A recent judgment of the Abu Dhabi Court of Cassation provides important guidance on the obligations of licensed financial institutions acting as investment managers, agents and custodians.
The Court confirmed that the description of an institution as a “limited-discretion manager” or agent does not, by itself, determine the extent of its liability. The court will examine the agreement as a whole, the institution’s combined contractual roles and the practical manner in which the investment was received, held and administered.
The decision is particularly relevant to investment managers, custodians, fund distributors, investment funds and investors involved in managed investment structures.
HAZ Law acted for one of the individual respondents, against whom the claim was dismissed.
Background
The dispute arose from an investment made through a licensed financial institution into an investment fund.
Under the relevant agreements, the financial institution was appointed as a limited-discretion investment manager and agent. It also opened and administered the investor’s investment account, acted as custodian of certain investments and had a separate relationship with the fund as custodian and exclusive subscription agent.
The investor subsequently recovered part of the investment, leaving an outstanding balance. After investment returns ceased, the investor served a written notice requesting the liquidation of the account and repayment of the remaining balance.
The financial institution acknowledged receipt of the liquidation request, but the balance was not returned within the contractual period.
The Court of First Instance ordered the financial institution and the fund jointly to repay the outstanding investment balance, together with interest at 3% per annum from the date of the judicial claim. It rejected the additional compensation claim and dismissed the claims against the individual directors.
Both the investor and the financial institution appealed. The Court of Appeal dismissed both appeals and affirmed the judgment. The financial institution then appealed to the Court of Cassation.
Contractual substance prevailed over labels
The financial institution argued that it was merely a limited-discretion investment manager and agent acting on the investor’s instructions. It maintained that it did not guarantee the performance of the investment and was not required to repay the investor from its own funds.
The Court rejected that argument.
It reaffirmed that the legal characterisation of a contract depends on the parties’ common intention, assessed through the agreement as a whole and the surrounding circumstances. The label attached to a party’s role is not decisive where the contractual provisions and the actual structure of the transaction impose wider obligations.
The Court therefore considered all the functions assumed by the financial institution rather than treating the management agreement in isolation.
The institution had assumed several distinct roles
The Court found that the financial institution was not acting solely as an intermediary transmitting the investor’s instructions.
Under the contractual arrangements, it had received the investment funds, opened and administered an investment account in the investor’s name, acted as custodian, arranged the investment in the fund and undertook obligations concerning the safekeeping and liquidation of the investment.
The agreements also gave the institution substantial authority to deal with brokers, custodians, counterparties and other service providers, and to register and safeguard investment assets through entities selected by it.
The Court concluded that these provisions made the institution directly responsible for performing the obligations associated with receipt, custody and liquidation of the investment. It could not rely solely on ordinary agency principles to avoid those obligations.
A heightened professional standard
The Court also addressed the standard expected of a licensed financial institution providing investment-management services.
It held that an institution managing investment portfolios and dealing in financial markets is required to act as a professional with a high degree of vigilance and care exceeding that expected of an ordinary person.
This includes understanding the material factors affecting an investment, selecting an appropriate and reliable investment counterparty, safeguarding the investment and complying with the agreed procedure when a liquidation or redemption request is received.
The judgment should not, however, be read as imposing an automatic guarantee of investment performance or capital in every managed investment arrangement. The outcome depended on the particular contractual structure, the institution’s combined management and custody roles, the treatment of the investor’s funds and the failure to implement the agreed liquidation process.
Joint liability of the manager and the fund
The Court upheld the finding that both the financial institution and the investment fund were liable for the outstanding balance.
The fund had received and retained the investment and had failed to return it. At the same time, the financial institution had a direct contractual relationship with the investor, had received and administered the funds, acted as custodian and was responsible for implementing the liquidation request.
The Court considered those obligations sufficient to support joint liability. The institution’s description as a limited-discretion manager did not displace its separate custody and repayment-related responsibilities.
The Court of Cassation therefore dismissed the appeal and left the corporate liability finding undisturbed.
No automatic personal liability for directors
The proceedings also distinguished corporate liability from the personal liability of directors and managers.
The claims against the individual respondents were dismissed because the evidence did not establish personal fraud, deceit, gross fault or other independent wrongful conduct attributable to them.
The fact that an individual holds a directorship or management position in a company does not, without more, make that individual personally liable for the company’s contractual obligations.
This distinction is important in investment disputes involving corporate structures. A claimant seeking recovery from an individual must establish a separate legal basis for personal liability rather than relying solely on the individual’s office or title.
Interest and additional compensation
The courts awarded interest at 3% per annum from the date of the judicial claim because the outstanding investment balance was a determined monetary obligation that had not been paid.
The investor’s claim for additional compensation was rejected. The courts found that no loss exceeding the compensation represented by the interest award had been proved, and there was no evidence that such additional loss had resulted from fraud or gross fault.
Practical Significance
The judgment provides several practical lessons for participants in managed investment structures.
Investment-management, custody and distribution agreements should identify each party’s role separately and clearly. An institution acting in more than one capacity should not assume that a limitation applying to one role will necessarily restrict obligations arising from another.
Redemption and liquidation clauses should state who must receive the request, who is responsible for realising the investment, who holds the relevant assets and who must transfer the proceeds to the investor.
Financial institutions should also maintain clear records showing the segregation, location and legal ownership of client assets, the appointment of sub-custodians or counterparties, and the steps taken following a redemption request.
Where a manager, custodian, distributor and fund are connected through overlapping contractual or management arrangements, conflict-management and governance records become particularly important.
Finally, corporate liability does not automatically extend to directors or officers. Personal exposure will ordinarily require evidence of separate fraud, gross fault or other individual wrongdoing.
Conclusion
The Abu Dhabi Court of Cassation’s judgment confirms that courts will assess investment arrangements by reference to their commercial substance and the complete contractual framework, rather than relying on labels such as “agent” or “limited-discretion manager”.
A financial institution that receives investor funds, administers the investment account, assumes custody responsibilities and undertakes to implement liquidation instructions may bear direct responsibility for the return of the investment balance.
At the same time, the decision remains fact-specific. It does not establish a general guarantee of investment performance, nor does corporate liability automatically result in personal liability for directors and managers.
DISCLAIMER
This publication is provided for general information only. It does not constitute legal advice and should not be relied upon as such. The outcome of any matter will depend on its particular facts, contractual documents and applicable law. Specific legal advice should be obtained before taking or refraining from taking any action.