This globally relevant Q&A of Lexology, Getting The Deal Through, focuses on key questions centered around Acquisition Finance in the United Arab Emirates. Some topics covered include; general structuring of finance, enforceability of foreign judgements, enforcement of claims and insolvency and many more.
Author: afridi-angell
Off-Plan Sales in Dubai: Risks and Rewards, ASIAN-MENA Counsel
Opportunities abound for investors, but there are some important considerations before making an off-plan investment. Learn everything you need to know by reading the full article.
A Pledge in Practice, Lexis Middle East Law Alert
Although a new UAE law governing the pledges of movable assets was issued back in 2016, as Charles Laubach, Partner at Afridi & Angell explains it is only now with the issue of its implementing regulations the impact of this new regime can actually be seen.
Merger Control Reform, The Oath
Abdus Samad of Afridi & Angell examines the key provisions of the Competition Law and their effect on M&A transactions in the UAE.
Qatar sanctions – new developments
The political dispute between Qatar and its neighbors escalated on Saturday 26 May 2018 with the announcement by Qatar that it would impose a ban on goods from the four boycotting countries, the UAE, Saudi Arabia, Bahrain and Egypt.
As we reported earlier, these four countries imposed a trade embargo on Qatar on 5 June 2017. The measures that were introduced prohibited the direct shipment of goods and the direct transport of passengers to or from Qatar and closed the land border between Qatar and Saudi Arabia. Ships and aircraft registered in Qatar were prohibited from entering the territories of the boycotting countries, and vice versa. Qatari diplomatic personnel and most Qatari nationals were compelled to depart from the boycotting countries.
Financial transactions were also affected, although payments by Qatari parties denominated in foreign currencies (such as Euros and Dollars) nevertheless proceeded.
These measures compelled the business community to implement a series of somewhat uncomfortable adjustments. Businesses in Dubai were particularly affected, as many operations based in Dubai serve customers around the Gulf, including Qatar. None of the adjustments that businesses put in place, such as the routing of shipments through non-boycotting countries, enjoyed official approval.
The new measures announced by Qatar could well cast doubt on the viability of a number of these adjustments. In Saturday’s announcement, the Ministry of Economy and Commerce of Qatar stated that the sale of products imported from the UAE, Saudi Arabia, Bahrain or Egypt would be prohibited. Retailers are directed to remove such items from their shelves. The Ministry would conduct inspections to ensure compliance. The Government of Qatar also announced that dairy products imported from Saudi Arabia via third countries would be prohibited. Somewhat more modest measures were also reported – that products from the boycotting countries would not benefit from GCC Customs treatment, and that the Government of Qatar has issued a directive that buyers should find new suppliers for the products that are impacted.
These measures appear to be aimed at consumer and retail products manufactured in the boycotting countries. It is unclear whether they will extend to other goods from those four countries that are not shipped directly. It is also unclear whether the new measures will impact existing supply contracts or only new supply contracts with customers in Qatar.
We will continue to monitor developments as they are reported. For the time being, parties with ongoing supply obligations to customers in Qatar must likewise watch developments closely, as many options for serving customers in Qatar might no longer be available. ■
Cautious optimism on 100 per cent foreign ownership
Recent media reports have suggested that 100 per cent foreign ownership of companies in the UAE will now be permitted. The reports are based on a government press release regarding a UAE Federal Cabinet (Cabinet) meeting held on 20 May 2018.
The press release states that the Cabinet announced changes in the system of foreign ownership in the UAE allowing global investors to own 100 per cent of companies by the end of the current year. While this is welcome news, some media reports and expert analysis have jumped the gun giving the impression that 100 per cent foreign ownership is a done deal. This news is better understood as a statement of intent and is not confirmation that the relevant legislation is already in place.
Companies incorporated in the UAE require a minimum of 51 per cent UAE ownership. This long-standing rule is set out in Article 10 of Federal Law 2 of 2015 on Commercial Companies, as amended (the Companies Law). The previous Companies Law (Federal Law 8 of 1984) contained a similar restriction. As an exception to this rule, 100 per cent foreign ownership is permitted in free zones.
