Author: afridi-angell

Should you continue to include DIFC-LCIA arbitration clauses or EMAC arbitration clauses in your agreement? Dubai Decree No. 34 of 2021 concerning the Dubai International Arbitration Centre (“Decree”)

 

The Decree, which came into force on 20th September 2021, abolished the Emirates Maritime Arbitration Centre (EMAC) and the DIFC Arbitration Institute (DAI) with immediate effect and has raised multiple queries in the legal and business communities, particularly as to whether parties should still opt for EMAC or DIFC-LCIA arbitration clauses in agreements that are presently being drafted.

 

Pursuant to the Decree, the Dubai International Arbitration Centre (DIAC) will replace all rights and obligations of the now abolished EMAC and DAI. The DIAC has been granted a period of no more than six months to effectively replace EMAC and the DAI.

 

Although the Decree does not abolish or even make reference to the DIFC-LCIA Arbitration Centre, the DIFC-LCIA Arbitration Centre was established consequent to an agreement entered into between the DAI and the LCIA; meaning that, the abolishment of the DAI calls to question (at the very least) the mandate under which the DIFC-LCIA Arbitration Centre continues to operate. It is expected that there will be further regulation, perhaps in the form of administrative orders, that will hopefully clarify the status of the DIFC-LCIA Arbitration Centre.

 

However, for present purposes, two questions arise, (i) what effect does an EMAC/DIFC-LCIA arbitration clause have consequent to the Decree; and (ii) should parties continue to include EMAC/DIFC-LCIA arbitration clauses in their agreements.

 

Pursuant to Article 6 (a) of the Decree, all agreements executed as at the date the Decree came into force (i.e., 20 September 2021) that contain a clause providing for “arbitration in the Canceled Arbitration Centers” (i.e., EMAC and by implication DIFC-LCIA) “shall be valid and effective”, and the DIAC shall replace “the Canceled Arbitration Centers” in “hearing and resolving disputes arising from such agreements” unless parties agree otherwise:

 

All agreements concluded as at the date of entry into force of this Decree for resorting to arbitration in the Canceled Arbitration Centers shall be valid and effective, and the Dubai International Arbitration Centre shall replace these centers in hearing and resolving disputes arising from these agreements, unless the parties thereto agree to otherwise. [LexisNexis translation]

 

The Decree therefore provides some comfort to parties who have opted for EMAC/DIFC-LCIA arbitration clauses in agreements that were entered into on or before 20 September 2021, as the Decree specifically provides that such arbitration agreements will be valid and effective.

 

In addition, Article 8 (c) of the Decree provides that the arbitration rules of “the Canceled Arbitration Centers” (i.e., the EMAC rules and by implication, the DIFC-LCIA rules) and the DIAC will continue to apply until DIAC approves its new arbitration rules. This, however, raises another concern. If an EMAC arbitration, for example, is initiated after 20 September 2021 (and prior to DIAC issuing its new arbitration rules), does it mean that in terms of Article 6 (a) and Article 8 (c) of the Decree, the arbitration must be initiated under the EMAC arbitration rules and thereafter, the new DIAC arbitration rules become applicable once issued by the DIAC? If so, such eventuality is likely to raise multiple practical and legal issues.

 

The next issue to consider is what effect an EMAC/DIFC-LCIA arbitration clause has in an agreement that was concluded after 20 September 2021. Would such an agreement be valid? And which institution will administer such an arbitration? A strict interpretation of Article 6 (a) of the Decree would suggest that the comfort given in Article 6 (a) of the Decree is limited only to agreements concluded on or before 20 September 2021. For agreements entered into after 20 September 2021, there is unfortunately no definite answer to this question as of now.

 

It remains to be seen whether further regulations to be promulgated pursuant to the Decree will expressly provide that any reference to an EMAC/DIFC-LCIA arbitration clause will be construed as a reference to an arbitration administered under the DIAC arbitration rules. Similar provision was made when the DIAC was first created in 2007 and references to arbitration under the Dubai Chamber of Commerce Rules were deemed to be a reference to the DIAC Rules.

 

Until there is more clarity, the prudent approach would be not to opt for EMAC or DIFC-LCIA arbitration clauses in agreements that are presently being drafted. We understand that the relevant authorities are in discussion regarding these issues, and we expect clarifications to be issued soon. ■

Yes, its groundbreaking, but what does it mean for you? A rough guide to the implications of Decree 34 for parties in arbitration in Dubai

Parties in the process of arbitrating disputes, thinking of commencing arbitration, or even thinking of including arbitration provisions in a contract have been given a lot to think about, thanks to the changes introduced by Decree 34 of 2021. It is early days yet, and we need to see how matters develop. With that caveat out of the way, here is a rough guide of what Decree 34 could mean for parties in arbitration in the UAE.

