Author: Afridi Angel Editor

The Participation Exemption – Dividends and Capital Gains

Ownership of shares by companies usually results in tax being payable for dividends received or capital gains realised upon sale. However, in the UAE, the Corporate Tax law (Federal Decree No. 47 of 2022) (“CT Law”) provides an exemption to Corporate Tax in a certain scenario referred to as the Participation Exemption.

 

Article 23 of the CT Law states:

 

“Participation Exemption”

 

1. Income from a Participating Interest shall be exempt from Corporate Tax, subject to the conditions of this Article.

 

2. A Participating Interest means, a 5% (five percent) or greater ownership interest in the shares or capital of a juridical person, referred to as a “Participation” for the purposes of this Chapter where all of the following conditions are met:

 

a.) The Taxable Person has held, or has the intention to hold, the Participating Interest for an uninterrupted period of at least (12) twelve months.

 

b.) The Participation is subject to Corporate Tax or any other tax imposed under the applicable legislation of the country or territory in which the juridical person is resident which is of a similar character to Corporate Tax at a rate not less than the rate specified in paragraph (b) of Clause 1 of Article 3 of this Decree-Law.

 

c.) The ownership interest in the Participation entitles the Taxable Person to receive not less than 5% (five percent) of the profits available for distribution by the Participation, and not less than 5% (five percent) of the liquidation proceeds on cessation of the Participation.

 

d.) Not more than 50% (fifty percent) of the direct and indirect assets of the Participation consist of ownership interests or entitlements that would not have qualified for an exemption from Corporate Tax under this Article if held directly by the Taxable Person, subject to any conditions that may be prescribed under paragraph (e) of this Clause.

 

e.) Any other conditions as may be prescribed by the minister.

 

This Article provides that income from a Participating Interest, such as dividends and capital gains, is exempt from Corporate Tax. A Participating Interest is defined as a significant, long-term ownership interest in a juridical person (the Participation) that suggests some degree of control or influence over the Participation and that meets the conditions of this Article 23. With respect to dividends, Article 23 is usually used for dividends received by a UAE company (which is a Resident Person) from a foreign company. Dividends received from a UAE company (which is a Resident Person) are exempt from Corporate Tax with no further conditions (Article 22 (1) of the CT Law).

 

As an example, if a UAE Company owns a German Company (Participating Interest) and it receives dividends and later sells these shares and receives capital gains, then the dividend income and the capital gains income can be exempt from Corporate Tax if the following condition are met:

 

a.) the UAE company has held, or has the intention to hold, the Participating Interest for an uninterrupted period of at least (12) twelve months. The UAE Company should hold the shares of the German Company (Participating Interest) for an uninterrupted period of 12 months.

 

b.) The Participation must be subject to Corporate Tax (or equivalent) of 9% or more. This condition requires the Participation (ownership of shares by the UAE Company in UAE Company) to be subject to Corporate Tax or any other tax imposed under the applicable legislation of the country or territory in which the juridical person is resident which is of a similar character to Corporate Tax. In this case, it would be subject to Corporate Tax if it were not for this exemption and it would be subject to a similar or higher tax rate in Germany. Hence this test is satisfied.

 

c.) The ownership interest of the UAE Company in the Participation entitles the UAE Company to at least 5% of the profits and liquidation proceeds. In this case, the UAE Company would be entitled to 100% of the profits and liquidation proceeds of the German Company as the 100% owner. The ownership interest must entitle the UAE Company to at least 5% of the Participation’s profits available for distribution and at least 5% of the liquidation proceeds upon cessation of the Participation. As a result, this test is satisfied. Note that if the acquisition of the Participating Interest exceeds AED 4 million then this test is also satisfied (Ministerial Decision 116 of 2023).

 

d.) 50% or less of the assets of the Participation consist of non-qualifying ownership interests. An ownership interest in a Participation will be deemed a passive or portfolio investment that does not qualify for the Participation Exemption if 50% or more of the Participation’s assets, on a consolidated basis, consist of ownership interests or entitlements that by themselves do not meet the conditions of this Article had they been held directly by the Taxable Person.

 

Assets that would not qualify for the Participation Exemption include, for example, ownership interests in foreign juridical persons that are not subject to a corporate income tax in the relevant foreign jurisdiction, unless such ownership interests meet the conditions of Clause 3, or any other conditions as may be prescribed by the Minister under Clause 2(e).

 

In this case, the assets of the UAE Company that are shares in the German Company would be subject to tax in the UAE. Hence, the shares in the German Company are qualifying ownership interests which should satisfy this condition.

 

e.) The Participation Interest must meet any other conditions as may be prescribed by the Minister. As of the date of this memorandum, the other prescribed conditions are not relevant to these facts.

 

Based on the above, the following income (as specified under Article 23(5) of the CT Law) being capital gains and dividend income shall not be taken into account by the UAE Company in calculating its Taxable Income for Corporate Tax:

 

  • Dividends and other profit distributions received from a foreign Participation that is not a Resident Person under paragraph (b) of Clause 3 of Article 11 of this Decree-Law.

 

  • Gains or losses on the transfer, sale, or other disposition of a Participating Interest (or part thereof).

 

  • Foreign exchange or impairment gains or losses in relation to a Participating Interest.

 

For the sake of illustrating the use of the Participation Exemption, the above analysis does not discuss the effects of any applicable double taxation treaty.

