UK: The DIFC Law Of Obligations: Fiduciary Duties

Last Updated: 26 February 2013
Article by Sara Khoja and Rachel Chadwick

In a previous legal update "The role of General Manager in the UAE: time for a fiduciary duty?" we examined the role of a "manager" within onshore companies in the UAE. In this legal update we examine the existence of fiduciary duties under Law No 5 of 2005 (DIFC Law of Obligations) and the potential scope of these provisions as applied to employees including managers.

What is a fiduciary relationship?

Part 8, section 158 (1) of the DIFC Law of Obligations states that: "a person is a fiduciary of another if he has undertaken (whether or not under contract) to act for or on behalf of another in a matter in circumstances which give rise to a relationship of trust and confidence."
Section 158(2) states that the following (amongst others) are presumed to be fiduciaries:

  • an employee as to his employer;
  • a director of a company, as to the company;
  • a partner of a partnership, as to the other partners; and
  • a member of a limited liability partnership, as to the limited liability partnership.

The law recognises that special obligations apply to an individual who is placed in a position of trust by virtue of the role he undertakes. An employee, director or manager will, in carrying out his duties or role, exercise a degree of discretion and need to apply his own judgment in doing so. This discretion and the decisions the employee, director or manager makes in performing his duties, has a direct effect on his employer's interests and that of the business generally. The scope of the duty owed must be assessed in the context of the commercial circumstances and the range of obligations undertaken.

What duties does a fiduciary owe?

The main obligation of a fiduciary is loyalty and this can be broken down further into the following duties (which are listed in schedule 3 of the DIFC Law of Obligations):

  • Good faith and loyalty: the fiduciary must act in good faith and in his principal's best interests without regard to his own interests; which means providing full disclosure of any information which may be relevant to the principal.
  • No conflict of interest: a fiduciary must not place himself in a position where his own interest conflicts with that of his principal or where there is a real possibility for such a conflict.
  • No secret profits: a fiduciary must not use the principal's property, information or opportunities for his own or anyone else's benefit unless the principal has granted prior consent or the use has been fully disclosed and the principal has approved it.
  • Confidentiality: a fiduciary must only use or disclose information obtained in confidence from a principal for the benefit of the principal.
  • Care, skill and diligence: in carrying out his duties. The fiduciary must do so with the care, skill and diligence to be reasonably expected of someone with his knowledge and experience.

What action may be taken for a breach of fiduciary duty?

  • Injunction: an injunction may be applied for from the DIFC Court to prevent the disclosure of confidential information or the fiduciary from taking certain action, for example, working for a competitor or misusing confidential information. If granted this injunction would need to be registered with the onshore UAE Courts for enforcement onshore, which could be problematic. The DIFC Court may also make a search order, or require the employee to deliver up, preserve, disclose or destroy the stolen documents or IT equipment containing the confidential information.
  • Setting aside: an agreement entered into by the fiduciary in breach of his duties could be set aside by the DIFC Court.
  • Account of benefit or profit: a claim may be brought against the fiduciary to account for any gain made as a result of the breach for example, diverting a business opportunity to his own business.
  • Damages: the fiduciary could be sued for the loss suffered as a result of his breach.
  • Regulatory sanction: depending on the sector in which the fiduciary operates, he may face sanction by a regulator such as The Dubai Financial Services Authority. Depending on the seriousness of the breach, criminal action may also be taken (the UAE Penal Code being applicable within the DIFC).
  • Dismissal or removal from office: depending on the level of breach, a director may be removed from office without compensation. A manager, employee or director may be summarily dismissed without notice or end of service gratuity.

Examples from UK Case law

The Law of Obligations is based on English case law and legislation; as such it is useful to see how the English courts have interpreted the duties of a fiduciary to see how a DIFC Court may apply the provisions of the Law of Obligations to employees, managers or directors.
In the UK, certain fiduciary duties owed by directors have been codified by the Companies Act 2006 and include duties to act within its powers, to promote the success of the company, to exercise independent judgment, to avoid conflicts of interest, not to accept the benefits of third parties and to declare an interest in a proposed transaction or arrangement.

English case law has distinguished between the level of duty owed by an employee, a senior employee and a director or manager. An employee is bound by a "duty of fidelity" requiring him to serve his employer with good faith and fidelity, not to make a secret profit or place himself in a position where his duty and his interest may conflict (for example, by working for another employer) and not to act for his own benefit or the benefit of a third party without informed consent of his employer. However, the duty of fidelity does not require the employee to put his employer's interests entirely before his own interests at all times and in all circumstances.

In contrast, a director or a senior employee in a fiduciary relationship with his employer is required to have "single minded, undivided loyalty"; being expected to report the misuse of confidential information by a fellow employee or even his own, be expected to pass on the benefit of every opportunity falling within the scope of the employer's business and report all competitor activity and opportunities within the fiduciary's knowledge.

With regard to directors it is worth noting that the following principles have been developed:

  • the duty is subjective; provided the director has exercised his powers diligently and in good faith, it is irrelevant that his conclusion as to what was in the best interests of the company differs from what a court could conclude;
  • the duty to account for any benefit or unauthorised profit is strict and does not depend on fraud, lack of good faith or the company suffering any loss; and
  • certain aspects of the duty to avoid conflicts of interest (for example, with regards to property, information or opportunities of which he became aware during the tenure of directorship) and not to accept benefits from third parties (regarding actions done or omitted before he ceased being a director) continue after the directorship ends.

Emirate of Dubai Law No 16 of 2011 - choice of jurisdiction in the UAE for resolving disputes

The DIFC is a separate jurisdiction within which the UAE civil and commercial laws do not apply. Before October 2011, for the DIFC laws to apply there had to be a nexus between the DIFC and the agreement; for example one or all the parties was based in the DIFC, or the contract was performed in the DIFC.

Following the introduction of Dubai Law No 16 of 2011, it is open to the parties of an agreement to choose the DIFC law and the DIFC Courts as the governing law and jurisdiction for any disputes arising out of the agreement. It is therefore possible for an employer and employee or director and a company based outside the DIFC, to agree that DIFC law will govern an agreement and that the DIFC Court will have jurisdiction.

However, the scope of this option is limited in the employment context given the onshore application of the UAE Federal Labor Law, the requirement to register prescribed form employment contracts with the applicable free zone or the Ministry of Labour. Very often, the lack of a duty of loyalty is highlighted in the onshore regulatory framework when an employee or manager is discovered to have put himself in a position of conflict with an employer and, yet the Federal Labour Law does not permit termination without notice or payment of end of service gratuity.

For very senior managers and employees, putting in place a separate agreement regarding fiduciary duties governed by DIFC law and subject to DIFC Court jurisdiction, may be an additional framework to govern expectations and the relationship. The employer and employee would agree as a matter of contractual agreement that each would be bound by the Law of Obligations.

Click here to view the legal update "The role of General Manager in the UAE: time for a fiduciary duty?".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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