Author: afridi-angell

The separability of an arbitration clause – the Sharjah Court of Appeal sets limits

The Sharjah Court of Appeal recently declined to apply the principle of separability of an arbitration clause, on the basis that the underlying agreement (i.e. in which the arbitration clause was contained) was not defective or argued to be invalid by the appellant. This judgment has potentially significant implications for parties who intend to rely on an agreement which contains an arbitration clause to assert claims in court.

 

The separability of an arbitration clause is the legal principle that allows an agreement to arbitrate to be considered independently from the contract in which the agreement to arbitrate is contained. The effect of this principle is that even if the underlying agreement is held to be invalid, the arbitration clause in the agreement will remain valid (unless the agreement to arbitrate itself is found to be invalid for reasons other than the invalidity of the underlying agreement). However, as specific authority is required to create a valid arbitration agreement under the laws of the UAE, it is common to see this principle being relied on to bring claims in court, on the basis that the arbitration clause is invalid for want of authority, but the rest of the agreement is sound and may be relied upon to assert claims.

 

The principle of separability is recognised in the UAE’s Federal Arbitration Law (Federal Law No 6 of 2018), and the recognition of this principle was considered one of the highlights of the law. Article 6(1) of the Federal Arbitration Law provides as follows:

 

An arbitration clause shall be treated as an agreement independent from the other terms of contract. The nullity, recission or termination of the contract shall not affect the arbitration clause if it is valid per se, unless the matter relates to an incapacity among the parties.

 

The dispute before the Sharjah Courts arose in relation to a commercial agreement between a foreign company (the plaintiff) and a UAE company based in Sharjah (the defendant). The plaintiff instituted proceedings before the Sharjah Court of First Instance asserting certain contractual claims based on the agreement. The defendant took the position that the Sharjah Court had no jurisdiction because the agreement contained an arbitration clause.

 

The plaintiff argued that the individual who signed the agreement on its behalf had no authority to agree to arbitration on its behalf. The plaintiff sought to advance this argument by reference to the standards applicable under UAE law to establish the authority to agree to arbitration (or in this case, the lack thereof). The defendant took the position that the issue of authority to agree to arbitration should be determined with reference to the law applicable to the plaintiff (i.e. the law applied in the plaintiff’s country of incorporation), and not UAE law.

 

Although the question of authority was the principal issue addressed in the parties’ pleadings, the Sharjah Court of First Instance issued judgment dismissing the plaintiff’s case for the want of jurisdiction. The court held that the plaintiff may not simultaneously rely on the agreement as the basis of its claims and seek to dispute the validity of the arbitration clause contained therein. The plaintiff thereafter filed an appeal to the Sharjah Court of Appeal, and its principal argument was based on the separability of an arbitration clause. The Court of Appeal held against the plaintiff/appellant on the basis that the plaintiff/appellant has taken the position that the agreement is binding in asserting its claims and, as the agreement itself was not defective or invalid, the arbitration clause cannot be separated from the rest of the agreement.

 

It therefore appears from this judgment that a party asserting a claim in court may not seek to rely on the separability of an arbitration clause if it does not also assert that the underlying agreement itself suffers from some form of invalidity. It is likely that this judgment will be appealed to the Union Supreme Court. Until such time the Union Supreme Court issues its judgment, this judgment will give pause to parties who intend to assert contractual claims in court on the basis that the arbitration clause in their agreement is defective. ■

 

Doing Business in Iran: Joseph R. Biden; New Path Forward

The landscape for doing business in Iran may have changed significantly with the election of Joseph R. Biden as President of the United States.

 

On July 14, 2015, the P5+1 (the United States, the United Kingdom, Germany, France, China and Russia), the European Union and Iran agreed and signed a Joint Comprehensive Plan of Action (“JCPOA”) contemplating the easing of certain Iran related sanctions. On October 18, 2015, Adoption Day, the JCPOA came into effect and signatories began embarking on the steps necessary for implementation of the JCPOA. On January 16, 2016, and after the International Atomic Energy Agency’s verification of Iran’s commitments under the JCPOA, the United Nations, the European Union and the United States ceased the application of sanctions relating to certain sectors of business activity with respect to Iran (i.e. no longer restricting non-US persons from engaging in certain activities) and doing business with Iran began again.