 

*****

 

Please contact Shahram Safai (ssafai@afridi-angell.com) if you require advice with respect to Corporate Taxation in the UAE. ■

Dubai Court of Cassation Issues Directions on the Imprisonment of Judgement Debtors in the UAE

Article 319(1) of the UAE Civil Procedure Law authorises an execution judge to imprison a debtor who fails to satisfy a judgment debt, unless the debtor is able to prove that he is insolvent.

 

Although the text of Article 319(1) places the burden of proving insolvency on the judgment debtor, this appears to have been reversed following a decision of the General Assembly of the Dubai Court of Cassation issued in October 2023. A judgment creditor is now required to prove that the judgment debtor is solvent before an order of imprisonment may be issued under Article 319. In its decision, the Court of Cassation refers to and codifies the principle of Islamic Sharia’ which presumes the insolvency of a debtor.

 

However, the decision maintains that Article 319(2) provides that a plea of insolvency cannot be maintained in the following circumstances:

 

a) if the debtor deliberately smuggled or concealed their assets; or

 

b) if the debt is due in instalments that the debtor has defaulted on, or if the debt arises out of a guarantee given to the court on behalf of a different debtor, except where the debtor provides evidence of new circumstances which did not exist before and which have adversely affected his financial situation.

 

This poses a significant evidentiary burden on judgment creditors, who must now prove that (a) the judgment debtor is solvent, or (b) that one of the exclusions in Article 319(2) applies in order to obtain an order for imprisonment. It also remains to be seen whether this decision would disincentivise parties from invoking the processes set out in the UAE’s bankruptcy and insolvency legislation.

 

Orders issued by the court under Article 319(1) prior to this decision have been vacated. ■

Navigating the Jurisdiction: Key UAE Court Decisions from 2023 Shaping the Arbitration Landscape

The UAE’s arbitration landscape continues to evolve and, as 2023 draws to a close, we summarise some of the more significant judgments issued by the UAE on-shore Courts in relation to arbitration this year. While the trend of the judgments reinforces the ‘arbitration-friendly’ approach of the UAE Courts of late, 2023 has not been without its outlier cases.

 

1) It may no longer be possible to circumvent an arbitration agreement by joining third parties to court proceedings

 

A popular strategy deployed by parties wishing to bypass an arbitration agreement and invoke the jurisdiction of the UAE Courts (ordinarily a claimant) is to add parties who are not party to the arbitration agreement, as in cases which involve multiple defendants, a UAE court which has jurisdiction over one defendant has jurisdiction over all the defendants.

 

In Dubai Court of Cassation Case No. 1078/2023, the court upheld a Court of Appeal decision rejecting this strategy. In its judgment, the Dubai Court of Appeal laid down several clear principles:

 

  • while a claimant may add multiple defendants, and while a court which has jurisdiction over one defendant will have jurisdiction over all the defendants, there must be ‘real claims’ against each of the defendants;

 

  • what constitutes ‘real claims’ is a matter to be determined by the trial court based on the evidence and any applicable presumptions of law (in this case, the court found that the claimant’s cause of action was clearly a contractual one, and there were no ‘real claims’ against individuals who were not party to the contract); and

 

  • adding parties solely for the purpose of invoking the court’s jurisdiction is not permitted.

 

2) Amendments to contracts need not expressly refer to an arbitration clause in the initial contract

 

In the same case, the Dubai Court of Appeal (Case No. 911/2023) also held that an amendment to a contract which contains an arbitration does not need to expressly refer to the arbitration clause in the initial contract, provided that the amendment clearly forms part and parcel of the contract which contained the arbitration clause (i.e. as opposed to standard terms or a different contract containing an arbitration clause which is incorporated by reference). However, the prudent approach remains to replicate or clearly refer to the arbitration agreement between the parties in the initial contract.

 

3) An agreement to arbitrate in a contract will extend to subsequent contracts between the same parties, provided that (a) there is a sufficiently close factual connection, and (b) there is no subsequent agreement to resolve disputes in a different forum

 

In Dubai Court of Cassation Case No. 828/2023, the court considered an appeal relating to a construction dispute. The parties had entered into a contract containing an arbitration clause, however, the dispute between the parties arose pursuant to purchase orders between the parties issued subsequent to the initial contract. One of the parties contended as the purchase orders do not contain an arbitration clause, disputes arising in connection with the purchase orders must be determined by the courts.

 

The Court of Cassation rejected this argument. After an analysis of the documents, it was determined that the arbitration clause in the initial contract applied to the purchase orders. This decision was based on the close connection between the initial contract and the purchase orders, involving not only the parties but also the subject matter of the contract. Following the ‘accessory follows the principal’ principle, the Court of Cassation held that “based on the implicit will of the parties deduced from all previous elements, all disputes regarding subsequent contracts are subject to the arbitration clause”. The court also took into consideration the nature of contracts entered into in the construction industry, holding that “taking into account the technical nature of the construction industry, which makes it unlikely that the parties intended to limit arbitration to specific matters and resort to state courts in other matters, which may be technically related to the matters subject to arbitration given the single nature of the subject matter of those contracts”.

 

However, the court made it clear that had there been an agreement to refer disputes to a different forum in the purchase orders, such an agreement would prevail. Where the subsequent instrument is silent, there now appears to be a presumption that the agreement of the parties to arbitrate (or other such agreement as to forum) in an earlier related contract will prevail.