 

You are party to an ongoing arbitration under the DIAC Rules

Carry on, you’re the least affected by the Decree.

 

You are party to an ongoing arbitration under the DIFC-LCIA or EMAC Rules

Unfortunately, you are at the opposite end of the spectrum. Although the Decree appears to contemplate that ongoing DIFC-LCIA and EMAC arbitration proceedings will continue without interruption, the language of the Decree also appears to make this conditional on the DIAC and its administrative body taking over supervision of any such proceedings. Afridi & Angell’s Legal Alert of 23 September 2021 addresses this scenario. Article 8(c) of the Decree provides that the DIFC-LCIA and EMAC Rules will continue to be applied to the extent they do not conflict with the Decree and the Statute, until the approval of the arbitration and conciliation rules of the DIAC by the DIAC Board of Directors. This seems to suggest that the DIFC-LCIA Rules and EMAC Rules will be disapplied once a new set of DIAC Rules are approved. Parties and arbitrators will need to tread carefully in order to avoid potential challenges to final awards.

 

You have ongoing litigation (either before the Dubai Court or the DIFC Court) in relation to arbitration

These matters will carry on. Article 7 of the Decree provides that the two courts will continue to hear all cases, petitions and appeals related to arbitration awards/procedures issued by tribunals appointed by the DIAC, DIFC-LCIA and EMAC.

 

You have a contract which provides for arbitration under the DIAC Rules

If you have made provision for the seat of the arbitration (e.g. Dubai, or the DIFC), that provision will be upheld and applied. However, if you have not made provision, the default seat will be the DIFC. Prior to the Decree, onshore Dubai would have been the default seat. Keep an eye out for revisions to the DIAC Rules – the version of the rules that will apply if a dispute goes to arbitration will depend on the language used in your dispute resolution clause.

 

You have a contract which provides for arbitration under the DIFC-LCIA or EMAC Rules

Although Article 6(A) of the Decree provides that all agreements which have been concluded by 20 September 2021 providing for arbitration under the DIFC-LCIA or EMAC Rules shall be considered as valid and effective, assuming that you do not run the risk of your claim being time-barred, you should consider waiting to see how matters develop before taking any steps. Article 6(A) goes on to provide that the DIAC will replace the DIFC-LCIA and EMAC in hearing and resolving disputes arising from these agreements. The DIAC has six months to effectively replace the EMAC and the DIFC Arbitration Institute, and a lot of the uncertainties should be resolved during this time. It may be necessary to consider amending your dispute resolution clause, depending how matters develop.

 

You are drafting a contract, and wondering what to put in as a dispute resolution clause

For the time being, and until the prevailing uncertainties are clarified, avoid opting for DIFC-LCIA or EMAC arbitration clauses. You can still opt for other institutional rules and have the DIFC as the seat of arbitration. The DIAC Rules, despite being possibly one of the oldest sets of institutional rules in the UAE, are suitable for most disputes. It is anticipated that the DIAC Rules will be overhauled very soon, and the recent amendments provide that the DIAC Court of Arbitration and the Board of Directors are empowered to issue and amend the DIAC Rules. ■

 

***

 

Regardless of which category you find yourself in, do not panic. Dubai is very nimble and proactive, and should soon iron out any issues that need to be addressed. Afridi & Angell’s dispute resolution team has extensive experience in advising on and representing clients in arbitrations. Should you have any questions, please contact the author or your usual Afridi & Angell contact.

Do you have an on-going DIFC-LCIA arbitration? If so, you should tread carefully: Dubai Decree No. 34 of 2021 Concerning the Dubai International Arbitration Centre (“Decree”)

The Decree, which came into force on 20th September 2021, has abolished the Emirates Maritime Arbitration Centre (EMAC) and the DIFC Arbitration Institute (DAI). The Decree has taken the local legal and business community by surprise, and has given rise to legitimate concerns as to its impact on arbitration proceedings presently underway.   

The Decree abolishes EMAC and the DAI with immediate effect and transfers all their assets, rights and obligations to the Dubai International Arbitration Centre (DIAC), which will in effect, replace EMAC and DAI. To this end, the DIAC has been granted a period of not more than six months to effectively replace EMAC and the DAI. The DIFC-LCIA Arbitration Centre was established consequent to an agreement entered into between the DAI and the LCIA; meaning that, the abolishment of the DAI (at the very least) calls to question the continuation of DIFC-LCIA Arbitration Centre.  

