Hexagon Holdings v DIFC – Lessons in DIFC Contract Law

Executive Summary

In August 2022, the DIFC Court of Appeal dismissed the application by Hexagon Holdings (Cayman) Limited (“Hexagon”), the Claimant, for permission to appeal the judgment of Justice Cooke thus concluding, after 3 years, one of the highest value damages claims heard in the DIFC Courts¹. 

The proceedings offer three salient lessons to parties and legal practitioners alike: 

1. Limitation periods are not subjective – parties must take action for a breach of contract within six years after the purported breach of contract occurs; 
2. Reservations of rights will not be effective indefinitely; and 
3. Termination of a contract based on anticipatory breach must be actioned within a reasonable period. Further, termination will not be effective after the breach is remedied or the contract affirmed.

The Background Facts

In December 2003, Hexagon and the Dubai International Financial Centre Authority (“DIFCA”) entered into a joint venture agreement (“JVA”), which was amended in May 2004 (“AJVA”), to establish a joint venture company to develop a plot of land in the DIFC. The rights and obligations under the AJVA were later assigned to the Dubai International Financial Centre Investments LLC (“DIFCI”). Hexagon brought claims against both the DIFCA and DIFCI; for ease of reference, this note will refer to them collectively and singularly as the “Defendants”. 

The AJVA required the land to be developed within four and a half years of the AJVA’s execution; despite this, to this day, the land remains undeveloped. 

Among other things, Clause 3 of the AJVA required the Parties to execute a shareholders’ agreement to reflect the terms of the AJVA, to incorporate a joint venture company, to fund the project, and to effect transfers of land. Clause 3 stipulated that the Parties would use “their best endeavours in good faith to complete the steps and procedure … as soon as is reasonably practicable”²  (the “Clause 3 Obligations”).

The development of the plot did not progress for the following reasons:³  

1. Nothing happened between 2004 and 2006 whilst the previous owners of Hexagon sold their shares to the current ultimate beneficial owners; 
2. It was not until the middle or end of 2006 that the current ultimate beneficial owners were in a position of control and able to progress matters; 
3. In February 2008, a shareholders’ agreement was executed, though it was common ground between the Parties that this agreement was ineffective and did not satisfy the obligations arising from the AJVA; 
4. From 2008, the global financial crisis substantially impacted Hexagon’s ability to procure financing and Hexagon sought to amend the terms of the Parties’ agreement in 2010 and 2012, with the goal of making the transaction more profitable for itself. Hexagon’s terms were unacceptable to the Defendants, and were not accepted.

Over the next several years, Hexagon continued to attempt to negotiate more favourable terms and obtain concessions from the Defendants, with limited success. The project land remained undeveloped. 

On 19 November 2018, Hexagon purportedly terminated the AJVA, alleging that the Defendants had breached the AJVA in such a way as to amount to “fundamental non-performance”, per Article 86 of the DIFC Contract Law. Article 86 states as follows: 

“86. Right to terminate the contract

1. A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance.
2. In determining whether a failure to perform an obligation amounts to a fundamental nonperformance regard shall be had, in particular, to whether:
   
   1. the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract;
   2. strict compliance with the obligation which has not been performed is of essence under the contract;
   3. the non-performance is intentional or reckless;
   4. the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance.
3. In the case of delay the aggrieved party may also terminate the contract if the other party fails to perform before the time allowed under Article 81 has expired.”

On 6 March 2019, Hexagon commenced proceedings against the Defendants. Hexagon sought a declaration that its 2018 termination was effective and that it was entitled to damages from the Defendants.⁴

Alternatively, Hexagon argued that its termination was an anticipatory repudiation of the Defendants’ alleged intended fundamental non-performance of the AJVA, per Article 88 of the DIFC Contract Law. Article 88 states as follows: 

To support its claims, Hexagon relied upon two letters from the Defendants of 12 June 2012 and 27 September 2012 (“Letters of Renunciation”), which purported to renounce the AJVA and which were followed up with oral renunciations in meetings between the Parties in 2016 and 2017. However, the Letters of Renunciation were themselves subsequently disavowed by the Defendants, and the Defendants argued that they had demonstrated an intention to be bound by the AJVA before Hexagon’s 2018 termination.⁵