An amendment to Article 10 of the Companies Law adopted in September of 2017 (pursuant to Federal Decree-Law 18 of 2017) stipulates that the Cabinet may adopt resolutions permitting greater than 49 per cent foreign ownership. Under the revised Article 10, the Cabinet has discretion to determine what types of companies may be majority or wholly owned by foreigners.
The idea of giving the Cabinet the power to designate companies in certain sectors as being eligible for 100 per cent foreign ownership is not new. For example, in September of 2011, following announcements by the Ministry of Economy regarding a series of forthcoming new laws, media reports circulated that a new foreign investment law giving the Cabinet the power to allow 100 per cent foreign ownership of certain companies was being drafted.
As of this time, no foreign investment law has been enacted. Instead, the mechanism for permitting the Cabinet to designate the sectors eligible for majority and 100 per cent foreign ownership has been inserted into the Companies Law.
While 100 per cent foreign ownership would be a welcome development, it is not yet a reality. Some reports may give the impression that a Cabinet Resolution that would allow implementation of 100 per cent foreign ownership is already in place. Such reports are misleading. A committee is currently studying the issue with a view to making recommendations but the Cabinet has not yet issued any resolutions stipulating that specific types of companies are eligible for 100 per cent foreign ownership. Until this happens, 100 per cent foreign ownership will be a goal rather than a reality.
Reports about new legislation in the UAE should always be treated with caution until the actual legislation is published in the Official Gazette. In some cases, rumored legislation never materialises. In other cases it takes much longer than predicted. For example, there were many reports going back well over a decade that the new Companies Law was imminent before it was finally promulgated in 2015. In the current case, the government’s press release indicates that the Cabinet has set a goal of implementing 100 per cent foreign ownership by the end of the year. Whether or not this goal will be achieved remains to be seen.
Permitting 100 per cent foreign ownership in certain sectors would be a major development. Not only have the relevant sectors not yet been identified, if and when such sectors are identified the government may get resistance from existing companies operating in these sectors. Industry resistance is a potential obstacle to implementation. The relevant business sectors must be identified and then the Cabinet must agree with the recommendations and adopt a resolution.
The recent news is cause for optimism that 100 per cent foreign ownership will eventually be implemented in certain sectors but 100 per cent foreign ownership is not yet a reality. ■
Regulatory Focus: Ready for reform across the region?
A host of employment law changes have been introduced across the GCC, which mean employers will have to think again about who they recruit and retain, and the penalties for failure to comply with other new requirements. Employment law experts from across the GCC explain the points to watch in each jurisdiction.
The UAE Federal Arbitration Law: a first look
The approval of the long awaited Federal Law on Arbitration by the Federal National Council was announced in March this year. The introduction of a comprehensive stand-alone law on arbitration is a welcome development in the UAE, and the new law will replace the provisions of Chapter Three, Volume II of Federal Law 11 of 1992 (the Civil Procedure Code) which to date comprise the only legislative provisions on arbitration in the UAE (outside of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)).
We set out below some of the highlights of the new law approved by the Federal National Council. Since this article was written, Federal Law No. 6 of 2018 has been issued promulgating the new law. The official gazetted version of the law is yet to be released, and there is a possibility that some of the articles of the new law referred to below have undergone further amendment, although it appears to be unlikely.
Application of the Law
Article 2 of the new law provides that its provisions shall apply to all arbitrations conducted in the UAE unless parties “agree to submit to another arbitration law”. It is likely that this provision is intended to accommodate parties who have chosen the DIFC or ADGM as their seat of arbitration. Article 59 of the new law goes on to state that the provisions shall apply to every arbitration “effective” at the time when it comes into force, which would include ongoing arbitration proceedings. Article 3 of the new law appears to envisage extra-territorial application where (a) the parties have agreed to be bound by this law for arbitrations conducted overseas, and (b) where the underlying dispute arises with regard to a legal relationship “organised by the applicable laws of the country”. It is unclear how the latter will operate in practice.
