In Brief:
- A client successfully obtained a final judgment rescinding a real estate agreement and securing repayment of AED 114 million after the developer breached its contractual obligations.
- During enforcement, a competing AED 160 million judgment in favor of the developer emerged and found to be based on an unauthorized admission and suspected collusion, prompting the client to challenge its validity.
- The Court of Appeal ruled that res judicata does not apply to third parties, invalidating the collusive judgment, and reinforced that courts can set aside fraudulent admissions in the interests fairness and the integrity of the legal system.
Challenging a Collusive Judgment and Limiting the Doctrine of Res Judicata
Hadef & Partners was instructed by a client (the “Client”) to initiate legal proceedings against a real estate development company (the “Company”) with which the Client had entered into a sale and purchase agreement (the “Agreement”) for the acquisition of a tower.
Due to the Company’s failure to fulfil its contractual obligations as seller, the Client commenced proceedings seeking rescission of the Agreement and restitution of AED 114,000,000, representing amounts paid toward the purchase price. The claim was based on Articles 272 and 274 of the Civil Transactions Law.
The Court of First Instance ruled in favor of the Client, rescinding the Agreement and ordering the Company to repay the claimed amount, together with legal interest from the date of filing until full settlement. This judgment was upheld by both the Court of Appeal and the Court of Cassation, thereby acquiring the status of a final and enforceable judgment.
Subsequently, Hadef & Partners initiated enforcement proceedings against the Company’s assets. During this process, it emerged that another judgment had been issued against the Company in favor of an individual who was both a partner and former manager of the Company. This judgment awarded AED 160,000,000, purportedly representing a loan extended by the individual to the Company. The individual had commenced enforcement proceedings, thereby competing with the Client in execution against the same assets.
Upon review, it became evident that the judgment in favor of the partner was based on a judicial admission made by the Company’s manager, an individual appointed by the same partner. Notably, the manager lacked the requisite legal authority or special power of attorney to make such an admission on behalf of the Company.
Further irregularities were identified. The manager failed to submit any substantive defence despite the absence of documentary evidence supporting the alleged debt and did not file an appeal against the judgment. These circumstances strongly suggested collusion between the partner and the manager to procure a fraudulent judgment and gain priority in enforcement proceedings.
In response, the Client initiated a separate action seeking nullification of the transaction underlying the partner’s judgment, relying on Article 397 of the Civil Transactions Law. However, the Court of First Instance dismissed the claim on the basis of the doctrine of res judicata.
The Client appealed this decision. It argued, first, that the prior judgment could not have res judicata effect against the Client, as the Client was not a party to those proceedings. Secondly, the Client demonstrated that the sole evidence relied upon – the manager’s admission – was invalid, lacking legal authority and constituting fabricated evidence designed to support an unfounded claim.
The Court of Appeal accepted the appeal and overturned the lower court’s decision. Significantly, the Court did not limit its ruling to invalidating the manager’s admission; it went further to invalidate the judgment issued in favor of the partner and rejected the application of the res judicata doctrine in this context.
In its reasoning, the Court emphasized the relative nature of res judicata, holding that its effects are confined to the parties involved in the original proceedings and cannot extend to third parties. As the Client was not a party to the earlier case, the doctrine could not be invoked against it.
Having established its jurisdiction, the Court of Appeal ruled to invalidate the underlying transaction and declared the prior judgment in favor of the individual unenforceable.
Conclusion
This case underscores the judiciary’s willingness to look beyond the formal existence of a prior judgment and examine the circumstances in which the judgment was obtained, particularly where allegations of collusion and abuse of process arise. It reaffirms that the doctrine of res judicata, while fundamental to legal certainty, is not absolute and cannot be used as a shield to protect fraudulent or improperly obtained judgments against third parties.
By recognizing the relative effect of res judicata and invalidating both the underlying transaction and the collusive judgment, the Court of Appeal safeguarded the integrity of the judicial process and ensured equitable treatment for creditors. The ruling serves as an important precedent, emphasizing that enforcement priorities cannot be manipulated through fabricated claims or unauthorized admissions, and that courts retain the authority to intervene where justice requires.
If you would like to understand how this development may be of relevance to your business, or any potential or current dispute, please contact Salih Ahnaish at s.ahnaish@hadefpartners.com or Mathlah Mohamed at m.mohamed@hadefpartners.com or reach out to your usual Hadef & Partners contact.
This article is intended for general informational purposes only and does not constitute legal advice. Readers should seek independent legal counsel in relation to their specific circumstances.