Walking the fine line between breach of trust and breach of contract
White Collar Crime and Investigations / UAE
Fatima HusseinAssociate,White Collar Crime and Investigations
When someone suffers losses at the hands of a third party, the first question is often what options are available for the company or individual to make themselves whole. This question depends on the nature of the act that causes the losses in the first place. Are we dealing with a civil matter of breach of contract, or does the conduct somehow also harm public morals and constitute a criminal offence?
The UAE penal code has a number of offences in relating to the misappropriation of property which may be relevant in certain incidents afflicting a business arrangement. This includes theft, which is essentially the transfer of ownership of property without consent, fraud where the owner of property has been intentionally deceived into transferring ownership to a third party, and finally breach of trust. Breach of trust cases can be loosely identified as circumstances where a third party acquires possession of property as a result of some legitimate contractual or fiduciary arrangement, but ultimately disposes or otherwise dissipates the property in breach of these duties against the rights of the owner.
Breach of trust cases are often complex and can be difficult to distinguish from breach of contract. This distinction is important, however, for victims to be able to identify the most efficient and pragmatic means of recovering their losses. This article explains some of the key principles and indicators that are relevant to assessing whether someone has been a victim of contractual breach or a criminal offence.
Article 453 of UAE Federal Law No. 31 of 2021 (the Penal Code) defines breach of trust as the misappropriation or misuse or dissipation of funds, trust deeds, or any other movable property causing loss to the beneficial owner in circumstances where the relationship falls within a number of prescribed circumstances that give rise to a fiduciary duty of the proxy towards the agent.
The most important element of the offence is that the funds must have been voluntarily entrusted to an individual as a result of a contract that is specified within Article 453, namely, a trust deed, lease, loan for use, or proxy contract.
Breach of trust offences can be difficult to prove due the specific circumstances in which the offence can arise. The limitation of the circumstances described under the law means that not in all cases where the person in receipt of funds or property who acts against the interest of the owner is liable to a criminal breach of trust.
To establish the offence, the following elements must be shown:
The case relates to one of the specific forms of property listed under Article 453;
The original owner of the property voluntarily handed over possession of the property without any act of fraud or deception;
The property was given to the perpetrator on the condition it was to be treated as a deposit, or rental, or mortgage, or to be used in a specific manner/purpose, or in circumstances where the relationship is one of agency and proxy.
The property is then misappropriated, misused, or otherwise dissipated by the proxy.
Establishing a breach of trust offence clearly depends on how widely each of these terms can be interpreted. This is especially true, for instance, in relation to understanding what may be considered a proxy or agent relationship.
Article 453 confirms that an agent/attorney is defined as any person who is partner over the funds, or who is in a fiduciary status over the funds belonging to the beneficial owner or was given possession of anything to be used for a specific purpose for the benefit of its owner or another designated party. If this special relationship between the parties cannot be established within the specific circumstances prescribed under Article 453, it is more likely that a breach of contract has arisen, rather than a breach of trust.
While the courts have acted in the past to strictly limit the scenarios in which action will be taken for breach of trust, there is some flexibility. In all cases, the authorities will look at the substance of what has taken place and not the form. In other words, they will assess each case on the particular facts of what has occurred.
Therefore, although the law requires a specific type of fiduciary contractual relationship, it is not necessary to have a formal written document setting out the agent/proxy relationship. The main proviso is that the property was handed over in circumstances that satisfy one of the specific scenarios designated as giving rise to a breach of trust.
An example of the Court taking the approach of substance over formality is the decision made by the Dubai Cassation Court in case number 646/2020 and 662/2020 Penal Challenges, which involved the manner in which a car dealer had dealt with a customer’s funds handed over to the dealer for the purposes of the purchase of a high value car. In this case, the customer had handed over AED 2,610,000 for the purchase of a Rolls Royce. This was, from the customer’s perspective, a bona fide business arrangement entered into on a voluntary basis and not induced by either deceit or fraud. Once the dealer had taken possession of the funds, however, he decided to utilise them for his own purposes. Having misused the customer’s funds, he then failed to deliver or register the new vehicle in the name of the owner, which was the purpose of the arrangement.
In this case, the crucial factor was the fact that the car dealer was not the registered owner of the vehicle that was intended to be purchased. The car was owned by a third party who had entrusted the car to the dealer to affect its sale. Therefore, the Court decided that when the money for the car was paid over the dealer was acting as proxy of the purchaser and was entrusted to use the funds to purchase the car on behalf of the customer.
By using the funds for a purpose other than that which was agreed, the dealer had effectively assumed ownership of the money in breach of his fiduciary duty to the customer. In that particular case, the court also found that although there was no formal contract which gave rise to the fiduciary duty, the substance of the case indicated that there was a proxy arrangement. This was evidenced by a payment receipt showing that the money was deposited with the car dealer for the purchase of the vehicle on behalf of the customer. This flexible approach illustrates that whilst the court has to work within strict limits of the law, it is still able to look at the facts of the individual case and consider whether they amount to the elements of the offence. In very similar circumstances, however, it is possible that the courts would have been more inclined to look at the case as a civil dispute. Had the courts focused on the presence of a contract between the customer and the dealer rather than a delegation of the purchase from a third party, or had the legal owner of the vehicle been the dealers themselves, it is possible that the case would have been more accurately perceived as a breach of contract.
Breach of trust offences arise under very specific circumstances, which are prescribed by the UAE Penal Code. These requirements are subject to interpretation, so while the courts are reluctant to expand the definition of breach of trust offences, they apply flexibility when assessing whether all aspects of an offence have been established.
Where anyone enters into an arrangement with a third party and grants them authority to possess or deal with their property for a specific purpose, collapse of that arrangement may give rise to either a civil breach of contract or criminal breach of trust claim. The nature of the underlying conduct is essential to understanding the best and most viable course of action available to recovering any losses.
If you think you may have been the victim of a beach of trust offence, please reach out to the White Collar Crime & Investigations team who can assist you in understanding your options.
For further information,please contact Fatima Hussein.
Published in January 2024