 

It is important to note that the US sanctions on Iran restricting US persons from dealings related to Iran (“US Primary Sanctions”) always continued in full force and were not affected by the JCPOA (as opposed to the U.S. sanctions regime concerning non-US persons’ dealings related to Iran (“US Secondary Sanctions”); it was these US Secondary Sanctions that ceased to apply as of January 16, 2016.

 

However, in 2018 the French, German and British governments had been in talks with the United States with respect to its concerns regarding the JCPOA for many months. Even though the United States had agreed to the deal in 2015, the US expressed serious concerns about certain aspects of the deal and decided to withdraw from the Iran nuclear deal (i.e. JCPOA).

 

The US government, in light of its withdrawal, reimposed certain US Secondary Sanctions with respect to Iran on August 6, 2018, with any remaining US Secondary Sanctions reimposed by November 4, 2018.

 

New Path Forward

 

However, with the election of Mr. Biden as President, there may be a new path forward with respect to Iran. Indeed Mr. Biden has stated that the US would rejoin the JCPOA if Iran returns to strict compliance with the JCPOA. If this occurs, it would usher in a new chapter in the economic and geopolitical landscape of the Middle East as well as renewed investment and business opportunities (and challenges). ■

Does VAT apply to bare land that is leased to a tenant who will develop it?

The supply of undeveloped (bare) land is exempt from value added tax (VAT) pursuant to Article 46 (3) of UAE Law No 8 of 2017.

 

Bare land (as opposed to covered land) is defined as ‘land that is not covered by completed, partially completed buildings or civil engineering works’ pursuant to Article 44 of Cabinet Decision 52 of 2017. Accordingly, the supply (in this case, a lease) of land that does not have completed or partially completed buildings or civil engineering works is exempt from VAT, and hence no VAT is payable.

 

Note that land means ‘any area on the surface of the earth which may include trees, plants or other natural objects in, under or on top of it’ (UAE Federal Tax Authority VAT Guide, Real Estate, VATGRE1, April 2020).

 

Land will not be considered to be bare land where it is covered by civil engineering works which are complete, or partially complete. Land will be considered to be bare land where there are civil engineering works which run underneath the land, but which do not break the ground surface of the land and to which land carries no right of access. Examples of civil engineering works include roads, bridges, and pipes used forming water or power services. Also, where land has been fenced to allow construction to commence and temporary movable structures were placed on the land then the fencing and movable structures will not change the classification of the land from bare land to covered land.

 

However, even if land that is leased to a tenant is bare to begin with, the classification of such land can change if the tenant develops the land. Accordingly, after the tenant commences construction such that the land has civil engineering works or a partially completed building, then the land is no longer bare land.

 

This subsequent change in nature of the land will not immediately affect the VAT treatment of the land, however if any further supply of the land is made by the landlord (for example entering into a new lease agreement, or if the supply is treated as being made periodically under Article 26 of VAT Decree Law No (8) of 2017), then this subsequent supply of the land would be subject to VAT at the standard rate as it would no longer be a supply of bare land. ■

UAE Introduces Filing Requirements Relating to Beneficial Ownership – Deadline of 27 October 2020

On 24 August 2020, the UAE issued Cabinet Resolution 58 of 2020 on Regulating the Procedures of the Real Beneficiary (the Resolution). The Resolution, amongst other things, aims to establish a legal framework for identifying and recording details of real beneficiaries of entities licensed to conduct business in the UAE.

 

The Resolution is an additional step towards the UAE’s efforts in combating money laundering, the financing of terrorism and illegal organisations. Many countries around the world have enacted similar legislation regarding real beneficiaries. Even prior to issuance of the Resolution, many licensing authorities in the UAE had already started requesting information about the ultimate beneficial ownership of entities licensed by them. However, the Resolution now requires a more streamlined and uniform approach to the information that must be maintained.

 

The Resolution was published in the Official Gazette on 27 August 2020 and came into force the following day. The Resolution introduces a filing requirement which is discussed further below.

 

Applicability of the Resolution 

The Resolution applies to registrars of companies (including the Dubai Department of Economic Development, Jebel Ali Free Zone Authority and the Dubai Development Authority) (each a Registrar) and entities licensed and/or registered in the UAE (including within the commercial free zones of the UAE). However, companies directly or indirectly wholly owned by the federal or state governments and companies licensed in the Dubai International Financial Centre or the Abu Dhabi Global Market free zone shall be exempted from the provisions of the Resolution.

