance is placed by the Defendant on the provision in clause 7.2(D) to the effect that the representations and warranties are accurate and not misleading “at the Closing Date”; but in my opinion this provision is intended to be an extension of the warranty that as at the date of the SPA [emphasis added] the buyer has the relevant funds available to it, not a substitution for that warranty. To limit the warranty in clause 7.2(B) to a warranty, effective only at the Closing Date (which will, on this argument, have been agreed only once funds are in place or at least secure), that as at that date the Buyer will have the requisite funds available to it, is entirely circular and would effectively deprive this provision of any effect.
(3) It is said that the Claimants failed to provide the Defendant with certain documents and other information regarding the business; a requirement which (it is contended) was a condition precedent to the transaction; and a failure on the part of the Claimants which therefore entitled the Defendant not to proceed. It is disputed by the Claimants that they failed to provide any relevant information – see paragraphs 23 and 24 of the first witness statement of Saif Al Zarouni. In the absence of the Defendant at the trial of the action, Mr Al Zarouni was not cross-examined on this issue (or on any other) and no evidence was adduced to support the Defendant’s case on this point.
(4) Finally, it is argued that the Defendant’s inability to obtain funding due to the coronavirus pandemic was a Material Adverse Change entitling the Defendant to terminate the agreement forthwith under clause 10.1 of the SPA. It is said in paragraph 33 of the defence that the Material Adverse Change was unexpected and outside the control of the Defendant having been caused by the severity of the pandemic and its impact on the Defendant’s financing, business and operations. However, to make good such an argument the Defendant would have to show how the pandemic had affected its ability to pay the Initial Consideration due on the Closing Date. This would require some evidence from the Defendant, and some detailed explanation of how the pandemic had impacted upon its [emphasis added] finances or cashflow, and how the situation had worsened for it (and for anyone on whom it was dependant) since the SPA was signed, less than one month earlier; and how this alleged Material Adverse Change prevented it paying the Initial Consideration when, according to the warranty in clause 7.2(B), it had funds available to it at the date of the SPA to enable it to pay this amount in full. No evidence was adduced by the Defendant to support its case – accordingly it must fail.
15. In light of the above, there was no contractual justification for the Defendant’s clear manifestation of an intent not to proceed with the purchase of shares under the SPA. Its conduct in this regard therefore amounted to a repudiation of the contract which the Claimants were entitled to accept, as they did by their lawyer’s letter of 13 May.
16. In the Particulars of Claim the Claimants sought damages in the sum of AED 9 million, the purchase price under the SPA. This was clearly excessive in circumstances where the Claimants retained the shares in the company. In Mr Saif Al Zarouni’s first witness statement, at paragraph 35, he explained that the Claimants had made desperate attempts to mitigate their loss and had been forced to make an urgent sale of the shares at a significantly reduced rate. He stated that the Claimants intended to amend their claim in this regard. I have no doubt that this witness statement was received by the Defendant at a time when the Defendant was still engaged in the process. They could have asked for further information or documents relevant to this sale had they been interested, but they chose not to do so. Just before the trial, the Claimants lodged a witness statement by Nazanin Esfandnia, a paralegal employed by the Claimants’ lawyers, to which she exhibited a contract entered into on 19 September 2020 in terms of which Ocean Mills LLC sold to a third party buyer the whole of its assets for a price of AED 6 million. Mr Saif Al Zarouni confirmed that this was the sale contract to which he had referred in his witness statement. The sale was structured differently, it being a sale by the Company of its own assets rather than a sale by the shareholders of their shares in the Company, but I am satisfied that there is an equivalence between the two transactions which enables the court to calculate the loss suffered by the Claimants by reason of the Defendant’s repudiation of the SPA. Given that the Defendant had had notice of this way of putting the Claimants’ case on the quantum of their loss, I allowed this material to be lodged late and allowed the quantum of the claim to be amended accordingly.
17. The calculation is straightforward. Under the SPA the Claimants were to receive AED 9 million for 90% of the shares in the Company. Under the contract in September 2020 the Company sold all of its assets for AED 6 million. This translates into AED 5.4 million for 90% of its assets. The loss is therefore the difference between AED 9 million and AED 5.4 million, a sum of AED 3.6 million.
18. The Defendant relied on clause 9.1 of the SPA, which provided that the aggregate liability of the parties for any Claims should not exceed AED 400,000. However, the term “Claim” is defined in clause 1.2 as meaning “a claim for breach of any of the Warranties”. A claim for damages for repudiation of the SPA is not a claim for breach of warranty. This provision therefore has no application to the claim for damages in this action.
19. I shall give judgment for the Claimants for AED 3.6 million. Interest will run on that sum from 13 September 2020, the date the Claim Form was issued. I will make an Order that the Defendant pay the Claimants’ costs of the action, to be assessed if not agreed.