Category: inBriefs

ADGM announces tech start-up licensing regime

The Abu Dhabi Global Market (the ADGM) recently announced the launch of a commercial license specifically catered towards tech start-ups that allows entrepreneurs to obtain an operational license in the ADGM and access to a Professional Services Support Program aimed at allowing entrepreneurs entry to a community of businesses, financial services and professional advisors.

 

The license is available to entrepreneurs of all nationalities floating technology driven start-ups with scalable innovative business concepts that can be deployed in the UAE and contribute to the development of the local economy. Demonstrable evidence of the progress of such technology (such as a prototype or market traction) will be required along with a clearly defined business plan with relevant forecasts.

 

Registering under the license offers the following benefits:

 

• a fully operational commercial license for two years;

 

• annual fee of USD700 (as opposed to the USD10,300 initial registration fee and USD8,100 annual renewal fee ordinarily  applicable);

 

• registration with a virtual office address (business centre or agent/advisor registered address) or physical working space  (micro-office);

 

• access to ADGM’s Professional Services Support Program; and

 

• the option to obtain up to four employee visas.

 

The registration process remains the same as the current online procedure used for ordinary commercial licenses (involving submission of an application form and business plan, initial screening and pre-approval, final approval and issuance of license after registration and incorporation). After two years, if the start-up is able to show progress such as revenue or a sufficient level of investments, it will either be converted to a traditional operational entity on normal license terms or a holding company.

 

The Professional Services Support Program is a unique partnership between the ADGM and leading local and international advisers, established to help entrepreneurs enhance the scalability of their ventures, build business skills and provide guidance in the fields of accounting, compliance, finance, legal and VAT.

 

These developments come on the back of a number of initiatives by the ADGM to address set-up costs, access to funding and business support for start-ups (such as the FinTech RegLab programme). They are also in line with the UAE’s National Innovation Strategy to make the UAE a more attractive base for new businesses and ultimately promote economic diversification, foster growth and stimulate the region’s innovation environment. ■

Dubai relaxes rules on filing appeals before the Court of Cassation

On 19 September 2018, H.H. Sheikh Mohammed Bin Rashid Al Maktoum, the Ruler of Dubai, issued Decree No. 28 of 2018 concerning the Acceptance of the Civil Petitions before Dubai Courts (the Decree). The Decree was issued by His Highness to address the procedures in filing appeals to the Court of Cassation. The Court of Cassation is the highest court in Dubai.

 

Article No. 173 of Federal Law No. 11 of 1992 (as amended) (the Civil Procedures Law) provides that appeals to the Court of Cassation must be filed within 60 days of the judgment of the Court of Appeal. A matter is appealable to the Court of Cassation on questions of law, and provided that the value of the dispute exceeds AED 200,000 (Article 176).

 

Prior to the Decree, appellants were required to make payment of the Court of Cassation fee of approximately AED 6,000 and file a detailed petition of appeal before the expiry of the 60 day deadline. Over the past few years, several appeals were rejected by the Dubai Court of Cassation because the payment of the Cassation Court fee was delayed beyond the 60 day deadline, even though the petition of appeal itself was filed in time.

 

The Decree seeks to address this issue by clarifying that the Cassation Court fee may be paid within three working days of the Case Management Office requiring the petitioner to pay the fee, irrespective of the 60 day limit to file the appeal. The Head of the Dubai Court is given discretion to amend this time frame. Going forward, parties wishing to appeal to the Court of Cassation are still required to file the appeal petition within the 60 day deadline, but only need to make arrangements to ensure that payment is made as soon as the Case Management Office requires it.

 

The Decree further provides that a party which had its petition dismissed for reasons of delay in payment of the Cassation Court fee after 3 May 2015 may apply to the Court of Cassation for reconsideration of the dismissed petition. Such applications must be made within 30 days of the Decree coming into effect. This option is not available where the Cassation petition itself was delayed for more than 60 days (i.e. as opposed to the payment of the fee).

 

The Decree will come into force upon being published in the Gazette, which is yet to occur. Dubai is not part of the Federal Court structure, and the Decree is applicable only with respect to proceedings before the Dubai Court of Cassation. ■

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. ■

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. ■

 

*  *  *  *

 

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. ■

 

 

 

Blockchain: hype vs reality

Over the past 1-2 years, a great deal of information concerning the revolutionary technology that is “blockchain” has been published on many business, legal and technology news sources, and innumerable self-proclaimed authorities on the subject have emerged to contribute articles and presentations (ourselves among them). Sometimes the information offered is insightful and helpful, but far too often the message is a surface level parroting of various platitudes that have become associated with all things blockchain without more meaningful explanation, leaving the audience with no useful information and only a vague sense that blockchain is important somehow. Using words such as “transformational” and “revolutionary”, industry leaders have described this technology as the next major step in human technological progress. We certainly agree that it appears to be important; however, we advise approaching the subject with the normal healthy skepticism with which you would approach any other subject matter which you might not fully understand. This can be difficult with so many blockchain evangelists dominating the media, and too few people pointing out its limitations.

