03 Nov 2021

Hadef in the Courts: Landmark case establishing precedent on requirement for power of attorney to benefit agents

Authored by: Mohamed Wahba and Hiba Mahmud

In brief:

A power of attorney is a legal document that allows an agent to act on behalf of the person granting the power of attorney, known as the principal. The agent is legally placed in the position of the principal. Unfortunately, powers of attorney are occasionally abused by the nominated agents. Abuse typically involves an agent using his or her power to personally benefit himself or herself, at the expense of the principal.

In a recent case handled by our Abu Dhabi office, the court established a precedent as to the requirement for such act by the agent to be permissible under a power of attorney and not constitute self-dealing.

Background

Our client, a sole proprietorship (the Client), had issued a power of attorney to a third party (the Agent) giving him broad powers to manage the Client’s affairs, including the power to guarantee third parties’ debts and obligations (the POA).

Subsequently, the Agent obtained a personal loan for approximately AED 18.5m from a leading UAE bank (the Bank). The Agent used the POA to sign, on behalf of the Client, a guarantee for the loan. The Client had no knowledge of either the loan or the guarantee.

The Agent defaulted on payment of the loan and, consequently, the Bank filed a claim against the Client as guarantor of the loan. Judgment was issued against the Client before the Court of First Instance and Court of Appeal, holding it liable to the Bank for the loan jointly and severally with five other guarantors. We had not acted for the Client before the lower courts, and received our instructions only after judgment was issued against the Client by the Court of Appeal.

Precedent established

In acting for the Client before the Court of Cassation, we raised complex legal arguments relating to the fiduciary duties of an agent under a power of attorney and the requirements under UAE law for the scope of powers designated to an agent by the principal to include the conferring of a benefit on the agent.  

The Court of Cassation agreed with the legal arguments we raised and declared that the guarantee signed by the Agent on behalf of the Client as void for self-dealing. The Court issued its judgment in the Client’s favour, overturning the judgments of the lower courts and dismissing the claim made against the Client by the Bank.

In its judgment, the Court referred to Article 156 of the Civil Code which states that “it shall not be permissible for a person to contract with himself in the name of the person for whom he is an agent, whether the contract is for his own account or for the account of another party, without authorisation from the principal, but provided that it is permissible for the principal in that event to approve the contract, having regard in all of the above to any contrary provisions of the law or commercial practice”. 

The Court held that the Agent’s action was contrary to Article 156 since the POA did not explicitly grant the Agent the power to guarantee his own debts or obligations, and as a result established the following judicial precedent: an agent under a power of attorney may not use the powers designated to him or her under the power of attorney to confer a benefit on or contract with himself or herself unless the principal has explicitly granted the agent such power.

Please note that the precedent established in this case does not prohibit the scope of powers under a power of attorney from including the conferring of a benefit on the agent, but rather clarifies that for such power to be valid it must be explicitly stated in the power of attorney.

This is an important precedent as it not only provides guidance in relation to the drafting of powers of attorneys, but it will assist in reducing potential to abuse powers of attorney by agents.

If you would like more information on this case, or have any questions, please contact Mohamed Wahba, Senior Legal Consultant, or Hiba Mahmud, Senior Associate, Dispute Resolution, Abu Dhabi.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.