 

However, the prudent approach remains to replicate or clearly refer to the arbitration agreement between the parties in the initial contract.

 

4) An arbitration agreement may be assigned and is binding on the assignee, even if there is no agreement in writing by the assignee to be bound by the arbitration agreement

 

In March 2023, the Dubai Court of Cassation (Cassation No. 1603/2022) held that an agreement to arbitrate contained in an agreement can be assigned to a third party, even where the third party had not expressly agreed to arbitrate.

 

The dispute arose in the context of a reverse factoring agreement. The defendant purchased goods from a supplier and agreed to make payment within 120 days from the date of the invoice(s). The plaintiff made early payment of the invoices to the supplier on behalf of the defendant. As a result, the right to receive payments for the goods purchased by the defendant was assigned to the plaintiff and the defendant was duly notified of such assignment. The contract between the defendant and the supplier contained an agreement to arbitrate. However, there was no arbitration agreement between the plaintiff and the defendant. The point of dispute arises from the defendant’s position that as a result of the assignment of invoices to the plaintiff, the arbitration agreement has also been assigned.

 

The Dubai Court of Cassation held upon the assignment of the right to receive payment to the plaintiff, the arbitration agreement between the supplier and the defendant was also transferred to the plaintiff.

 

The rationale of the court was that the assignment does not create new rights, but merely transfers existing rights that were vested with another party. On this basis, the court held that the arbitration agreement shall also be deemed to be assigned unless the assignment agreement expressly states otherwise.

 

5) An indirect claimant may rely on an arbitration agreement entered into by the party on behalf of whom the indirect claim is being made

 

In a dispute involving a claim asserted by a subcontractor in the context of a construction dispute, the Abu Dhabi Court of Cassation held that the subcontractor (who was asserting an indirect claim pursuant to Articles 392 and 393 of the UAE Civil Code) could resort to arbitration under the contract between the main contractor and the employer. Articles 392 provides that “every obligee …may exercise, in the name of the obligor, all of the rights of that obligor, save those that relate particularly to his person or which are not capable of being attached”, and Article 393 provides that “the obligee shall be regarded as a proxy for his obligor in exercising his rights”.

 

The Abu Dhabi Court of Cassation, in interpreting and applying Articles 392 and 393, found that they extend to a right to resolve disputes through arbitration. Consequently, a party representing another’s rights, in the context of Articles 392 and 393, may resort to arbitration under the original contract between the debtor and the creditor.

 

6) The Dubai Court of Cassation recognized the distinction between jurisdiction and admissibility and held that a question of inadmissibility does not result in the annulment of an arbitral award

 

In its judgment in Cassation Case No. 1514 of 2022 issued in July 2023, the Dubai Court of Cassation for the first time drew a distinction between the concepts of jurisdiction and admissibility.

 

The underlying dispute between the parties arose from an International Federation of Consulting Engineers (FIDIC) construction contract. The respondent in the arbitration sought to set aside the arbitral award against it on the basis that the claimant had failed to comply with the conditions precedent stipulated in the contract prior to referring the dispute to arbitration.

 

In dismissing the Respondent’s appeal, the Dubai Court of Cassation held that pre-arbitral conditions precedent does not pertain to the question of jurisdiction or competence of arbitral tribunal, i.e., they are not determinative of whether arbitration is the proper forum to hear the dispute or not. Rather, they go to the question of admissibility, i.e., whether the claims raised can be heard at that point in time, or whether such claims have been referred for arbitration prematurely.

 

Significantly, the court addressed the consequences that may flow from a finding of inadmissibility. The court stated that where an issue of inadmissibility is correctly invoked, the most likely result is that the arbitration proceedings may be adjourned pending the fulfilment of the conditions precedent by the parties, though arbitration remains the proper forum to resolve the dispute (i.e. the tribunal remains vested with jurisdiction). This is a departure from previous cases where the courts held that the failure to follow pre-arbitral questions go to the issue of jurisdiction, and annulled awards on that basis.

 

7) Non-payment of advances on costs do not result in the exhaustion of an arbitration clause

 

The same judgment of the Court of Cassation is also significant as it held that the court does not become seized with jurisdiction over disputes that do not proceed to arbitration due to the parties’ failure to pay advances on costs. This represents a departure from previous cases where the court held that non-payment of arbitration fees results in the exhaustion of the arbitration clause.

 

This was reinforced in November 2023 by Decision No. 10/2023 of the Dubai Court of Cassation which directed that the previous principle of considering an arbitration agreement be exhausted if an arbitration does not commence/proceed due to the parties’ failure to pay advances on costs must no longer be followed.

 

8) Notwithstanding the DIAC 2022 Rules, specific authority to agree costs may still be required

 

It is a long-settled principle of UAE law that arbitral tribunals require express authority to award legal costs. This remains the case even following the enactment of the Federal Arbitration Law, which was expected to dispense with this requirement. Possibly in response to this, the Dubai International Arbitration Centre (DIAC) Rules of 2022 (Article 36) appeared to suggest that tribunals are empowered to award legal costs by including the “fees of the legal representative” within the costs of arbitration. The Federal Arbitration Law does not require tribunals to possess the express authority to award the costs of the arbitration.