 

Real Beneficiary

A real beneficiary of an entity is someone:

 

a) who ultimately owns that entity through direct or indirect ownership of shares representing 25% or more interest in the capital of such an entity; or

 

b) who has voting control of 25% or more of the capital of such an entity by exercising control over such an entity (by for example, having a right to appoint or remove the majority of the entity’s directors/managers).

 

If it is not possible to identify the real beneficiary (i.e. a natural person) of an entity, then the natural person who exercises control over the entity shall be considered as the real beneficiary.

 

Obligations of UAE Entities

 

Entities in the UAE are required to take reasonable measures to obtain proper, accurate and updated information relating to their real beneficiary(ies) and maintain a register of real beneficiaries containing such information. This register of real beneficiaries is required to be created within 60 days from the date the Resolution was published (i.e. by 27 October 2020).

 

The Resolution does however state that the obligation to maintain a register of real beneficiaries shall not extend to those entities that are owned by a listed company in a regulated market which is subject to sufficient ultimate beneficial disclosure requirements or any affiliates which are majority owned by such listed company.

 

The register of real beneficiaries shall include at least the following information on each real beneficiary:

 

a) full name, nationality, date and place of birth;

 

b) place of residence or address for communication;

 

c) passport or identity card details;

 

d) the basis on which the identified real beneficiary became a real beneficiary and the date of acquiring such capacity; and

 

e) the date on which a person ceases to be a real beneficiary.

 

If an entity discovers that a person who might be a real beneficiary and his beneficial ownership was not registered in the register of real beneficiaries, then such an entity is required to enquire about the status of such a person by following the process laid down in the Resolution. The Resolution further provides for the process required to be followed in case a party (not mentioned as a real beneficiary of an entity) requires amendment (i.e. inclusion of its name) to the register of real beneficiaries.

 

The Resolution also provides that an entity must not register or execute any documentation in connection with the transfer of its shares unless the transferee provides information confirming whether such transfer will result in the change of the real beneficiary of the entity and the nature of such change.

 

All entities are also required to maintain the details of its partners/shareholders in a register of partners or shareholders.

 

Any change in the register of real beneficiaries and the register of partners or shareholders (together the Registers) must be notified to the relevant Registrar within 15 days from the date of such change.

 

 

Sharing of Information with the Registrar

 

Within 60 days from the date of publication of the Resolution, each entity is required to provide the Registers to the relevant Registrar. At present we have been informed that the Dubai Department of Economic Development is still in the process of establishing the way in which the Registers will be provided to it. The Resolution also provides for certain timelines required to be followed by the entity in case of any change in the Registers. Note that each Registrar has been given broad powers to request additional documents and information regarding the Registers and the real beneficiaries.

 

If an entity is in the process of liquidation, the Resolution also obliges the appointed liquidator to submit the Registers (or a true copy thereof) to the Registrar within 30 days of its appointment.

 

It should also be noted that under the Resolution, the entity, the management of the entity or the liquidator must maintain the Registers for at least five years from the date of the dissolution and liquidation of the entity.

 

Confidentiality

 

The Resolution requires authorities not to disclose information in the Registers to any person without the consent of the real beneficiary(ies). However, this will not prohibit an authority from sharing information required pursuant to international laws and agreements entered into by the UAE.

 

The Resolution, provided implemented effectively, will improve the transparency and wider availability of uniform information relating to entities incorporated in the UAE and will bring the UAE closer towards more established and regulated jurisdictions of the world. ■

UAE Amends the Labour Law

The promulgation of Federal-Decree Law 6 of 2020 has introduced two amendments to the Labour Law of the United Arab Emirates, Federal Law 8 of 1980, as amended. The amendments introduce equal treatment for male and female employees in respect of compensation and parental leave. The new measure was promulgated on 25 August 2020 and took effect on 25 September 2020.