Issues

The key issues between the Parties were: 

1. Did the Defendants breach their Clause 3 Obligations, and in particular the obligation to use “best endeavours in good faith” to negotiate a shareholders’ agreement, such that Hexagon had the right to terminate the contract pursuant to Article 86 of DIFC Contract Law?⁶  
2. Was the Defendants’ withdrawal of their Letters of Renunciation in December, 2012 effective, such that by the time of Hexagon’s purported termination on 19 November 2018, there was no “anticipated fundamental non-performance” that Hexagon could rely on to terminate under Article 88 of the DIFC Contract Law?
3. If the Defendants’ conduct did amount to anticipatory breach:
   1. Was Hexagon entitled, as a matter of law, to terminate the contract: 
   2. Did Hexagon terminate within a reasonable time, pursuant to Article 87(2) of the DIFC Contract Law? 
   3. In the alternative, did Hexagon reserve its rights or affirm the AJVA at common law? 
   4. Notwithstanding the breach, would Hexagon have been able to perform the contract? 
   5. Had Hexagon suffered any loss?

The Court’s Decision

Clause 3 Obligation and Good Faith 

Hexagon’s case was that the Defendants had never intended to engage in the joint venture with Hexagon and that the Defendants’ participation in negotiations had been “filibustering on a grand scale”⁷ . Hexagon alleged that the Defendants had engaged in various breaches of the terms of the AJVA and in particular, the Clause 3 Obligation to use “best endeavours in good faith” to enter into a shareholders’ agreement. Notably, Hexagon would only agree to a shareholders’ agreement with terms that were more favourable to it than those incorporated in the AJVA. Hexagon alleged that the Defendants’ refusal to agree to these terms was a breach of the Clause 3 Obligation. A further “oddity” of the case⁸,  was the involvement of a third party, called “Nexus”. Clause 3 of the AJVA provided for Nexus to draft the shareholders’ agreement in circumstances where many of the terms were already incorporated into the AJVA (and just needed to be transposed into the shareholders’ agreement).  However, for whatever reason, Nexus never prepared a shareholders’ agreement for the Parties.

Justice Cooke found that a “best endeavours in good faith” duty cannot require a party to a contract to vary or renegotiate the existing terms of that contract.⁹  The most the obligation could require was that the Parties had to agree to a shareholders’ agreement that accorded with the terms of the AJVA – the Defendants were not required to agree to terms other than those. This was so even where the commercial reality surrounding the project had clearly changed as a result of the impact of the global financial crisis. 

Justice Cooke also held that to the extent that a “best endeavours in good faith” obligation did require a party to negotiate, this amounted only to a mere agreement to negotiate, which agreements are typically unenforceable. 

The Defendants’ Renunciation of the AJVA 

Hexagon argued that the Defendants’ 2012 Letters of Renunciation gave rise to the right to terminate the AJVA pursuant to Article 88 of the DIFC Contract Law. The Court dismissed this claim. 

Put simply, if Hexagon wanted to terminate the AJVA pursuant to Article 88 of the DIFC Contract Law, it ought to have done so when the Letters of Renunciation were issued, not six years later, and not after the Defendants had recommitted themselves to the AJVA. 

The Limitation Issue Periods and the Reservation of Rights 

Hexagon alleged breaches by the Defendants stemming from events as far back as 2006. This gave rise to limitation issues, which Hexagon sought to avoid by arguing that the breaches were “continuing breaches” or that it had reserved its rights to bring proceedings, such that limitation issues were not engaged.¹²  Hexagon’s arguments were dismissed. 

The Court held that, as a matter of DIFC law, a cause of action arose when all the elements to make out the claim first became apparent. A party could not argue that a breach was “continuing” as a means of avoiding limitation issues. Further, the Court considered that a party’s reservation of rights did not negate the effects of the DIFC’s six year limitation period, emphasising that a reservation of rights should only be temporary. The Court’s findings in this regard meant that any cause of action which accrued before April 2012 was time-barred, with the result that Hexagon’s only causes of action that survived the limitation period were those that related to the Letters of Renunciation. 