This alert very briefly highlights some of the questions that arise, by reference in particular to proceedings being undertaken under DIFC-LCIA Arbitration Rules (Rules), and considers the steps that might be required to mitigate potential challenges to the integrity of arbitration proceedings and any arbitration award that is issued under the Rules.  

While each case will need to be examined on its own particular circumstances, some of the more immediate concerns that arise are as follows:   

First, although the Decree appears to contemplate that ongoing DIFC-LCIA arbitration proceedings will continue without interruption, the language of the Decree also appears to make this conditional on the DIAC and its administrative body taking over supervision of any such proceedings.  Article 6(b) states as follows:  

The arbitral tribunals and committees formed as at the date of entry into force of this Decree at the Canceled Arbitration Centers and the Dubai International Arbitration Centre shall continue to hear and resolve all arbitration cases before them without interruption and in accordance with the rules and procedures adopted by them in this regard, unless the arbitration parties agree to otherwise, provided that the Dubai International Arbitration Centre and its Administrative Body shall undertake supervision over these cases. [LexisNexis translation]  

Therefore, a question arises as to how the proceedings would continue without interruption pending the replacement of the DIFC-LCIA Arbitration Centre with the DIAC.  Parties to an arbitration and their arbitrators will need to consider what steps might need to be adopted in order to cover the interim period, otherwise potential challenges to a final award can conceivably be made on the basis, for example, that the arbitration procedure adopted was not in accordance with the agreement of the parties, or was otherwise defective.   

Secondly, the role of the DIFC-LCIA Arbitration Centre and the LCIA Court is an integral part of the Rules and, therefore, in circumstances where the effect of the Decree calls into question the very existence of the DIFC-LCIA Arbitration Centre, tribunals and parties will need to consider how the arbitration can in fact continue under the Rules if the DIFC-LCIA Arbitration Centre is removed from maintaining its traditional function which is embedded under the very same Rules. One such example is that Article 26.7 of the Rules requires the DIFC-LCIA Registrar to transmit the final award to the parties “authenticated by the Registrar as an DIFC-LCIA Arbitration Centre Award”.  This may no longer be possible.

Although the DIFC-LCIA Arbitration Centre has very recently published an update assuring parties that it continues to deal with the day-to-day management of cases under the Rules, it is unclear by what authority it continues to do so, given that the DAI stands abolished as of 20th September 2021. This too could potentially translate into challenges to awards (or a refusal by a Court to recognize awards).
 
Thirdly, an important practical consideration for tribunal members will be the status of the tribunal fees and disbursements that might need to be incurred to attend hearings, particularly where arbitrators based outside of the UAE plan to incur travel and accommodation costs to attend hearings in person.  Given that all functions concerning payments of fees are to be taken over by the DIAC, arbitrators will need to account for potential delays in the reimbursement of expenses and payment of fees.   

Parties and arbitrators will need to give careful consideration to these factors and, notwithstanding the apparent intention under Article 6(b) of the Decree that proceedings should continue uninterrupted, parties and arbitrators will need to consider whether it might be prudent to stay or suspend proceedings until such time as the DIAC formally steps in, or until the parties and tribunal enter into an agreement that comprehensively covers some of the concerns highlighted above. A delay to proceedings would in such circumstances be inevitable, but the inconvenience will need to be balanced with the possible disastrous outcome if an award is set aside because of a failure to properly address the ramifications of the Decree.  

No doubt this development will eventually settle into a new norm, but until then, both arbitrators and parties should tread carefully. ■

POD inBrief – Employment Law in the UAE

This episode of Afridi & Angell’s POD inBrief focuses on the UAE’s employment law and is a dialogue between Charles Laubach, employment practice head at Afridi & Angell, and Kirsten Elizabeth, HR manager for a trading company.    


Kirsten has questions on workforce overtime rules, termination, and non-compete and confidentiality clauses amongst others.    

 

Listen to “Afridi & Angell’s POD inBrief_Employment in the UAE” on Spreaker.