 

The first amendment affects Article 32 of the Labour Law. Previously, Article 32 simply provided that a woman shall be paid the same salary as a man if she performs similar work. Now, this provision requires that a woman be paid the same as a man if she performs the same work or work of equal value. Furthermore, the Cabinet is enabled to promulgate detailed regulations on the subject of equal value, based on the recommendations and proposals of the Minister of Human Resources and Emiratisation. Such regulations may be expected to establish the parameters for calculation of equal value; they could also set out avenues of redress for aggrieved employees and provide for sanctions for violations.

 

The second amendment relates to Article 74 of the Labour Law. When originally enacted in 1980, this provision defined the UAE’s official holidays. It was repealed in 2017, and a Cabinet Resolution introduced a new and slightly revised list of official holidays. Now Article 74 has been repurposed to address the subject of parental leave, giving any employee the right to take five paid days of parental leave at any time from the birth of a new child until the child reaches six months of age. This right is given regardless of the employee’s gender. This right would therefore benefit female employees in addition to the provisions on maternity leave that appear in Article 30 of the Labour Law and which remain intact. Moreover, this right would appear to attach immediately upon commencement of employment.

 

The concept of equal value is new to the Labour Law, but it is already playing a role in other sectors of the labour market. With regard to the public sector, Federal Decree-Law 27 of 2018 provides equal wages to female employees of Federal government entities who have the same specialisations, qualifications, skills, work experiences and professional competencies as male employees. With regard to two financial free zones of the UAE, the Dubai International Financial Centre and the Abu Dhabi Global Market, it is prohibited to discriminate on the basis of gender in respect of any terms and conditions of employment. ■

 

Dubai Family Ownership of Common Property Law

On 13 August 2020, the Ruler of Dubai issued Law 9 of 2020 to regulate family ownership of common property in the Emirate of Dubai (the Law). The Law aims to establish a legal framework for family ownership of common property in Dubai and to facilitate its transmission among successive generations. This concept of undivided family assets introduced by the Law also exists in other jurisdictions.

 

There are many family run businesses in Dubai. These businesses have been in existence for many years and are often in the name of one or more senior family members even though other family members are beneficiaries of such businesses. This ownership of businesses and family assets in the name of a select few senior family members (without written agreement on ownership, management or succession) can create disputes between the family members, especially in case of the death of the owner of record of such assets.

 

The Law also aims to provide a legal framework for maintaining continuity of family ownership and avoiding division of businesses amongst family members to the detriment of the businesses and families.

 

Family Property

 

A family is defined under the Law to include the spouse, blood-relatives and lineage up to the fourth degree. Although the Law does not specifically mention that only UAE nationals can avail benefits under the Law, the Law has primarily been enacted for the benefit of UAE nationals. However, nationals of other countries and of any religion are not excluded from the Law.

 

The Law permits family members who have a common property to classify such common property as a family property. A family property may be contributed by any member of the family. The term family property in not restricted to real estate and can include shares/interest in companies (except public shareholding companies), assets in individual establishments, movable and immovable properties and other intellectual property.

 

Family Property Contract

 

A family property may be created, regulated and managed by a family property contract entered into between family members. Property subject to a family property contract shall be treated as common property of the family members. A family property contract is the fundamental document governing the family property and must be drafted carefully to avoid any ambiguity. It must meet the following conditions:

 

a) the parties (also referred as partners) to a family property contract must be members of one family;

 

b) the parties must have one business or common interest;

 

c) the share and interest of each party must be identified in the family property contract;

 

d) each property (which is part of the family property) must be owned by one or more persons who has the right to transfer the property;

 

e) the contract must be signed by all the parties in the presence of a UAE notary public; and

 

f) must not violate public order.

 

Amendment to a Family Property Contract

 

Any amendment to a family property contract requires the consent of persons holding at least 75 per cent of the family property. The family property contract may provide for a higher approval threshold.

 

Term of a Family Property Contract

 

The term of a family property contract can be a maximum of 15 years. The term may be renewed by unanimous consent of the partners provided that each such renewed term does not exceed 15 years.

 

Note that for renewal of any term, unanimous consent of the partners is required. A single partner (irrespective of the share of such a partner in the family property) can therefore withhold the renewal of a family property contract.

 

If partners fail to agree to a term for renewal of a family property contract, any partner may, by giving six months’ notice, apply to a committee (to be established pursuant to the Law to settle disputes arising out of a family property contract) for permission to take his shares out of the family property.

