Hadef & Partners highlight the importance of diligence and duty of care of professionals

The Hadef and Partners team were recently involved in two litigious matters which highlighted the importance of the obligation on lawyers and auditors to exercise duty of care, skill, and diligence in undertaking their professional duties. Lawyers and auditors acting for clients, or submitting evidence in a juridical case, risk exposing both their client to a myriad of legal complications, and themselves to professional liability.

Case 1

Hadef and Partners represented a predominant land developer in Abu Dhabi (the "Developer") in a case that was filed by an investor who had executed a Musataha (usufruct) agreement with the Developer.

The parties had agreed in the Musataha agreement that all disputes arising from, or in connection with, the agreement would be resolved through arbitration.

The Musatih was delinquent in making payments as per the payment schedule agreed to in the Musataha agreement, therefore the Developer terminated the agreement with the Musatih and confiscated the amounts paid.

The Musatih filed a case before the courts of Abu Dhabi in an attempt to bypass the arbitration clause previously agreed to in the Musataha agreement, requesting the Developer to return the amount of AED 103,000,000 and to pay him AED 50,000,000 as compensation. Hadef submitted its defense on behalf of the Developer in the first hearing, requesting the court not to accept the case on the grounds that the agreement stipulates that the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) is the competent body to resolve the parties' disputes.  Therefore, the courts of Abu Dhabi did not have jurisdiction to examine the case.

The Musatih submitted incorrect translation of the Musataha agreement, in which he had deleted the phrase which stated that the parties had agreed to settle all disputes pertaining to the agreement through arbitration.  The Musatih had replaced the same with a phrase that stated that the parties had agreed to settle only technical disputes through arbitration, in an attempt to mislead and convince the Abu Dhabi court of first instance that it had jurisdiction to examine the case.

Had it not been for the diligence of the litigator handling the case who immediately noticed the fraudulent translation, the court would have proceeded to examine the case. However, the litigator pointed out to the court in their pleading, that the plaintiff had submitted an incorrect and misleading translation of the provision of the agreement. The litigator further submitted an accurate translation of the Musataha agreement, which the court of first instance and subsequently the court of appeal and the court of cassation had taken into consideration when issuing their respective judgments.  The litigator refused to examine the merits of case, stating that the courts of Abu Dhabi do not have jurisdiction to examine the case as per the terms of the agreement.

I cannot emphasize enough the importance of a lawyer's duty of care. Had the lawyer not been diligent i) submitting their defense in the first hearing requesting the court not to accept the case and ii) in thoroughly examining the documents of the case received from their client and those submitted by the counterparty, the case would have been accepted and examined by the Abu Dhabi courts.  Thus contradicting the will of the parties who had clearly agreed, upon execution of the agreement, that the competent body that would be responsible for resolving their disputes would be ADCCAC.

Case 2

A criminal case was filed against the manager of a prime regional fund (AFESD) in 1982 for breach of trust and embezzlement. He was indicted by the criminal court of first instance and in its judgment the said court stated that the financial auditors (Hadef and Partners' client) may be held liable for civil damages, as the auditors were not diligent in conducting their annual audit and therefore did not discover the fraud and embezzlement that was taking place throughout that period.

Based on the criminal court's judgment, AFESD filed a case against its former manager and its external auditors claiming that the auditors were negligent when conducting their audit and failed to discover the fraudulent acts of the former manager. The amount of the claim exceeded $76,000,000. The case had lingered for about twenty years before the federal courts of Abu Dhabi and several expert committees at different litigation stages had been appointed, including an expert committee from the Central Bank. The case reached the court of appeal then the court of cassation, it was further returned to the court of appeal by the court of cassation and finally it returned to and was finalized by the court of cassation.

The case was assigned to Hadef and Partners at a very late stage when the auditing firm felt that it was in serious need of legal assistance. The Partners at Hadef and Partners handling the case; Dr. Faraj Ahnaish and Counselor Salah Eldin Al Nahas stated in their defense that the auditors were expected to conduct their role in accordance with the normal financial auditing standards, and were not expected to follow any out of the norm practices, as the auditors had inspected the information and documents that were made available to them.  They were not obliged to inspect or request to inspect documents that were not provided to them, particularly since the indicted manager had deliberately concealed information from AFESD and its auditors. Additionally, the relationship between AFESD and the auditing firm was not regulated by a contract that had stipulated the scope of work expected from the auditors, therefore they were expected to conduct their auditing obligations in accordance with the normal auditing standards. The Central Bank's expert committee had taken such defense into consideration and in fact relied on such defense when preparing its report.

The Union Supreme Court has recently issued its judgment on 8 May 2012 approving Hadef and Partners' defense and the Central Bank's expert report stating that the auditors did not violate any normal practice standards. The report also stated that their obligations were limited to such obligations that were required of them in accordance with the practical standards of the business, considering that the parties were not bound by a contract that stipulated that the auditors were required to perform certain tasks. The judgment also made it clear that certain documents that lead to the indictment of the manager, and the financial transactions pertaining thereto, were deliberately never disclosed to the auditors and were only discovered after the auditors had completed their task. Therefore, as far as the auditors are concerned, they performed their duty in the manner required of a professional auditor and the Union Supreme Court acquitted them from any liability towards AFESD.

Hadef and Partners have managed to prove the importance of clearly identifying the duty of care required of professionals depending on their field of work and the tasks assigned to them.

© Hadef & Partners 2012