 
 An overview of their discussion is mentioned below:    

Overview:  
– Employee overtime rules    
– Employee termination causes (legitimate reasons) and employee notice period    
– Employee end of service gratuity and savings plan    
– Employee contracts; non-compete and confidentiality clauses    
– Delayed termination of employee benefits (i.e., visas, health insurance and schooling)    
– Advice on COVID-19 reduced office space  

Further recognition of judge-made law, and new courts: more changes to the UAE’s Civil Procedure Code

The UAE’s Civil Procedure Code was enacted in 1992 as Federal Law No. 11, and the first amendments to the Code were made more than a decade later in 2005. Since 2014, almost each successive year has seen amendments being made, the most extensive of which were the regulations issued under Civil Procedure Code (the Regulations) which came into effect on 16 February 2019. The Regulations themselves were amended in 2020 by Cabinet Decision No. 33/2020.

 

Federal Decree No. 15 of 2020 (the Decree) and Cabinet Resolution No. 75 of 2021 (the Resolution) comprise the latest set of amendments to the Civil Procedure Code and the Regulations, and cover a range of issues from service of defendants, to the conduct of proceedings, and the execution of judgments. This article examines some of the more notable changes introduced by the Decree and the Resolution.

 

The creation of Single-Level Courts 

The Decree makes provisions for the UAE Minister of Justice or the head of the Judicial Authority of an Emirate to create a Single-Level Court, which shall comprise of three judges, one each drawn from the Court of First Instance of the Emirate, the Court of Appeal of the Emirate, and the Court of Cassation of the Emirate or the Federal Supreme Court (to allow for the fact that save for the Emirates of Abu Dhabi, Dubai and Ras al Khaimah, the final level of appeal for the other Emirates is the Federal Supreme Court). The Single-Level Court was first proposed several years ago and, when established, will have jurisdiction where parties have agreed to submit themselves to the jurisdiction of that court, or where the subject matter falling within its jurisdiction is identified by regulations issued under the Civil Procedure Code (which is yet to happen). The court will only have jurisdiction over disputes which have a ‘definite value’  (i.e.  would  exclude  claims  for  unassessed damages) which is over AED 500,000. The judgments of the Single-Level Court will not be subject to appeal, except where the judgment is subjected to review under the provisions of Article 169 of the Civil Procedure Code, reversal pursuant to Article 187(bis) (discussed below) or where the judgment is defective as the parties were not properly summoned.  

 

Review of Court of Cassation judgments – a step towards further recognising judge-made law  

The UAE, being a civil law jurisdiction, does not have a system of binding judicial precedent as understood in common law systems. That said, while a single judgment of the UAE Courts does not bind, a line of authority established by the superior courts is influential, for example the principle that arbitration is an exceptional form of dispute resolution. Federal Law No. 10 of 2019 created a judicial tribunal comprising judges from the Federal Supreme Court and the Courts of Cassation to unify the federal and local judicial principles and precedents issued by these courts and to eliminate potential conflicts.

 

The role of judicial principles within the framework of UAE law is further recognised by the Decree, which identifies conflict with judicial principles as one of the grounds for appealing a judgment of a Court of Cassation. Prior to the Decree, Article 187 of the Civil Procedure Code provided that a judgment of a Court of Cassation was not subject to appeal, but was subject to review in certain limited circumstances set out in sub-articles 1, 2 and 3 of Article 169 of the Civil Procedure Code (being fraud, forgery or false testimony, and suppression of conclusive evidence respectively). The Decree adds Article 187(bis) which provides that the Court of Cassation may at its own initiative or at the application of the party against who the judgment is issued, reverse a decision, among others, in the following cases:  

 

– where a procedural error (either by the court directly or by one of its departments) affecting the conclusion of the decision/judgment has occurred;

 

– where the decision/judgment is based on a repealed law, and a different outcome would result if the current law is applied; and

 

– the decision/judgment violates judicial principles established by the panel, or other entire court circuits, or if it violates the principles established by the court, or the principles established by the judicial tribunal created by Federal Law 10 of 2019.    

 

Where a party wishes to seek this remedy, an application for reversal should be made to the President of the Federal Supreme Court/Court of Cassation, with a deposit of AED 20,000. Applications may only be made within one year of the initial judgment. If the application for reversal is accepted, the matter will be remanded back to the court which issued the decision for reconsideration.

 

The amendments do leave some matters unresolved. There is no clear guidance as to what constitutes a judicial principle. The Decree is also silent regarding judgments of any courts other than the Federal Supreme Court and Courts of Cassation which may have become final, e.g. by reason of not being appealed, although the language suggests that this mechanism is limited to judgments of the Federal Supreme Court and Courts of Cassation.