Failure to Terminate within a Reasonable Time / Affirmation 

In the alternative, Hexagon argued that the Defendants’ breaches of the Clause 3 Obligations and the issuing of the Letters of Renunciation were fundamental breaches of the AJVA, and granted Hexagon an inalienable right to terminate. This claim was also dismissed. 

Justice Cooke found that by its own conduct, Hexagon had affirmed the AJVA after the Defendants’ alleged breaches and after the Letters of Renunciation, thereby rendering Hexagon’s purported termination on this ground ineffective. In so holding, the Court relied upon correspondence from Hexagon’s counsel to the Defendants in October 2015 reminding them of their contractual obligations. 

The Court held that Hexagon was required to exercise any termination within “a reasonable time” and that an occasional reservation of rights was not effective to overcome this. Justice Cooke considered that “I do not consider that a party can retain a right to terminate over a period in excess of six years from the date when such a right to terminate is said to have accrued. On this basis alone, the right of termination was lost.”¹³ Going a step further, Justice Cooke held that Hexagon’s own actions, in insisting that the DIFC negotiate a joint venture agreement on the basis that the AJVA remained valid and effective, affirmed the AJVA “notwithstanding any prior breaches by the Defendants”. ¹⁴

Notwithstanding the breach, would Hexagon have performed the contract? 

Hexagon maintained that but for the Defendants’ breaches, the AJVA would have been completed. In support of this claim, it relied upon the evidence of its witnesses who claimed to have “hundreds of millions of dollars at their disposal”. However, no evidence of assets, bank accounts or loan agreements were produced to support these statements.   Hexagon failed to comply with the Court’s order to produce documents to demonstrate its ability and willingness to invest in the project via “liquid finance”.¹⁵ Hexagon’s failure to produce these documents enabled the Court to draw adverse inferences regarding Hexagon’s ability to perform the contract, with the Court concluding that Hexagon would not have been able to proceed with the AJVA, irrespective of the Defendants’ purported breaches. Therefore, as no project would have occurred it was hard to establish what loss Hexagon would have suffered as a result of the Defendants’ purported breaches.¹⁶

For these reasons and others, the Court found that Hexagon’s case was fundamentally unsound and could not be made out. In contrast, the evidence indicated that the Defendants had acted in good faith and in a manner consistent with their obligations under the AJVA at all times. The Court accordingly declined to award the damages sought by Hexagon.

Appeals

Since March 2022, when the first instance judgment was handed down,  Hexagon has twice tried, and failed, to appeal the judgment. 

In April 2022, the Court of First Instance declined to grant Hexagon’s application for permission to appeal,¹⁸ on the grounds that Hexagon’s application sought to “misquote and mischaracterise the judgment of the [first instance] Court”. ¹⁹ The Court considered that the appeal had no prospect of success, and was “in part incoherent and in whole unmeritous”.²⁰ Permission to appeal was denied and indemnity costs were ordered.

In May 2022, Hexagon applied to the DIFC Court of Appeal for permission to appeal.²¹ Again, the Court dismissed this application, finding that: 

1. There was no reasonable prospect of success on the appeal because each proposed ground of appeal was without merit; and
2. There were no compelling reasons to grant permission to appeal. 
   
    

Conclusion

To businesses contracting in the DIFC, this case and its appeals offer some key takeaways: 

1. If the right to terminate a contract arises, the terminating party should take prompt and decisive action either to terminate or waive the breach. The DIFC Contract Law requires parties to terminate within a reasonable timeframe. Terminations effected after the breach is remedied will not be effective, nor will indefinite reservations of rights. Parties should assess their termination rights with this in mind. 
2. Limitation periods can be fatal to a party’s claim. Once a party becomes aware of a breach, they should seek immediate legal advice to understand the limitation period and bring any claims within the relevant period. 
3. A long-standing reservation of rights will be unlikely to overcome an expired limitation period. Parties should act decisively upon uncovering a breach of contract.
4. DIFC Contract Law co-exists with the English common law concerning contracts. The DIFC Court may continue to rely on common law principles whilst establishing its own precedent.