United Arab Emirates: A Duty To Disclose Own Wrongdoing In The DIFC

A recent DIFC Small Claims Tribunal (SCT) decision could lead to more stringent fiduciary duties being placed on senior DIFC employees. The DIFC SCT has found in favour of the Claimant in Heitor v Helah [2017] DIFC SCT 141, a decision which could mean that senior DIFC employees will now have a fiduciary duty to disclose their own wrongdoing, with non-disclosure potentially amounting to misrepresentation under Articles 29 and 30 of DIFC Law No.5 of 2005 (the DIFC Law of Obligation).

Background

Mr. Helah (the Defendant) was employed in the DIFC by Heitor (the Claimant) as a Senior Executive Officer (SEO) from 05 September 2016 until his employment was terminated by mutual consent on 28 February 2017.

On 01 March 2017, the parties entered into a settlement agreement (the "Settlement Agreement") whereby the Defendant agreed to forego certain contractual entitlements in exchange for a AED 332,697.98 payment to be made in instalments before the 04 March 2017.

However, after paying AED 204,422.28 as an initial installment, the Claimant discovered that, on 24 February 2017 the Defendant had written a letter to a third party, Helga Middle East Limited (Helga), disclosing confidential information about the Claimant's business and terminating a Cooperation Agreement (the "Cooperation Agreement") with Helga that the Defendant had signed in his capacity as an authorized signatory of the Claimant.

As a result, the Claimant sought to have the Settlement Agreement terminated and any monies paid to the Defendant recovered. It alleged that the Defendant had not only breached his fiduciary duties by writing the letter, but that he also had a fiduciary duty to disclose his wrongdoing and in not doing so his actions amounted to a misrepresentation which had induced the Claimant to enter into a contract they would otherwise have not entered into.

The Defendant refuted the claim, bringing a counter claim against the Claimant. The Defendant provided that he acted in accordance with his contractual obligations under the Cooperation Agreement in sending the letter to Helga, asserting that the Cooperation Agreement would have been terminated by Helga even if letter had not been sent.

Establishing a fiduciary relationship and understanding fiduciary duties

Under Article 158(1) of the DIFC Law of Obligations:

"a person is the 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".

Further, Article 158(2) of the DIFC Law of Obligations provides (amongst other examples) that an employee is presumed to be a fiduciary to his employer.

In accordance with Article 159 of the DIFC Law of Obligations, as an individual placed in a position of trust, a fiduciary has a duty of loyalty to their principle (the employer).

Schedule 3 of the DIFC Law of Obligations breaks this duty down further into the following duties:

  • 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.

Misrepresentation

In accordance with Article 29(c) of the DIFC Law of Obligations, a misrepresentation exists where a statement "is made in order to induce, and does induce, a person to enter into a contract" and under Article 30 a person is liable for misrepresentation if:

  1. he is the representor in relation to a misrepresentation;
  2. the representee has entered into a contract after the misrepresentation has been made;
  3. the misrepresentation influenced the representee to enter into a contract or affects the terms upon which he agrees to enter into it; and
  4. the representee suffers loss as a result of entering into the contract.

However, Article 29(5) of the DIFC Law of Obligations provides that:

"Non-disclosure cannot amount to a representation, unless the non-disclosure is a breach of a specific duty to disclose".

The SCT judgement

The SCT found that:

  • a fiduciary relationship existed between the Claimant and the Defendant;
  • the Defendant was in breach of his fiduciary duties when sending the letter to Helga without the Claimant's consent;
  • as a senior employee, the Defendant had a fiduciary duty to disclose his own wrongdoing to the Claimant;
  • the Defendant's non-disclosure amounted to a misrepresentation pursuant to Articles 29 and 30 of the DIFC Law of Obligations; and
  • the Settlement Agreement should be terminated and the Claimant be entitled to recover AED 204,433.28.

Judgement analysis - DIFC v UK

The DIFC Law of Obligations does not expressly obligate a fiduciary to disclose their own wrongdoing. However, in finding that the Defendant did have a duty to disclose his wrongdoing in his capacity as a senior employee, the SCT have potentially set a new precedent which effectively obligates fiduciaries to incriminate themselves.

In the UK, the duty for an employee to disclose their own wrongdoing has been the subject of a number of cases.  Whilst the relevant legislation also provides no express duty for a fiduciary to disclose their wrongdoing, this concept is supported by various examples of UK case law. For example; in Tesco stores v Pook (2004) IRLR 618, the court found that the employee had a positive obligation to disclose his wrongdoing because:

  1. the employee was a senior employee; and
  2. the wrongdoing in question had constituted a breach of his fiduciary duties.

Potential issues

Settlement agreements

The SCT's decision could bring into question the enforceability of settlement agreements entered into between senior employees and their employers, in circumstances where the previous conduct of an employee could amount to misrepresentation and/or breach of their fiduciary duties, where the employee fails to disclose the conduct.  In such circumstances, the terms of the settlement agreement could fall away.   

Applicability and scope

In the UK only senior employees and directors have a fiduciary duty in respect of their employer, whereas an individual in the DIFC is deemed to be a fiduciary by virtue of their position as an employee alone. Therefore, it is arguable that the SCT's decision could be extended to include all employees rather than just senior employees in future cases.  It will be interesting to see how this area of law develops.  The SCT decisions are not binding on the higher courts and therefore there is scope for further clarification on an employee's duties and their effect on any settlement agreement.

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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