 

Amendments regarding Payment Order applications

One of the key changes introduced through the Regulations was the expansion of the summary procedure known as Payment Orders, previously confined to disputes involving commercial instruments, to disputes which involve a written confirmation of debt. The Cabinet Resolution makes further changes to the law governing this procedure, notably the following:

 

– Amending Article 64 of the Regulations to require the judge to provide justification for the court’s decision when granting or denying a Payment Order application in relation to implementation of a commercial contract. Previously, justification was required only where the judge rejected an application.

 

– An appeal against a Payment Order (appeals are available where the value of the claim is more than AED 50,000) now may be made within 30 days of the decision. Previously, it was 15 days. The amendment also requires a detailed memorandum of appeal to be filed at the time of filing the appeal. Previously, a simple notice of appeal sufficed. Where the value of the claim is less than AED 50,000, a challenge must be made by way of an objection (or a ‘grievance’ as commonly referred to) within 15 days – the law with respect to such challenges has not changed.

 

– The Cabinet Resolution provides that in an appeal originating from a case has been filed as ordinary proceedings but the supervisory judge has instead issued a Payment Order, and the Court of Appeal takes the view that the requirements for issuing a Payment Order has not been met, the Court of Appeal may remand the matter to the Court of First Instance to be heard as an ordinary claim. Prior to the amendment, if the Court of Appeal takes the view that the requirements for issuing a Payment Order have not been met, the application would be dismissed.

 

Summoning of parties  

A constant theme in the amendments to the Civil Procedure Code since 2017 is the attempt to streamline the process of serving court process on defendants. The Cabinet Resolution take further steps in this direction by providing that:

– summons may be served by recorded audio or video calls, short message services, smart applications, email, fax, or any other means agreed between the parties from the method of service recognised in the Regulations;

 

– summons may be served at the defendant’s domicile, residence, or on their attorney, spouses, relatives or servants and that refusal to accept summons will be deemed to result in personal service; and

 

– summons may be served at a place of work on the defendant, his/her manager or the management of the workplace.  

 

If service cannot be affected as above, summons shall be served among others by publication on the court’s website or in newspapers, including a foreign language newspaper where the party sought to be summoned is not a UAE national. In practice service of summons can still be a time-consuming exercise in the UAE courts (less so in the Dubai Courts), and it is hoped that the changes made by the Cabinet Resolution will make this a more efficient process.    

 

Added scope for ad-hoc courts

Article 30(bis) of the Civil Procedure Code provides that the Minister of Justice or the head of the Judicial Authority of an Emirate may create an ad-hoc court presided by one judge and assisted by two local or international experts to hear and determine certain matters that would otherwise fall within the jurisdiction of the major circuit of courts. The Cabinet Resolution clarifies that the ad-hoc courts will have the jurisdiction to hear civil, real estate, commercial and inheritance cases, and such disputes that the parties agree will be subject to the jurisdiction of the ad-hoc courts. Where there is such an agreement, other courts should decline jurisdiction, provided that the defendant in the matter asserts a jurisdictional objection before addressing the court on the merits of the dispute (i.e. similar to the position when asserting a jurisdictional objection based on the existence of an arbitration agreement). Each ad-hoc court will have a ‘preparation judge’ who shall exercise the powers of supervising judge and case manager. The ‘preparation judge’ is required to encourage settlement of disputes, and if a settlement is reached, the minutes of settlement shall acquire the status of a writ of execution. If settlement is not possible, the ‘preparation judge’ must, within 30 days, prepare a memorandum of opinion considering the parties’ position and the applicable law, and the matter will be referred to the competent court for adjudication in the ordinary manner. ■  

SAFEs-Start-up Company Financing

The UAE has seen a significant increase in investments and entrepreneurship over the last decade.  The Dubai International Finance Centre (DIFC) reported record growth driven by ‘a robust ecosystem, global partnerships and investment in FinTech and Innovation’. This exceptional growth in investments has acted as a catalyst for the increased usage of Simple Agreements for Future Equity (SAFEs) in start-up company financings.

 

SAFEs are a method of funding directly between start-ups and investors used in the seed financing rounds of a company’s start-up phase to raise capital in return for future equity. They have been an increasingly popular form of funding within the start-up ecosystem since their establishment in 2013, and even more so since their modification in 2018.

 

What is a SAFE?

SAFEs were established to create a quick and easy way for investors to invest in start-ups using a simplistic legal document that is entrepreneur friendly and easily understandable. Under a SAFE, investors can provide funding for start-up companies during the initial phase of funding of a company and in return, the SAFE will convert into ownership of shares during the next equity investment round of funding at a predetermined rate. The major difference between SAFEs and other forms of start-up financing such as convertible notes, is that SAFEs have no interest rate or maturity date.

