DIFC Court refuses strike out, audit negligence claim set for trial

CFI-041-2021: Abraaj Investment Management Limited (In Official Liquidation) & Abraaj Capital Limited (Dubai) (In Official Liquidation) v KPMG Lower Gulf Limited & KPMG LLP

Introduction

On 27 November 2024, Chief Justice Wayne Martin in the DIFC Court of First Instance handed down judgment on an application, brought by the Abraaj Group's former auditors, KPMG Lower Gulf Limited and KPMG LLP, to strike out part of the claims brought against them in negligence. The application was dismissed.

Strike Out Application

The specific issue on the strike out application was whether the Abraaj Group are permitted to claim for losses associated with fines imposed by the Dubai Financial Services Authority ("DFSA") on the two Claimant companies. Those losses are quantified at $242.1m. The Defendants alleged that (i) as quasi-criminal penalties, the DFSA Fines could not be recovered from a third party as a matter of public policy - the burden of the DFSA Fines cannot be shifted to them, and (ii) preventing or mitigating the DFSA Fines did not fall within the scope of the Defendants' duties as auditors of the Claimants. In argument, the key focus of the Defendants' submissions included references to the rule of Lord Hoffman in Gray v. Thames Trains Ltd¹ which they said meant that a party cannot recover for damage which is the consequence of a sentence imposed for a criminal act (the narrow rule in Gray). The Defendants said that this remains good English law and should be applied in the DIFC. Further reliance was placed on the decision of the UK Supreme Court in Patel v. Mirza² which contained a thorough review of the doctrine of illegality under English law.

The Claimants' position on the application was that the DFSA Fines would not have been imposed on the companies had the auditor identified the various financial irregularities uncovered when the Abraaj Group collapsed. The auditor's very function is to protect the company from the consequences of errors in the financial statements, providing the board and shareholders with accurate information that can allow the affairs of the company to be scrutinised fully.

The Claimants' defence to the strike out application also focussed on: (i) the doctrine of attribution, including reference to Stone & Rolls v Moore Stephen,³ and that the acts of illegal conduct by a few members of management cannot prevent the companies pursuing claims arising from that conduct; and (ii) that the DFSA Fines related to offences of strict liability which are excluded from the scope of the illegality doctrine.  

Decision

In dismissing the application, Chief Justice Wayne Martin found that the claims relating to the DFSA Fines were unsuitable for summary judgment or strike out because: (i) they give rise to issues of law which will need to be developed within the DIFC (and that are still developing, and have been vexed, within England & Wales); (ii) there was no case management benefit to issuing summary judgment on the claims as it would not significantly change the course to trial, or the scope of the issues to be determined; and (iii) the claims entailed a number of mixed issues of fact and law which could only be determined once the facts of the case have been found at trial. The Chief Justice listed 10 questions arising from the issues on the strike out application which will need to be determined at trial.

All of these questions are of significant interest to those who regularly consider or deal with professional negligence cases, whether in England & Wales, the DIFC or elsewhere.

The Claimants' successful defence of the strike out application paves the way for a 10-week trial scheduled to be held in the DIFC in October 2026. Chief Justice Wayne Martin observed that this would be the longest trial ever heard in the DIFC.

The Order with Reasons of Chief Justice Wayne Martin can be found here.

¹ Gray v Thames Trains [2009] UKHL 33; [2009] AC 1339
² Patel v Mirza [2016] UKSC 42; [2017] AC 467
³ Stone & Rolls (in liquidation) v Moore Stephen [2009] 1 AC 1391