 

However, the Dubai Court of Cassation, in a matter involving the ICC Rules (in which Article 38 make provision similar to Article 36 of the DIAC Rules), set aside the part of the award in which the tribunal awarded legal costs on the basis that “Article 38 of the International Chamber of Commerce Rules, which the arbitrator relied upon, did not explicitly empower the arbitral tribunal to decide on the legal fees of the parties’ legal representatives in the arbitration.”. On the face of it, this appears to be an incorrect finding by the court, as Article 38.1 of the ICC Rules expressly provides that the “costs of the arbitration shall include the fees and expenses of the arbitrators … and the reasonable legal and other costs incurred by the parties for the arbitration.”

 

Given the similarity between the DIAC 2022 Rules and the ICC Rules, there now appears to be a question whether Article 36 of the DIAC 2022 Rules (of itself and without express agreement by the parties empowering the tribunal) is sufficient to empower a tribunal to award legal costs.

 

9) There is a risk that a finding of invalidity of a contract could extend to an arbitration clause in the contract, notwithstanding that the Federal Arbitration Law recognizes the separability of an arbitration clause.

 

In Court of Cassation No. 585/2023, the Dubai Court of Cassation held that a finding of invalidity of a contract extends to an arbitration clause contained in the same contract. The dispute arose in the context of a dispute between shareholders of a limited liability company established in the 1990’s. As required under law at the time, the majority shareholder was an Emirati national, and this was reflected in the company’s Articles of Association. However, at the same time, an addendum was executed to the Articles to provide that, among others, the Emirati national did not own any shares in the company.

 

The Emirati shareholder successfully asserted certain claims arising out of the addendum in an arbitration conducted under the DIAC Rules. The respondent sought to set aside the award, and the Court of Appeal set aside the award on public policy grounds as provided for in Article 53(2)(a) of the Federal Arbitration Law.

 

The Court of Appeal went on to hold that “the arbitration agreement as well as filing the arbitral proceedings on the basis of such invalid contract is against public policy” and, in doing so, appears to have linked the invalidity of the contract with the invalidity of the arbitration agreement. The judgment of the Court of Appeal was upheld by the Court of Cassation which found that a decision to invalidate a contract extends to all its terms including the arbitration clause.

 

This was a surprising outcome, given that the Federal Arbitration Law expressly recognizes the separability of an arbitration clause.

 

10) Parties choosing to resolve disputes through arbitration under the ICC Rules in the UAE may find the ADGM deemed to be the seat of arbitration.

 

Earlier this year, the Abu Dhabi courts ruled that they lacked supervisory jurisdiction over an arbitration conducted under the ICC Rules, even though the agreement stated that the seat would be in Abu Dhabi. However, the agreement did not specify whether the seat would be in the Abu Dhabi Global Market (ADGM) or on-shore Abu Dhabi. The Abu Dhabi Court of Cassation held that, because the parties chose the ICC Rules, and that because the ICC maintains a representative office in the ADGM, the ADGM should be taken to be the seat of arbitration, thereby vesting the ADGM Courts with jurisdiction to hear applications related to the arbitration. It is relevant to note that following this judgment, the ADGM Courts have accepted jurisdiction in matters arising out of arbitrations conducted under the ICC Rules and where the seat was specified to be Abu Dhabi.

 

A similar judgment was issued approximately two years ago by the Dubai Court of Cassation, in which it held that it had no jurisdiction over claims arising from a Dubai International Financial Centre (DIFC) and London Court of International Arbitration (LCIA) arbitration seated in Dubai and that as the DIFC-LCIA was a DIFC establishment, the DIFC Courts are the courts vested with jurisdiction. While this issue is no longer likely to arise as the DIFC-LCIA no longer exists, it highlights the need to specify the seat of arbitration with care, particularly in the Emirates of Abu Dhabi and Dubai, given that four jurisdictions exist within the two Emirates. ■

New Maritime Law in the UAE

The UAE issued a new Maritime Law this week. The new Maritime Law, Federal Decree-Law No 43 of 2023 will come into force six months from publication and will repeal the 1981 Maritime Law.

 

As expected, the new Maritime Law significantly improves the maritime landscape in the UAE, and will no doubt seal the UAE as a shipping-hub in the region.

 

On the precautionary arrest of a vessel front, the new law requires the applicant seeking an arrest of the vessel to provide security to cover the expenses of the crew, and to maintain the vessel. The new law also appears to have broadened the definition of a “maritime debt” to include claims arising out of damage caused by the vessel to the environment and coastline, wreckage removal and port fees. Arrest of a sister vessel is also permitted, provided that the sister vessel was owned by the debtor at the time of submitting the application for arrest. This is a departure from the position under the 1981 law which permitted the arrest of a sister vessel if the sister vessel was owned by the debtor at the time the debt arose.

 

The Afridi & Angell maritime team is closely reviewing the new law and will continue to provide further updates. ■

Termination of employment in the UAE – can an employer terminate an employee’s employment at will?

Under the employment law that was previously in force in the UAE, employers were not permitted to terminate an employee’s employment (even with notice) absent a “legitimate reason” and if “the reason for such termination has no connection with work”. In other words, the concept of termination “at will” was not recognised as an enforceable right in the context of an employer-employee relationship.

 

This inBrief will examine whether the new labour law (Federal Decree 33/2021) (the New Law) which replaced the 1980 Federal Law (the Old Law) has changed this position, and how the Abu Dhabi and Dubai Courts have interpreted the relevant provisions on termination of employment with notice.

 

What does the New Law say about termination with notice?