 

SAFEs were established to create a quick and easy way for investors to invest in start-ups using a simplistic legal document that is entrepreneur friendly and easily understandable. Under a SAFE, investors can provide funding for start-up companies during the initial phase of funding of a company and in return, the SAFE will convert into ownership of shares during the next equity investment round of funding at a predetermined rate. The major difference between SAFEs and other forms of start-up financing such as convertible notes, is that SAFEs have no interest rate or maturity date.

 

Pre-money SAFEs vs Post-money SAFEs

When introduced in 2013, SAFEs were formed based on pre-money valuations which are based on the initial value of the company before taking into account the investment contributions made by the SAFE investors (pre-money SAFEs), however, complications resulted as SAFEs became increasingly popular and of higher value making it difficult for start-ups to know their share capital dilution and for investors to know their relative ownership percentage. In light of this difficulty, SAFEs were revised and adapted in 2018 (post-money SAFEs).

 

The key difference between pre and post money SAFEs is that the investor’s ownership percentage using a post money SAFE is fixed and calculated based on a fixed post SAFE valuation. This makes it much more transparent and guarantees the investor a minimum percentage of ownership after the SAFE round.

 

Pro Rata Rights

Initially, pro rata rights were compulsory in SAFEs meaning SAFE holders were required to participate in subsequent equity rounds in order to maintain their percentage of ownership without dilution. However, upon adaptation in 2018, this was changed and pro rata rights became optional for investors.

 

Advantages and Disadvantages of SAFEs

The advantages and disadvantages of SAFEs are:

 

Advantages

– No interest rates (unlike convertible notes) meaning the costs of financing are lower.

 

– No maturity date which means theoretically the SAFE could be everlasting, except in the following circumstances, which would terminate a SAFE: the following equity round, acquisition of the business, IPO or if the company shuts down.

 

– Instant transactions directly between the start-up and the investor meaning no co-ordination with other shareholders is needed.

 

– Simplicity makes it a cost effective and time effective option.

 

Disadvantages

The disadvantages of SAFEs are dependent on the type of SAFE acquired.

 

– The disadvantages of a pre-money SAFE is that it lacks transparency between the start-up company and investor as tracking dilution and stock ownership is difficult.

 

– The most significant drawback of pre-money and post-money SAFEs is the inevitable dilution effect on existing investors, which is amplified even more in post-money SAFEs because a guaranteed minimum percentage of ownership is given to investors.

 

Conclusion

SAFEs have proven to be an increasingly popular method of start-up company financing, and we anticipate this trend to continue, especially in the Middle East. The upcoming EXPO 2020, beginning in October 2021, which aims to attract more investors into the Middle East will further accelerate the growth of the start-up/venture capital ecosystem and the use of SAFEs. In addition, the successful handling by the UAE government of the COVID-19 crisis continues to bolster the attraction of the UAE as an investment destination. ■

Consistent messaging from the Dubai Courts: Arbitration clauses are to be construed as narrowly as possible

In a decision issued in July 2021, the Dubai Court of Appeal held that an arbitration clause should be construed narrowly, and emphasized that everything that may be waived or prevents its [i.e., the arbitration clause’s] application must be sought.   

 

In finding that the Dubai Courts have jurisdiction over the dispute, the Dubai Court of Appeal referred to judgments of the Dubai Court of Cassation characterizing arbitration as an exceptional means of dispute resolution and, being a departure from the general rule that the courts have jurisdiction over disputes, arbitration clauses must be interpreted narrowly, and everything that may be waived or prevents its application must be sought. The latter phrase in particular is of interest, as it suggests that the Court will need to be satisfied that there exists no issue that might affect the applicability of an arbitration clause.    

The dispute resolution clause in question, while containing the provisions regarding the number of arbitrators, the seat and the language of the arbitration, included language stating that any referral to arbitration will be ‘without prejudice’ to the jurisdiction of the UAE Courts and ‘subject to agreement between the parties’. The Court of Appeal recognized that parties may agree to arbitration as a method of dispute resolution, provided that it does not conflict with public order. However, in this case the Court of Appeal found that there was no evidence that an agreement was reached between the parties to resolve disputes through arbitration as set out in the dispute resolution clause, and that consequently the forum for dispute resolution is the Dubai Court.    