New Provisions
The new law addresses a number of issues hitherto unaddressed in legislation (unsurprisingly, given that the previous legislation comprises only 15 articles in the UAE Civil Procedure Law) and addresses other issues in greater detail. A few examples are set out below.
a. The Arbitration Agreement
The new law maintains the requirement that an agreement to arbitrate should be in writing. However, the new law provides that this requirement may be satisfied by reference to communications between the parties. This is consistent with case law on this point such as the judgment of the Dubai Court of Cassation in Civil Petition for Cassation No. 73/2010, which held that a written agreement to arbitrate may be evidenced through written correspondence between parties. It is helpful to have legislative affirmation of this point.
The new law has expressly permitted electronic means of agreement to arbitrate in accordance with the laws in relation to electronic agreements. The new law also provides that an arbitration clause will be valid by reference if contained in standard form conditions, provided that the reference is clear and explicit.
Article 6 of the new law recognises the concept of severability of an agreement to arbitrate, which is a well-established principle in arbitration and is reflected in the arbitration rules of the DIAC, DIFC-LCIA and the ADCCAC.
Article 8 of the new law provides that where a party institutes proceedings in court notwithstanding the existence of an agreement to arbitrate, the court shall dismiss the proceedings if the defendant asserts a jurisdictional objection based on the arbitration agreement before making submissions on the merits of the dispute. This is a more flexible requirement contrasted with the provisions of Article 203(5) of the Civil Procedure Code, which requires the defendant to assert the jurisdictional objection at the first hearing. Article 8 goes on to provide that arbitration proceedings may be instituted or continued notwithstanding that judicial proceedings have been instituted challenging the validity of the arbitration agreement.
b. Jurisdiction
Article 19 of the new law provides that an arbitral tribunal may rule on its jurisdiction (or lack thereof) (kompetenz-kompetenz) including objections with respect to non-existence, expiration or nullity of an arbitration agreement by way of a preliminary judgement. Such decision is appealable within 30 days of such decision to a competent court whose decision would be final. The tribunal may continue with the arbitration notwithstanding the appeal being pending.
c. Limitations for Preliminary Objections before the Tribunal
Article 20 sets out a deadline for submitting a plea for the lack of jurisdiction of the Arbitral Tribunal on the following grounds:
i. A defence that the tribunal has no jurisdiction has to be submitted not later than the time fixed for the respondent to submit his statement of defense.
ii. A defence that the matters raised by the other party are outside the scope of the arbitration agreement has to be asserted immediately upon such matters being raised in the arbitration by the other party.
These limitations may be waived by the tribunal, provided reasonable justification for delay is provided by a party.
Article 25 provides that a party who continues to participate in an arbitration, without objection notwithstanding being aware of violation of the arbitration agreement or the law will be presumed to have waived his right to subsequently rely on such violation. Such an objection must be made within any agreed time limit, or in the absence of an agreed time limit, within seven days from the date of becoming aware of such violation. The provisions of Article 25 do not apply where matters of public policy are concerned.
d. Interim Awards and Supporting Orders
The new law has the welcome addition of specifically recognising interim or partial awards and provisional measures granted by an arbitral tribunal which would facilitate emergency arbitrations and interim awards in the nature of injunctions available under certain institutional rules (e.g. ICC Rules and DIFC-LCIA Rules). Article 21 sets out provisional awards that may be issued by the tribunal:
a) Awards preserving evidence that is likely to be essential in the dispute resolution.
b) Awards to take the necessary measures to protect the goods that constitute a part of the dispute subject matter (e.g. to deposit goods with a third party, to sell damageable goods).
c) Awards to preserve the assets by which a subsequent decision may be implemented.
d) Awards to preserve the situation as it is (i.e. maintain status quo) or to be resorted to its previous position until a decision on the dispute.
e) Awards to take appropriate measures to prevent a current or imminent damage or a prejudice to the arbitration proceedings, or abstention from any act that may cause damage or prejudice to arbitration.
Such awards will now be enforceable through court and will have the effectiveness of a court order, once recognised. Article 21 of the new law further allows a party issued with a provisional measure to request a court to order the execution of such a measure.