 

The relevant provision for termination with notice is contained in Article 43 (1) of the New Law, and provides that either party may terminate the employment contract, with notice, for any “legitimate reason”. This position is no different to what was in place in Article 117 of the Old Law. Significantly, both the Old Law and the New Law require termination to be for a “legitimate reason” [لاي سبب مشروع]. Neither the Old Law nor the New Law provide a definition for what constitutes a “legitimate reason”. Some guidance was available in Article 122 of the Old Law which provided that a termination of employment of an employee would be deemed “arbitrary” if the reason for termination had no connection with the work of the employee. However, there was no definite interpretation of what a “legitimate reason” could entail, which was a point of concern for both employers and legal practitioners.

 

What about arbitrary termination of employment?

 

There appears to have been a significant departure as to what constitutes arbitrary termination of an employee’s employment under the New Law. A comparison of the relevant provisions is set out below:

 

 

Article 122 of the Old Law Article 47 (1) of the New Law
 

The termination of service of a worker by an employer shall be considered to be arbitrary if the reason for such termination has no connection with work. In particular, the termination shall be considered arbitrary if it is caused by the worker submitting a serious complaint to the competent authorities or making a claim against the employer which is proved to be correct.

  

The termination of the worker’s service by the employer shall be illegal if such termination is due to his filing a serious complaint with the ministry or filing a lawsuit against the employer that has been proven to be valid.

 

Under the Old Law, termination of employment was considered arbitrary if “the reason for such termination has no connection with work”. What might have been deemed as arbitrary termination therefore was potentially broad in scope, and could conceivably be for any reason that was not work-related. This was reinforced by the wording of the Old Law providing: “[i]n particular, the termination shall be considered arbitrary if it is caused by the worker submitting a serious complaint to the competent authorities or making a claim against the employer which is proved to be correct” (emphasis added).

 

In contrast, the mirroring provision in the New Law appears to indicate a departure from the position under the Old Law. The most notable departure is the absence of the language that the termination of employment would be considered arbitrary if “the reason for such termination has no connection with work”. Instead, the New Law restricts circumstances where termination of employment would be considered arbitrary to only “if such termination is due to his filing a serious complaint with the ministry or filing a lawsuit against the employer that has proven to be valid.” Importantly, the New Law has done away with the concept that any termination that is unrelated to the employee’s work will be deemed arbitrary.

 

Therefore, any discretion available to a judge under the Old Law in assessing whether or not the termination was work-related or arbitrary appears to have been removed by the New Law. It would seem that the drafters might have made a conscious attempt to limit the circumstances that would be deemed arbitrary dismissal by confining its application only to instances where an employee is terminated for filing a complaint with the Ministry of Human Resources and Emiratisation (MoHRE), or for filing a lawsuit against the employer.

 

How have the courts interpreted this?

 

The courts seem to have addressed the question of what can amount to arbitrary termination. In a recent decision of the Dubai Court of First Instance, the court referred to a “settled” position in law, as follows:

 

It is also settled in the precedents of the Dubai Court of Cassation that as per the provisions of Article 47 of Federal Decree-Law 33 of 2021 termination of an employee’s service by an employer is unlawful if the termination of the employee’s service is due to filing of a serious complaint to the Ministry or filing of a valid claim (lawsuit) against the employer. This means that the termination of the employment contract by an employer is considered termination without lawful reason if it aims at harming the employee due to submission of a serious complaint to the Ministry of Human Resources and Emiratisation or filing of a valid claim (lawsuit) against the employer. (Emphasis added)

 

The Court also cited with approval a judgement given by the Abu Dhabi Court of Cassation in late 2022 where the Abu Dhabi Court determined that the effect of the new provisions was to restrict what is deemed arbitrary dismissal or unlawful termination only to the two instances specified in Article 47 (1). The Court also found in that case that if arbitrary termination had been established by an employee, an employee would be entitled to compensation regardless of whether or not notice of termination was given.

 

In this case, the court cited an extract of a judgment of the Abu Dhabi Court of Cassation delivered in late 2022. The judgment of the Abu Dhabi Court of Cassation is important for two reasons. One, it recognised the intention of the drafters of the labour law to restrict arbitrary dismissal or unlawful termination to two instances specified in Article 47 (1). Second, it held that where either of the two circumstances are concerned, employees will be entitled to compensation even where the employer had given notice of termination. The relevant extract of this judgment referred to by the Dubai Court of First Instance is as follows:

 

The legislators, in the new law on regulating labour relations, restricted employees’ entitlement to fair compensation for arbitrary termination to two cases only, first, where the employer’s termination of the employee’s employment was due to the employee filing a serious complaint and termination was a result of the complaint. The court of first instance shall assess the seriousness of the complaint and whether a settlement took place or whether it was referred to court. The second is where termination was a result of the employee filing a case against the employee, of any type, provided its validity is proved from a procedural aspect without waiting for the outcome thereof.  The employee shall be entitled to compensation in both cases even if the employer abides by the obligation to give notice.

 

Significantly, the Dubai Court of First Instance, in this case, also opined that “[i]t is also settled that whoever claims that unlawful termination has occurred shall bear the burden of proving his claim, considering that he is claiming contrary to the general rule which provides that each use of a right is a legitimate use unless evidence to the contrary is established.”