 

This judgment highlights the need to have a carefully drafted dispute resolution clause, particularly where the parties wish to have disputes resolved through arbitration.  

 

The principle that arbitration clauses must be interpreted narrowly is a well-established one, and the language that everything that may be waived or prevents its [i.e., the arbitration clause’s] application must be sought appears to have been used by the Dubai Court of Cassation as far back as in Petition No. 192 of 2007. This principle and precedent was part of a strategy successfully deployed by Afridi & Angell in a recent case before the Dubai Court of First Instance to argue that the Dubai Courts had jurisdiction over a dispute in which the plaintiff and one of the defendants had an arbitration agreement. The dispute in question arose from a real estate contract containing an arbitration clause. The developer at the time the contract was entered into had been replaced by the time the dispute arose, and the new developers were added as defendants to the court proceeding by the purchaser (our client). The court found that as the added parties did not have an arbitration agreement with the plaintiff, the court had jurisdiction over all of the defendants, notwithstanding that the plaintiff and the initial defendant had an agreement to resolve disputes through arbitration. ■  

POD inBrief: Real Estate in the UAE

 

This episode of Afridi & Angell’s POD inBrief focuses on real estate in the UAE, recent performance, trends, and indicators for the upcoming months.

 

Shahram Safai, partner at Afridi & Angell and head of the real estate team led the discussion. He represents real estate stakeholders including developers, owners, architects, engineers, contractors and government entities in all stages of the real estate and construction process. In addition to real estate, Shahram represents clients on general corporate matters, private equity, venture capital and doing business in the region.

 

Listen to “Afridi & Angell’s POD inBrief _ Real Estate in the UAE” on Spreaker.

 

Overview:

 

  • Summary of real estate performance since 2018/2019
  • Current trends in recent real estate transactions
  • Discussion of the upward trends in real estate activity and the high demand for luxury housing and if these trends are here to stay
  • Evaluation of the impact of Dubai Expo 2020 on the economy and real estate in particular
  • Words of advice to investors and end-users looking to buy real estate in the UAE

Booming Market: Real Estate Ownership Rules for Foreigners in Dubai and Abu Dhabi

The real estate market in Dubai has been making significant improvements in 2021 after the successful handling of the COVID-19 pandemic by the UAE. March 2021 had the highest number of transactions in 16 months as well as the highest number of secondary/ready properties transacted for foreigners in a single month since June 2015. This boom in sales resulted in record increases (23 per cent annual increase between April to June for luxury villas). Such developments in real estate activity will most likely translate into positive activity in Abu Dhabi as well.

With the above in mind and such renewed interest, in this inBrief we compare the foreign ownership laws for real estate in Dubai and Abu Dhabi:

 

Where Can Foreigners Buy Property in Dubai, Abu Dhabi

 

Foreign investors should familiarise themselves with the two foreign ownership systems that operate in Abu Dhabi and Dubai so that they can make an informed decision when purchasing a property.

 

Dubai: The general rule regarding nationality requirements to acquire real estate interests in Dubai is set out in Article 7 of 2006 which states that: “non-UAE nationals may, in certain areas determined by the rules, be granted the following rights: (a) freehold ownership of Real Property without time restrictions; and (b) usufruct or leasehold over Real Property for a period not exceeding ninety-nine (99) years.”

 

The designated areas for foreign ownership of real estate interests are determined by the ruler of the Emirate of Dubai by way of decrees and regulations issued from time to time.

 

For foreigners, the most attractive designated areas have traditionally been Emirates Hills, The World Islands, Dubai Marina, Palm Jumeriah, Burj Khalifa, Downtown and Business Bay.

 

However, due to the current global economic climate, foreign investors have now been looking to Dubai’s affordable housing sector which has seen strong returns in communities such as Jumeriah Village Triangle, Jumeriah Village Circle and International City.

 

Foreigners must make specific inquiries with the Dubai Land Department as to whether foreign ownership is permitted for areas which are not listed above as the list of designated areas is subject to change as previously alluded to.

 

Furthermore, foreigners should be aware that currently the Dubai Land Department (DLD) does not allow foreign companies to own real estate directly in designated areas; instead it requires foreign companies to own real estate by establishing subsidiary companies in the free zones of: (a) Jebel Ali Free Zone; (b) the Dubai Multi Commodities Centre; or (c) The Abu Dhabi Global Market (ADGM; which we note is a recent development pursuant to a memorandum of understanding dated 10 October 2018 between the DLD, ADGM, and the International Financial Centre in Abu Dhabi).

