A Trading Agreement in stocks and bonds is an agreement between a brokerage company or agency and its customer (the “investor”), pursuant to which the brokerage company acts as the investor’s broker and dealer for the purpose of buying and selling stocks and bonds.
Trading in securities in the UAE is subject to the provisions of many federal laws including most prominently: (a) the Federal Commercial Transactions Law (Law No. 18 of 1993), (b) the Emirates Securities and Commodities Authority and Market Law (Law No. 4 of 2000) and (c) the UAE Central Bank Law (Law No. 10 of 1980) and its amendments.
In the following judgment, the Dubai Court of Cassation classified the relationship between a Brokerage Agency and the investor as an agency created via agreement subject to the general statutory provisions governing bilateral contracts, and the provisions governing commercial agencies set out in the UAE Commercial Transactions Law.
Facts of the case
The claimant (a licensed financial brokerage company) brought a claim before the Dubai Court of First Instance against the defendant, an individual who had entered into a trading agreement with the claimant.
The claimant had opened up an account on behalf of the defendant with the Dubai Financial Market (DFM). Transactions were performed by the claimant on behalf of the defendant for which the latter was receiving his profits directly.
An outstanding balance accrued in the defendant’s account. The claimant notified the defendant and several meetings were held. The defendant did not however settle his account.
The claimant requested the Court to appoint a court accredited expert in the field of financial trading to determine the amount owed to the claimant by the defendant, and further requested the court to order the defendant to pay the amount concluded by the expert in his report.
The defendant filed a counterclaim requesting the court to appoint an expert in the field of financial trading to review his account with the claimant and to (i) exclude all transactions executed in contradiction to the DFM regulations; and (ii) to determine the losses and damages resulted from such irregularities. The defendant further requested that the court order the claimant to pay the amounts determined by the expert’s report.
The Court appointed a banking expert specialized in the field of trading securities and bonds who concluded that the loss suffered by the defendant (which amounted to AED 42 million) was due to the market conditions at the given period of time and the sharp drop in the prices of the shares and securities traded by the claimant at that period.
The expert also concluded that due to this loss, a sum of AED 14 million was owed by the defendant to the claimant.
After the submission of the expert’s report the claimant requested the Court to adjudicate the amount concluded by the expert. The defendant however requested that the Court appoint a tripartite committee of experts specializing in the field of trading securities and bonds to reevaluate the matter and investigate the case again.
The Court of First Instance, before adjudicating the case, returned it to the previously appointed expert to investigate the defendant’s objections. The Court further ordered the expert to examine all telephonic orders and instructions issued by the defendant to the claimant.
After submitting the expert report, the Dubai Court of First Instance rendered its judgment ordering the defendant to pay the claimant, with interest, the amount determined by the expert’s report.
The defendant appealed before the Dubai Court of Appeals which upheld the appealed judgment and dismissed the case. The claimant consequently challenged the appeal court’s judgment before the Dubai Court of Cassation.
The Court of Cassation
The defendant argued that the First Instance judgment was flawed because it relied on conclusions of the expert which were based on presumptuous grounds. The expert based his conclusion on his examination of the defendant’s account statements with the claimant, but without confirming that the orders had been executed on the instructions of the defendant.
The defendant’s objections to the expert’s report were:
The expert in his report acknowledged that the claimant contradicted DFM regulations by failing to keep on file a copy of all written instructions by its customers.
For the above reasons the defendant contested the expert’s conclusion and argued that the appealed judgment should be overturned since it was not based on valid reasoning.
The Court of Cassation agreed with the defendant and whilst explaining its decision made a number of comments clarifying the relationship between brokers and their investors:
The Dubai Cassation Court therefore overturned the judgment.
The Court of Cassation in this case classified the relationship between a financial brokerage agent and an investor as an agency agreement that creates a fiduciary relationship between the parties by virtue of which the agent must execute transactions within the limits of the principal’s instructions and not exceed them unless specific conditions apply. If the broker does exceed his instructions then those transactions will not be binding on the investor.