 

Based on the above, it would appear that a claim for unlawful termination has now been restricted to a great extent as the courts have taken the position that termination can only be considered arbitrary where either of the two circumstances stipulated in Article 47 of the labour law are applicable. Furthermore, the burden of proof will be on the employee claiming unlawful termination.

 

What about the requirement for a “legitimate reason” under Article 43 (1)?

 

Unfortunately, the Dubai Court of First Instance did not provide any guidance on what constitutes a “legitimate reason” for termination with notice. However, the Dubai Court of First Instance made the following observation:

 

In relation to the prayer for notice pay, the labour law has stipulated provisions on termination of employment contracts in order to achieve a balance between the interests of the parties, by granting both the employee and the employer the right to terminate the contract subject to certain controls. Article 43 (1) of the labour law provides that either party to an employment contract may terminate the contract for any legitimate reason, provided the other party is notified in writing and provided the notice period is not less than 30 days and not more than 90 days. Article 43 (3) provides that the party that does not abide by the notice period shall pay to the other party the notice pay as compensation, even if the absence of notice does not cause damage to the other party. The compensation shall be equal to the employee’s salary for the full notice period or the remaining period thereof. (Emphasis added)

 

The reference to “certain controls” in the judgment could allude to the requirement that a termination should have a “legitimate reason” or, alternatively, the duty to give notice (or both).  However, where Article 43 (3) specifically stipulates a sanction for failing to comply with the notice requirement, there is nothing in the New Law that mandates any penalty where a termination is not for a “legitimate reason”. This indicates that the legislature has placed more emphasis on the notice obligation, and less emphasis on the requirement for a “legitimate reason”.

 

What does this mean for employers and employees?

 

It would still be unsafe to conclude that the UAE has adopted the concept of “employment-at-will”.  In certain jurisdictions, employers are able to terminate employees without cause, but that is not the case under the New Law. Employers are still required to base any termination on a “legitimate reason” and to give due notice in terms of the law and the contract of employment. However, it is clear that the New Law has brought about a greater balance to the employer-employee relationship as far as termination of employment is concerned. The labour law places a high burden on employers as far as termination without notice is concerned. But, when it comes to termination with notice, the position appears to be far less onerous for employers now. ■

Amendment to the UAE Federal Labour Law

Article 54 of the Labour Law (Federal Decree-Law 20 of 2023 on the regulations of labour relations, as amended) dealing with employment disputes has been amended to give greater powers to the Ministry of Human Resource and Emiratisation (the Ministry). The amended provision shall come into effect from 1 January 2024.

 

Authority to issue a decision

 

Under the Labour Law, in case of an employment dispute, before filing a case before the Court of First Instance, the employer or the employee is required to file an application to the Ministry. The Ministry is required to examine the application and take appropriate actions it deems necessary to amicably settle the dispute between the parties.

 

In case the parties fail to amicably settle a dispute, while earlier the Ministry was required to refer the matter to the courts (i.e., the Court of First Instance), now the Ministry has been given powers to decide a dispute with a final decision:

 

i.  if the claim amount in the dispute is less than AED 50,000; or

 

ii. where a dispute relates to failure by either party to comply with an amicable settlement decision previously issued by the Ministry (irrespective of the claim amount).

 

The party in whose favour the Ministry has issued its decision can directly proceed with execution (a mechanism for enforcement of a decision) of the said decision as per the rules of execution under the UAE Civil Procedure Law.

 

The requirement to file an application to the Ministry is not applicable to free zone companies (employers) and its employees wherein an aggrieved party is required by the relevant free zone authority’s rules to first approach the free zone authority instead of the Ministry. Although a free zone employer/employee is still required to approach the Ministry in order to obtain a referral letter to the court (stating that the employee can file a case before the court), the Ministry does not look into the substance of the dispute and its role is just to issue the referral letter. It will be interesting to see if the applicability of these provisions will also be extended to apply to disputes between free zone companies (employers) and its employees.

 

Right to file the claim before the Court of Appeal

 

Within 15 working days from the date of notification of the Ministry’s decision, either party may file a case directly before the Court of Appeal (and not the Court of First Instance). The Court of Appeal shall set a date for hearing within three working days and issue its decision within 15 working days from the date of starting the proceedings before the Court of Appeal. The decision of the Court of Appeal shall be final.

 

If proceedings have commenced before the Court of Appeal, there will be a stay on the execution of the decision issued by the Ministry.

 

Failure to Amicably Settle a Dispute or Claim Amount of more than AED 50,000

 

If the parties fail to amicably settle a dispute (within the timeframe provided under the law) and if the claim amount in the dispute is more than AED 50,000, the Ministry shall refer the dispute to the competent court (i.e., the Court of First Instance) together with a memorandum which shall include a summary of the dispute, the arguments of the parties and the Ministry’s recommendation. Within three working days from the date of receipt of the application from the aggrieved party, the competent court is required to set a date for the hearing and promptly decide on the dispute.

 

These are welcome amendments to the Labour Law which will result in quick resolution of disputes where the claim amount is low and will reduce the workload of the UAE Court of First Instance. ■

DIFC Courts to oversee disputes in all free zones?

A survey published by the Dubai Statistics Center has called for input from the public in what appears to be research relating to the application of ‘Common Law’ in all free zones in Dubai. The survey is not about the use of ‘Common Law’ in a general sense. Instead, the Dubai government is focused on integrating DIFC laws and giving jurisdiction to the DIFC Courts for overseeing civil and commercial disputes within the free zones.