 

As of April 16, 2019, the right to own real estate on a freehold basis in the investment areas has been granted to foreigners in Abu Dhabi, according to Law 13 of 2019. The law states, “Non-Nationals, whether natural or legal persons, may own and acquire all original and secondary rights in rem of the real estate existing within the investment areas, and they may conduct any disposition thereof.”

 

A right of ownership, known as freehold, is considered an original right in rem, while the right to grant a mortgage pledge or lien over that freehold property is classified as secondary rights in rem.

 

In a move to modernize its real estate laws, on 16 April 2019 Abu Dhabi announced that foreigners are now permitted to own freehold title to real estate within the “investment areas” in Abu Dhabi. Prior to this, foreigners were only able to buy real estate through long term leases of up to 99 years or rights of Musataha or usufruct.

 

It is expected that this change in the law will contribute to the increasing demand in real estate in Abu Dhabi and level the playing field with Dubai in terms of its foreign ownership rules.

 

The ten most popular investment areas where foreigners can now buy freehold property are: Al Reem Island; Yas Island; Saadiyat Island; Al Reef; Al Raha Beach; Al Shamkha; Masdar City; Nurai Island; Al Falah City; and Al Maryah Island.

 

What are the transfer fees payable by foreigners – Dubai vs Abu Dhabi

 

Dubai: A transfer fee of 4 per cent of the value of the sale contract is payable to the Dubai Land Department to register a transfer of property in Dubai. The fee is the same regardless of whether it is a foreign individual or a company making the purchase.

However, after the registration of the transfer, any change in the shareholding (at any level up to the ultimate beneficial owner) of the foreign company purchaser is considered a transfer of the real estate requiring payment of a further transfer fee at the Dubai Land Department.

Abu Dhabi: A transfer fee of between 1 per cent to 4 per cent of the property value is payable to register a transfer of property in Abu Dhabi. Currently, the Municipality is applying a rate of 2 per cent of the property value (or if higher the property value as assessed by the Municipality). The fee is the same regardless of whether it is a foreign individual or a company purchasing. Post-acquisition, the transfer fee process varies in the different investment areas in Abu Dhabi in respect of how changes in shareholders’ equity of a foreign company are dealt with, and specific inquiries for each investment area must be made.

 

What permanent residency and long term visas are available to foreign real estate investors – Dubai vs Abu Dhabi

 

In both Dubai and Abu Dhabi, a 5 year residency visa may be applied for by the investors in real estate in the UAE if the following conditions are met pursuant to Cabinet Decision 56 of 2018:

 

  • The investor must have invested in one or more properties in the UAE with a total value of no less than AED 5 million;
  • The amount invested must not be derived from the proceeds of a loan. Consequently, it will not be possible for there to be a mortgage over the property if this visa is to be applied for;
  • The property must be owned by the investor for at least 3 years from the date of issuance of the residency visa;
  • The investor must be financially liable for any claims or civil judgements which reduce his/her financial solvency below AED 10 million; and
  • The investor must have a comprehensive health insurance policy covering him/herself and any family members.

 

In both Dubai and Abu Dhabi, a 10 year residency system called the “Golden Card” is available to the following categories of foreigners in the UAE (and their spouse and children): (1) investors; (2) entrepreneurs; (3) specialised talents; (4) researchers; and (5) outstanding students. Amidst the pandemic, Dubai and Abu Dhabi have seen this visa expand and in particular authorities are encouraging frontline workers such as doctors to apply. The UAE Government Communications Office reported that, since 21 May 2019, the “Golden Card” system has granted a “Golden Card” to 6,800 qualified individuals with approximately AED 100 billion in combined total investments in the first round of applications.

In light of the pandemic, authorities have developed other visa options, such as retirement and remote working, which adhere to work flexibilities. This makes it an idealistic time to secure residency in Dubai and Abu Dhabi.

 

Conclusion:

The new announcement in Abu Dhabi permitting foreign freehold ownership in the designated investment areas, along with the introduction of the 10 year residency and other long-term visa schemes in the UAE, will serve to increase investor confidence and attract more foreign investment into the UAE. Dubai and Abu Dhabi remain attractive markets for domestic and international investors alike with globally high rental yields and relatively low prices.  The UAE’s successful handling of the COVID-19 pandemic has added to such attraction. The UAE continues to attract entrepreneurial companies and people from across the world. There is much to be positive about regarding the Dubai and Abu Dhabi property markets in 2021 and 2022. ■

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