Magdeev v Tsvetkov

Factual and Procedural Background

This case concerns a dispute between two former close friends, the Plaintiff and the Defendant, regarding the repayment of a US$10 million loan originally made by the Plaintiff to the Defendant to finance the purchase of Graff diamonds for resale in Dubai and Cyprus. The Defendant guaranteed the loan on behalf of a company incorporated in the UAE (Company A). The loan was structured through an Investment Agreement and a sham Employment Agreement intended to disguise the payment of interest on the loan, which was contrary to UAE law.

The business involved several entities, including Company A in Dubai and a Cyprus company (Company B), with complex shareholding and investment arrangements involving the Plaintiff, Defendant, and other parties. Over time, multiple payments were made by Company A and others to the Plaintiff and his associates, some characterized as salary or bonuses under sham employment contracts, others as repayments or investments. The parties disputed the nature and effect of these payments, the existence and terms of several oral agreements modifying the original arrangements, and the enforceability of the loan agreement in light of alleged illegality under UAE law.

The Defendant denied liability for repayment of the loan, contending that the loan had been repaid through various payments, and that the employment contracts were sham agreements. The Plaintiff claimed the Defendant remained liable for the outstanding loan amount. The case involved issues of English and UAE law, including questions of illegality, contract interpretation, burden of proof, and the enforceability of agreements structured to circumvent UAE legal restrictions.

Procedurally, the case was heard over three weeks in the Commercial Court, involving extensive witness and expert evidence, with the Plaintiff represented by Attorney Robins and the Defendant by Attorney Berry QC. The court considered related proceedings in Dubai and England, and various counterclaims including conspiracy and claims relating to a high-value diamond purchase.

Legal Issues Presented

1. Whether the Defendant is liable to repay the US$10 million loan made by the Plaintiff.
2. Whether the various payments made to the Plaintiff and associates constituted repayments of principal under the loan or other forms of payment such as salary or bonuses.
3. The legal effect and enforceability of the sham Employment Agreements under UAE law, including whether they constituted forgery or fraud.
4. The impact of illegality under UAE law on the enforceability of the loan and related agreements under English law.
5. The burden of proof regarding the characterization of payments as repayments of principal.
6. The existence and terms of oral agreements modifying the original loan arrangements.
7. The validity and effect of the Plaintiff’s resignation letters and alleged waiver of claims.
8. The merits of counterclaims including those relating to a Pear-Shaped Diamond transaction and conspiracy allegations.
9. The enforceability of the jurisdiction clause in the Investment Agreement and the consequences of proceedings commenced in Dubai.

Arguments of the Parties

Plaintiff's Arguments

• The US$10 million loan remains outstanding and the Defendant is liable to repay it.
• The payments made under the Employment Agreements and other transactions were not repayments of principal but disguised interest or other payments.
• The sham Employment Agreements were not genuine contracts and were used to circumvent UAE law, but this should not void the underlying loan agreement.
• The Defendant’s case on oral agreements denying repayment or altering terms is inconsistent and unsupported by contemporaneous documentation.
• The Plaintiff did not intend to waive claims by signing the resignation letters; any such waiver was a mistake.
• The counterclaims, including conspiracy and claims related to the Pear-Shaped Diamond, are valid and should be considered.
• The Dubai proceedings breached the exclusive English jurisdiction clause and caused damages recoverable by Company A.

Defendant's Arguments

• The US$10 million loan has been substantially repaid through various payments characterized as salary, bonuses, and capital repayments under oral agreements.
• The Employment Agreements were sham contracts created to obtain a UAE visa and are contrary to UAE law, potentially affecting enforceability.
• The Plaintiff waived any remaining claims by signing the resignation letters, which included broad releases of claims against Company A.
• The Plaintiff’s evidence is inconsistent, and the documentary record is unreliable, with backdated and falsified documents.
• The alleged oral agreements modified repayment terms, including waiving interest and treating salary payments as repayment of principal.
• The conspiracy claim lacks credible evidence of a combination to use unlawful means with intent to harm the Defendant.
• The Dubai proceedings were not solely for security purposes and thus did not fall within exceptions to the jurisdiction clause.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by carefully considering the factual background and the complex dealings between the parties, noting the breakdown of trust and the fluid nature of the arrangements. It found that the sham Employment Agreements were not genuine contracts but vehicles to disguise the payment of interest on the loan, which was contrary to UAE law. The court accepted the Defendant's account that the parties agreed orally in late 2014 (the First Oral Agreement) to waive interest on the US$10 million loan and treat the payments under the Employment Agreements as repayments of principal.

Regarding the various payments made by Company A, the court analyzed each disputed payment, concluding that almost all payments, including salary, bonuses, and payments labeled otherwise, were repayments of principal, except for one payment of US$110,000 which was treated as repayment of an informal short-term loan.

The court found the Plaintiff's resignation letter constituted a genuine waiver of any remaining claims for repayment, given the near full repayment and the context of the parties' relationship at that time.

On illegality, the court accepted expert evidence that the Employment Agreements constituted forgery under UAE Penal Law, as they involved alteration of truth and were used to secure visas fraudulently. However, applying English law principles of foreign illegality, the court balanced the seriousness of the illegality against the overall transaction. It concluded that the illegality was incidental to a legitimate loan transaction and that enforcement of the loan agreement would not be contrary to justice or international comity.

The court rejected the conspiracy claim for lack of credible evidence of a combination with intent to injure the Defendant, and found the counterclaim relating to the Pear-Shaped Diamond lacking sufficient basis to imply contractual terms or prove breach.

Finally, the court addressed the claim by Company A for damages for breach of the jurisdiction clause due to Dubai proceedings. It found that the Dubai proceedings were substantive claims, not solely for security, and thus breached the exclusive English jurisdiction clause. However, the damages recoverable were limited to costs caused by the breach, and the claim failed on the issue of hopelessness of the Dubai proceedings.

Holding and Implications

DISMISSED

The court held that the Defendant is not liable to repay the US$10 million loan, as the loan was effectively repaid through a series of payments treated as repayments of principal, and any outstanding amounts were waived by the Plaintiff’s resignation letter. The sham Employment Agreements, while illegal under UAE law, did not render the underlying loan agreement unenforceable under English law given the incidental nature of the illegality and the overall balancing of public policy considerations.

The conspiracy and Pear-Shaped Diamond counterclaims failed for lack of sufficient evidence and legal basis. The claim by Company A for breach of the jurisdiction clause in relation to Dubai proceedings was rejected on its merits.

This decision directly resolves the parties’ dispute over the loan repayment and related claims without setting new precedent, reaffirming established principles on burden of proof, treatment of sham agreements, foreign illegality, and contractual interpretation in complex international commercial disputes.