 

Management of Family Property

 

The family property is to be managed by one or more managers appointed by partners holding two thirds of the family property. The number of managers must be an odd number. The manager(s) can be a partner or a third party including a corporate entity.

 

A family property contract can also provide for formation of a board of directors to supervise the manager(s). The rules and regulations regarding appointment, governance and powers of board of directors may be included in the family property contract.

 

The manager(s) shall have general powers to manage the family property including but not limited to distribute profits to the partners, represent the family property before third parties and such other responsibilities and powers as may be specified in a family property contract.

 

The manager(s) can be held liable and be required to indemnify the partners for any losses caused due to his negligence or breach.

 

Partner’s Transfer of Shares in a Family Property

 

If a partner wishes to transfer his shares in a family property, he must offer such shares to the other partners in proportion to their shares. However, if such a transfer by a partner is an assignment of his shares to his spouse or any of his first-degree relatives or any specific partner, the partner transferring the shares is not obligated to offer the same to the other partners, unless otherwise agreed in the family property contract.

 

Additionally, a partner may transfer his/her shares to third parties (other than the partners) or impose a right in kind in favour of third parties, provided that he has the consent of partners holding at least 51 per cent of the family property. Although not expressly stated by the Law, such third parties must presumably be other family members who are eligible to be partners in the family property.

 

In case none of the partners are interested in purchasing the shares of a partner or an heir or the partners do not agree to a transfer to a third party, the affected partner or heir may approach the committee (discussed earlier) which may permit the transfer to a third party provided that (i) there is a strong justification for transfer of shares to a third party; and (ii) such transfer will not affect the continuity of the family property.

 

Acceptance by Government Authorities

 

The Law should bring order in the management and succession of family property and businesses in the Emirate of Dubai. All government authorities in Dubai are required to take appropriate steps (such as preparation and maintenance of commercial and real estate registers) to ensure acceptance and enforcement of the Law. It will be interesting to see how other Emirates will recognise a Dubai family property contract.

 

The Law is an effort to simplify succession issues and to prevent major family assets from being sold to generate liquidity for distribution among heirs upon the death of a patriarch. ■

‘Retire in Dubai’ programme announced in Dubai

Afridi & Angell was pleased to have advised Dubai Tourism on the testamentary and inheritance framework in Dubai in the process leading up to the much-welcomed announcement of the ‘Retire in Dubai’ programme.

 

The announcement, made on Wednesday 2 September 2020 offers resident expatriates and foreigners aged 55 and above an opportunity to retire in the Emirate. As part of the programme, eligible applicants will be provided a Retirement Visa, renewable every five years.

 

The new scheme, unveiled under the directive of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, intends to showcase Dubai as the world’s preferred retirement destination. Led by Dubai’s Department of Tourism and Commerce Marketing (Dubai Tourism) in collaboration with the General Directorate of Residency and Foreigners Affairs – Dubai, the global retirement initiative aims to boost economic development in the country and enhance its global reputation as a business investment centre.

 

The initial phase of the programme will focus on UAE residents working in Dubai who have reached retirement age. Interested retirees must apply through the Retire in Dubai website and qualify as an eligible applicant under specified requirements. Applicants must be at least 55 years of age at the time of applying, have valid UAE health insurance and need to meet one of the financial requirements: earn a monthly income of at least AED 20,000 or have savings of AED 1 million or own AED 2 million worth of property in Dubai. Applicants may also make an application for their spouse on the condition the retiree continues to meet the criteria.

 

A competitive offering is confirmed through the collaborative work of Dubai Tourism and their partners in developing key propositions for retirees covering healthcare, real estate, insurance and banking. The newly introduced global retirement initiative revolves around seven key factors that make Dubai the ideal destination for retirees: a unique lifestyle, convenience, recreation, an active and fit society, proximity and connectivity, a world class healthcare system and legacy management with the DIFC Wills Service Centre offering discounts of up to 35-45 per cent on fees for registration of wills.

 

Should you have any questions with respect to applying for a retirement visa or on legacy management matters, please contact the authors or your usual Afridi & Angell contact. ■

A Customs-free access?

The Federal Decree-Law 19 of 2018 on Foreign Direct Investment (the FDI Law) permits majority foreign investment in certain business sectors and activities. Although majority ownership is attractive, it is not the only factor that a potential foreign direct investor should consider.