 

The DIFC

 

The DIFC is governed by its own body of laws with an independent judicial authority, the DIFC Courts. The DIFC Courts currently have jurisdiction to hear disputes in connection with an entity established in the DIFC, disputes which are connected to the DIFC or disputes in which the parties have agreed to the jurisdiction of the DIFC Courts.

 

The rules of procedure in the DIFC Courts largely follow the Civil Procedure Rules followed by the English courts. The DIFC Courts apply DIFC laws in disputes before it, unless there is an agreement to the contrary. DIFC laws are largely a codification of English common law. The DIFC Courts can also apply any other law agreed among the parties to the dispute, such as UAE law.

 

Under the current legal framework in Dubai, unless a free zone company agrees to resolve its dispute through arbitration or through the DIFC Courts, all disputes will have to be referred to the on-shore Dubai Courts. The on-shore Dubai Courts operate under a civil law system and apply UAE laws by default. Proceedings before the Dubai Courts are conducted exclusively in Arabic, whereas in the DIFC Courts they are conducted in English.

 

The Survey

 

The survey published by the Dubai Statistics Center appears to suggest that the Dubai government is considering two possible means by which the jurisdiction of the DIFC Courts and the laws of the DIFC may be extended to all free zones in Dubai: a hybrid system and a standalone system.

 

a) Hybrid System: DIFC Courts having jurisdiction with UAE laws as default

 

Under this framework, the DIFC Courts would be responsible for overseeing civil and commercial disputes within the free zone. UAE laws will be applicable by default to the dispute. However, for matters concerning litigation procedures and evidentiary rules, the DIFC laws will take precedence. This means that while disputes will be adjudicated by the DIFC Courts, the foundational laws of the UAE would influence and guide the decisions in court cases.

 

b) Standalone System: Extended jurisdiction of DIFC to selected free zones

 

In this setup, the entire legal framework of DIFC’s civil and commercial laws (excluding licensing regulations) would extend to the selected free zone. This would mean that companies in these zones will function entirely under DIFC laws and regulations (e.g. company law, bankruptcy law, employment law, etc.), with the DIFC Courts handling all respective disputes.

 

Outcomes

 

As noted above, if the Hybrid System is implemented, the DIFC Courts will have jurisdiction over any entity in any free zone in Dubai without the need for agreement among the disputing parties to submit to the jurisdiction of the DIFC Courts. However, the DIFC Courts will only apply UAE law (and not DIFC law) unless there is an agreement among the parties to apply a specific different law. In other words, the lex fori (the law of the Court) would be common law.

 

Under the Standalone System, the DIFC Courts will, in addition to having jurisdiction over disputes concerning other free zone entities, also apply DIFC Laws by default. In effect, this system will determine disputes under common law, through a common law process of court (lex fori and lex loci). It is unclear whether a non-DIFC free zone entity engaged in financial services will be subject to the supervision of the Dubai Financial Services Authority in the same manner that applies to DIFC entities. ■

DFSA Decision Notices not Findings of Fact in the DIFC Courts

The DIFC Courts have recently confirmed that Decision Notices issued by the Dubai Financial Services Authority (DFSA) are not binding on the Court as findings of fact.

 

Decision Notices

Under Article 116(2) of the Regulatory Law 2004 (as amended), the DFSA may publish, in such form and manner as it regards appropriate, information and statements relating to decisions of the DFSA, the Financial Markets Tribunal and the DIFC Court, sanctions, and any other matters which the DFSA considers relevant to the conduct of affairs in the DIFC. These include Decision Notices issued under Article 5 of Schedule 3 of the Regulatory Law in respect of Authorised Individuals who are defined as individuals who have been authorised by the DFSA to perform one or more Licensed Functions for an Authorised Firm.

 

The DIFC Claim

In the Court of First Instance case of [2018] DIFC CFI 080, the Claimant initiated proceedings against the Defendant, alleging, among other claims, that the Defendant had misappropriated funds invested by the Claimant in connection with a DFSA Authorised Firm (the Relevant Entity).

 

The Claimant sought to rely on a Decision Notice issued against the Defendant by the DFSA (and unconnected to the DIFC Claim) which referred to a series of misdoings on the part of those engaged in the business of the Relevant Entity and failures to abide by the DFSA Rules and Regulations which applied to financial advisers and investment managers as well as the Defendant’s personal responsibility for breaches.

 

The Defendant contested the admissibility and relevance of the Decision Notice in respect of the DIFC Claim.

 

The Judgment

Issuing the judgment consequent to trial, Justice Sir Jeremy Cooke held, among other things, that:
• the DFSA proceedings were “adversarial” and “disciplinary” in nature; and
• the “conclusions reached by others cannot bind [the DIFC] Court, absent the application of res judicata or specific exceptions to the rule in Hollington v Hewthorn which is binding on English Courts”.

 

The Court also referred to the English cases of Conlon and another v Simms [2006] EWCA Civ 1749 and Three Rivers DC v Bank of England (No.3) [2001] UKHL 16, [2003]2 AC 1 in support of its conclusions and confirmed that the principles set out in those cases “reflect the law of the DIFC” and apply in relation to Decision Notices issued by the DFSA.

 

Conclusion

The case is an important precedent from the DIFC Courts which considers the evidential burden to be met in establishing a claim. It also provides individuals against whom Decision Notices are issued by the DFSA an opportunity to defend themselves in claims brought against them based on the merits of each case.