An arbitral tribunal on its own accord or upon the request of either party is empowered to apply for a court order to obtain any evidence it requires, including the ability to compel a witness to give evidence and produce documents. While similar powers are given to arbitrators under Article 209 of the Civil Procedure Code, the new law does not require that the arbitration proceedings be suspended until such an order is obtained from court as presently required under Article 209.
e. Awards
Absent an agreement between the parties on the length of an arbitration, the new law (as is the position under the Civil Procedure Code) sets a time limit of six months from the date of the first hearing for the issuance of an award, with the arbitral tribunal having been given the power to extend the deadline for up to a further six months. Article 42(1) suggests that the parties may agree to an extension of more than six months. Article 42 of the new law provides that any extension of time beyond this period needs to be by way of a court order. Many existing arbitration rules provide that the administering institution has the power to extend the deadline for an award. Examples of such provisions are found in the DIAC Rules and the DIFC-LCIA Rules as well as the ICC Rules of arbitration. How the provisions of the new law will interact with such provisions (particularly the DIAC Rules, which are issued by Decree of the Ruler) will have to be seen.
A party may also apply for a court order terminating the arbitration proceedings in the event the arbitration award is not issued within the requisite time period. In the event of such termination, either party may file a case before a competent court to rehear the dispute.
Article 212(4) of the Civil Procedure Code required an award to be issued in the UAE, failing which the award will be treated as a foreign award. This requirement is commonly interpreted to mean that the arbitrators must sign the award in the UAE. However, Article 41 of the new law dispenses with this requirement and recognises that domestic arbitration awards may be signed outside of the place of arbitration and may even be signed electronically.
f. Challenges to Arbitration Awards
Article 53 of the new law provides that an arbitration award may be nullified on the following grounds:
a) Where no arbitration agreement exists, or if the arbitration agreement is void, or the time limit for rendering the award has expired.
b) Where one of the parties at the time of entering into the arbitral agreement was a minor or lacked capacity pursuant to the law governing his capacity.
c) If one of the parties to the arbitration was unable to present a defence because such party was not properly notified of the appointment of an arbitrator or of the arbitral proceedings, etc.
d) If the arbitral award discarded the application of the law agreed to by the parties on the subject matter of the dispute.
e) If the composition of the arbitral tribunal or the appointment of the arbitrators has occurred in a manner contrary to the law or the agreement of the parties.
f) If the arbitral proceedings “are tainted by nullity” affecting the arbitral award.
g) If the award contains decisions on matters not included in the arbitration agreement or beyond the scope of such agreement (any portion of the award separable from the rest which comes within the scope of the agreement may be held valid).
These grounds appear to be a restatement of the present grounds set out in Article 216 of the Civil Procedure Code in more detail and increased scope. These provisions also mirror the grounds for refusal to enforce an arbitral award as recognised by the New York Convention with the exception of the ability to refuse recognition on the basis that the award may not yet have become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made- a recognised ground under the New York Convention.
The new law requires that a court execute a ratified arbitral award unless it finds a cause for nullity as set out above. An execution can be stayed only by a decision of court.
Article 54 provides that if a party wishes to annul or set aside an arbitration award, it should commence court proceedings for an order of nullification within thirty days of receiving the award.
In circumstances where proceedings have been filed for the nullification of an award, Article 54 of the new law provides that the judgment of such an action shall be appealable only by way of cassation. ■
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The foregoing is only a preliminary view on some of the features of the new arbitration law, which will come into effect in 30 days of being published in the gazette. Afridi & Angell will be releasing a more in-depth commentary shortly.
The end of the Iran deal?
The French, German and British governments have been in talks with the United States with respect to the Iran nuclear deal (Joint Comprehensive Plan of Action or JCPOA) for many months. Even though the United States agreed to the deal in 2015, the new administration in Washington has expressed serious concerns about certain aspects of the deal and has decided to withdraw from the Iran nuclear deal.
US Secondary Sanctions
The US government has stated, in light of its withdrawal, that it will reimpose certain US secondary sanctions with respect to Iran on August 6, 2018, with any remaining US secondary sanctions to be reimposed by November 4, 2018 (secondary sanctions are sanctions applicable to non-US persons).