One additional factor is whether the proposed business would qualify for the 5 per cent GCC customs duty exemption that is discussed below. Customs-exempt access to the larger GCC market could be a critical factor to the success of a business.

COVID-19 and Commercial Leases in the UAE

The Covid-19 pandemic has swept the globe like a tsunami and it continues to impact countries and their economies worldwide. The UAE is no exception. Businesses have come under increased cost pressure as revenues decline. Such cost pressure primarily involves real estate leasing costs.

 

In this inBrief, we look at the impact Covid-19 has had on commercial leases.

 

Rent Deferment 

 

From a real estate perspective, the authorities in the UAE have introduced a series of initiatives to support commercial tenants in response to Covid-19.

 

During March and April, the Government of Dubai temporarily suspended all eviction judgements and cheque dishonour complaints/actions in the Emirate.

 

In Abu Dhabi, Administrative Resolution 92 of 2020 was passed which grants tenants in the restaurant, tourism and recreational sectors a refund of 20 per cent of the rent value collected during 1 April 2020 to 30 September 2020.

 

The Dubai Free Zones Council announced a major relief package at the end of March for companies operating in the free zones of the Dubai Silicon Oasis Authority, the Dubai Airport Free Zone Authority, Jebel Ali Free Zone, the Dubai World Trade Centre, the Dubai International Financial Centre, the Dubai Development Authority, Dubai South, Meydan City Corporation and the Dubai Multi Commodities Centre (DMCC). Measures included an up to six months’ rent postponement period and easy installment plans.

 

In the DMCC, tenants benefitted from a waiver of rent for two months for commercial tenants impacted by the Dubai Economy Directive requiring them to temporarily close; a three months’ suspension of rent for Flexi Desk and DMCC Business Centre tenant renewals or a monthly/quarterly instalment plan with no discount; and a waiver of outdoor area rents for JLT retail tenants where DMCC is the building owner/landlord.

 

From April to June, retail tenants in DIFC’s Gate Avenue, Gate Village and Gate District were not required to pay basic rent.  The DIFC also allowed deferred rental payments with respect to all properties owned by DIFC Investments for a period of up to six months.

 

Sharjah Asset Management, the investment arm of the Sharjah Government, waived commercial rents for all tenants of Haraj and Jubil markets for three months from March.

 

Suspension / Termination by Force Majeure 

 

Apart from government initiatives to support commercial tenants, a force majeure clause is often found in a lease and typically excuses one or both parties from performance of their obligations under the lease following the occurrence of a force majeure event. A force majeure event is generally defined as an event beyond a party’s control (i.e. an act of god). Often the clause will provide that, if the force majeure event continues for a period of time, then either party shall have the right to terminate the lease.

 

If a lease does contain such a force majeure clause and it defines a “pandemic” or “epidemic” as an event of force majeure, then the tenant is likely to be protected contractually either by a suspension of the tenant’s obligation to pay the rent or a right to terminate.

 

UAE Law

 

However, if the lease does not contain such a force majeure provision, then the tenant will have to rely on its rights under UAE law.

 

Under the UAE Civil Code, a tenant may apply to the court to terminate a lease in circumstances of “force majeure” or an “exceptional event”.

 

UAE law requires performance of the lease to be impossible in a force majeure event and courts require force majeure to be unforeseeable. Both of these are arguable and may be hard to satisfy in order to fall under the protection of force majeure under Article 273 of the Civil Code.

 

However, if the event does not qualify as a force majeure event under UAE law, then it can be argued that it is ‘an exceptional event’ (Article 249 & 794 of the Civil Code). The law requires an exceptional event to be unforeseeable and that performance of the contractual obligations to be so onerous so as to threaten grave loss.   This must be proven factually.

 

There have been three high profile court cases reported in the media recently where tenants were permitted to terminate their leases on the basis of the above Articles of the Civil Code and using the Covid-19 pandemic as a reason. Nevertheless, the application of these Articles is still subject to the discretion  of  the  judge  and the facts and the law must be properly presented and argued.

 

 

Conclusion

 

The Covid-19 pandemic will lead to continued uncertainty in the real estate market in the UAE and worldwide.

 

We expect that some businesses will continue to seek to negotiate or terminate their commercial leases during this pandemic on the basis of “force majeure” or “exceptional event”. ■