However, it remains to be seen whether the DIFC Courts would take a different view if the findings in a DFSA Decision Notice directly related to a specific claim in the DIFC Courts, and were properly substantiated by direct witness evidence in relation to the Decision Notice. ■

Recent Amendments to the Arbitration Law

The UAE recently enacted Federal Decree Law 15 of 2023 (the Amendment) making certain changes to the provisions of the law governing arbitration, Federal Law 6 of 2018 (the Arbitration Law). These changes are consistent with the UAE’s forward-looking approach to arbitration. Some of the key amendments are highlighted below.

 

 

An individual who is a member of the administration of an arbitration institution may now act as an arbitrator subject to certain safeguards

 

The Amendment relaxes the outright prohibition contained in Article 10 (2) of the Arbitration Law against a member of the administrative branch of an arbitration institution from acting as an arbitrator. However, this is subject to eight conditions which must be satisfied, the contravention of which would result in the award becoming invalid. This change paves the way for the UAE to attract highly skilled professionals to contribute to the administration of arbitral institutions, who will not be prevented from sitting as an arbitrator in a UAE-seated arbitration.

 

Arbitration institutions are required to provide the necessary technological infrastructure

 

With the onset of COVID-19, the UAE was quick to adapt to virtual hearings for both litigation and arbitration. Since then, virtual arbitration hearings have become the norm rather than the exception. However, getting the necessary technological support in place prior to commencing hearings (including the virtual platforms and transcription services), could be a time-consuming and expensive process as the parties were required to engage third-party service providers. Article 28 (3) of the Arbitration Law, as amended, now requires arbitration institutions to provide the technology necessary to conduct arbitrations, in accordance with the standards and controls applicable in the UAE.

 

This should not only make matters more convenient for the parties (and hopefully less costly), but also enhances privacy and confidentiality by restricting the involvement of third parties in arbitration proceedings. The positive impact of this amendment will be augmented by the publication of guidelines for virtual hearings by arbitration institutions in the UAE that do not already have such rules in place.

 

Discretionary power of tribunals to determine the applicable rules of evidence now subject to party autonomy and public order

 

Article 33 (7) of the Arbitration Law, as amended, has modified the language so as to limit the discretionary power on arbitral tribunals to determine the applicable rules of evidence (where the rules of evidence that are applicable do not have provisions that are relevant). The amended provision indicates that parties would be able to agree to exclude such discretion from tribunals, enhancing party autonomy. Additionally, the exercise of this discretion is now subject to a public order proviso. Accordingly, a rule of evidence applied by a tribunal, in the exercise of its direction, must not be contradictory to the UAE’s public order. This proviso may apply in the context of admissibility of evidence. For instance, it could operate to bar the admissibility of evidence gathered by means which are deemed unlawful under the UAE law.

 

The provisions of the Arbitration Law will only apply to arbitrations seated in on-shore UAE. ■

New Commercial Transactions Law: Amendment to the Period of Limitation

The new commercial transactions law (Federal Decree Law 50/2022), which abrogated Federal Law 18/1993, has significantly reduced the period of limitation for initiating action relating to commercial transactions between ‘merchants’ from ten years to five years.

 

Application of the new commercial transactions law

The new commercial transactions law applies to merchants and all forms of commercial activities. The new commercial transactions law has broadened its ambit to include virtual commercial activities as well, i.e., commercial activities carried out by any person (even if the person is not a trader) through modern mediums of technology or in the technological sphere. The term ‘merchants’ is broadly defined and includes every person performing acts of commerce, and every company engaging in commercial activity in a form specified by Federal Decree Law 32/2021 on Commercial Companies.

 

The period of limitation

Under the now-repealed 1993 commercial transactions law, parties could bring actions relating to the commercial obligations of merchants within ten years from the breach of a contractual obligation (Old Period of Limitation). However, the new commercial transactions law prescribes that parties must initiate action within five years from the date the cause of action arises (New Period of Limitation). It is pertinent to note that the New Period of Limitation is shorter than the limitation period prescribed by the laws of England and Wales, which is six years from the date the cause of action arises.

 

What effect does the new limitation period have on a cause of action that arose before the new law?

An important question that would arise is, what would happen to those transactions where the cause of action arose prior to the effective date of the new commercial transactions law? The answer may be found in Articles 6 and 7 of the UAE Civil Code:

 

a) If the application of the New Period of Limitation would result in the expiry of a party’s right to commence action prior to the new commercial transactions law coming into force (2 January 2023), the Old Period of Limitation will be applied. For example, if the cause of action arose in 2014, in accordance with the Old Period of Limitation, the party would have the right to institute action until 2024. On the other hand, if the New Period of Limitation were to be applied, the party’s right would have lapsed in 2019 (prior to the new commercial transactions law coming into force). In such circumstances, the Old Period of Limitation will be applicable in order to prevent prejudice being caused to such party

 

b) If, on the effective date of the new commercial transactions law, the duration of a party’s right to commence action is longer than the New Period of Limitation, the duration of such right will be reduced in accordance with the New Period of Limitation. For instance, if on 2 January 2023, a party has the right to bring an action within eight years, such right will be reduced to five years.

 

c) If, on the effective date of the new commercial transactions law, a party has the right to commence an action within three years (shorter than the New Period of Limitation), the period of three years will continue to apply. ■