No United Nations Sanctions
Such withdrawal by the US is a repudiation of the JCPOA. The US could have followed another course of action that would impose United Nations sanctions under the JCPOA without repudiating it. The JCPOA contains “snap-back” provisions that would allow signatories to reimpose United Nations sanctions against Iran. However, in this regard, the JCPOA requires that the International Atomic Energy Agency (IAEA) certify that Iran is not in compliance with its obligations, but the IAEA has repeatedly confirmed that Iran is in compliance. Nevertheless, the US could have elected to continue to waive US secondary sanctions (hence continuing to comply with the US’s obligations under the JCPOA) and instead invoked the Dispute Resolution Mechanism under the JCPOA if the US believed that Iran was not meeting its commitments under the JCPOA. The Dispute Resolution Mechanism would ultimately culminate in a UN Security Council vote to continue to waive UN sanctions. If such vote is not unanimous (i.e. the US does not vote in favour), then UN sanctions would be reimposed. Unlike the unilateral US sanctions, the UN sanctions would be global in applicability.
However, the US chose not to follow such path. As a result, US secondary sanctions will snap back on the dates discussed above and not the United Nations sanctions.
Consequences
The effect of such US secondary sanctions will be a further significant chilling of foreign business with and foreign direct investment in Iran. This will be in addition to the already existing reluctance/avoidance by international banks and most regional banks to facilitate Iran business. This is primarily due to US sanctions laws and the increased internal compliance scrutiny that a bank may be subject to if it facilitates Iran business.
Path Forward?
Given all of these impediments, the path to doing business in Iran may look like a dead-end. However, when US secondary sanctions are unilaterally reimposed by the US, regional banks with no exposure to the US market might still decide to continue to offer Iran related services. Also, companies with no presence or business in the United States might continue to pursue Iran business. Nevertheless, it is still a daunting business proposition: business in Iran will result in blacklisting of companies from doing business in or with the US or its banking system.
Indeed, reports suggest that the European Union, Russian and Chinese governments have prepared contingency plans to support companies. For example, there is consideration of extending non-dollar lines of credit and credit guarantees to preserve as much of the deal as possible. Also, the European Union is being asked to pass laws to protect European firms from US secondary sanctions. However, the reality is that no country can completely shield businesses and investments in Iran given the US pullout.■
Legal reforms in Abu Dhabi
Abu Dhabi has introduced new rules governing the functioning of the Emirate’s judiciary. The new rules appear in Abu Dhabi Law 13 of 2018, which amends Abu Dhabi Law 23 of 2006 on the Abu Dhabi Judicial Department.
The new provisions largely address internal matters related to the functioning of the courts, such as the composition of panels of the courts and the accountability of judges. But two features could be of more general interest.
First, the Chairman of the Judicial Department is accorded the power to establish specialised courts. This would be a major advance, as the need for specialised courts (such as maritime courts) has long been recognised. Moreover, the existence of specialised courts is expressly contemplated by other recently enacted statutes, such as the Federal Bankruptcy Law. The Chairman of the Judicial Department may determine the competence of the specialised courts, and may establish Departments of First Instance, Departments of Appeal and Departments of Enforcement in such specialised courts.
Second, a formal procedure has been introduced for the overruling of precedents. The new provisions introduce a General Assembly of the Abu Dhabi Court of Cassation comprised of all of the Court’s judges and having general administrative authority for the functioning of the Court. Two panels, each composed of nine judges, are formed within the General Assembly, each headed by the Chairman of the Court or another senior judge. One panel is specialised in criminal matters and the other in civil, commercial, personal status and other matters.
If a panel of the Court of Cassation, while considering a case, wishes to consider overruling a legal precedent established by previous judgments, or wishes to pronounce on an issue on which contradictory principles were previously articulated in the Court’s judgments, then it must refer the matter to the Chairman of the Court for presentation to the competent panel of the General Assembly. A decision to overrule a legal precedent would require an affirmative vote of at least six members. The Chairman of the Court, if he considers the same appropriate, may present the matter to both panels sitting en banc, in which case a decision to overrule the precedent would require an affirmative vote of 13 members.
The amendments also reduce the size of the panels of the Abu Dhabi Court of Cassation that consider disputes before the Court, from five judges to three. ■