 

In this briefing, we explore some of the most common claims that are made about blockchain technology in an effort to curb what strikes us as often irrational enthusiasm and to encourage critical thought.

 

Brief Summary of Blockchain

 

Blockchain can best be described as a ledger system that, rather than recording and storing information on a central system or server, is stored and maintained on multiple servers that are connected over a network using a blockchain application. Hence the term “distributed ledger”. Every time there is new information added to the ledger (i.e., any transaction occurring on that particular blockchain network), the new entry is verified by a majority of the network nodes (members of that blockchain network) with reference to past transactions recorded on that blockchain, and periodically groups of entries at a time are consolidated into what is referred to as a “block”. Block after block of data entries are created and are linked in chronological order, and this is the “chain” or “blocks”. The creation of a block, and the linking of each block to the last and the next in the chain, are simply cryptographic events carried out by the software and in total can be thought of as a process of protecting the entries through encryption. Do not visualize blocks and chains; just understand that the data is being powerfully encrypted to render it very difficult to retroactively alter. It therefore seems to us that, in the simplest of terms, blockchain can be regarded as a new method of storing and sharing information electronically.

 

We will now set out a series of claims or statements that are frequently made about blockchain and will give our views on each.

 

Blockchain takes [X] process and makes it transparent (like a manufacturing process plus shipping and distribution of the end-product).

 

This often-cited claim envisages a scenario where all interested parties (such as buyer, seller, manufacturer, shipping line, banks) are members of a particular blockchain application which would record all steps in the lifecycle of a given transaction, from placement of an order to different phases of raw material acquisition and manufacturing, packaging, shipping, delivery and payment. The transparency claim is based on the fact that everyone on that particular blockchain network would have access to all of the entries on that blockchain, and assumes that entries would be made throughout the process in question, providing a running real time update. Users would then be able to see the provenance of all materials used in a manufacturing process, how the process is going at any given time, and where the goods are. This claim is perfectly laudable, but it is far from revolutionary. This is essentially an observation that data can be shared electronically, and that being a member of a blockchain network is one way to do that. Email is another way. Posting updates to any forum accessible to the relevant parties is another. Proponents will cite the improved reliability of the information when it is made available through a blockchain application because it cannot be “hacked”, and therefore reduced fraud.  This is positive, but the incremental nature of the benefit should not be lost amidst claims that attempt to credit blockchain technology with enabling electronic communication.

 

Putting information relating to a transaction (such as a shipment of goods) onto a blockchain prevents fraud. 

 

While it may be accurate to say that putting information relating to a transaction onto a blockchain reduces the costs and time delay in multi-party business activities, the mere act of recording and sharing information in blockchain format clearly cannot prevent underlying fraud in a commercial transaction. The source of the information being entered must be understood (human or machine?  reliable?). It is important to understand that a blockchain verification process does not guarantee that any entry will be factually correct. Indeed, it has nothing to do with that. Blockchain software only verifies that the transaction was entered by a valid user (or someone with the password) and that it is a logical possibility when considering the past transactions (e.g., you cannot create fake goods where none existed on the blockchain, but you can say they are complete when they are not). To take an example, imagine a commercial transaction concerning the sale of ballpoint pens. The purchaser wishes to purchase 5,000 black ball point pens and the seller offers to sell the purchaser 5,000 black ball point pens. Unknown to the purchaser, blue ballpoint pens are substantially cheaper to manufacture than black ones, and the seller could save a substantial amount of money by shipping blue pens rather than black pens. In the event that the seller chooses to ship blue pens instead of black pens, the fact that the underlying contract is stored and exchanged on a blockchain will not eliminate the ability of the seller to ship blue pens, should it decide to do so, and to enter confirmation on the blockchain that the order is filled and shipped, just as the seller could have done by sending an email to that effect.

 

We have no doubt that blockchain can indeed help with the reduction of fraud in commercial transactions, especially with the growing integration of sensors and devices which automate reporting, removing the factors of human error or deceit to some extent. The creation of an immutable audit trail on the blockchain should help deter fraud as well. However, it is important to place things in context and to appreciate that as things stand at present, you should stress test claims of fraud prevention by asking questions about the source of the information that will be added to the blockchain and understanding whether (or rather how easily) it can be manipulated.

 

Blockchain removes the need for “trust” in a transaction because all transactions get verified by the network (put another way, blockchain disrupts the disruptors by removing the need for trusted intermediaries like Air BnB or Uber).  

 

It is often said that by placing a contract on a blockchain (i.e., by creating a “smart contract”), parties to a contract eliminate counterparty risk and also eliminate the need for “trust” in a commercial transaction, and by extension trusted third parties like banks, aggregators, brokers, escrow agents, etc. This is, in our view, perhaps the boldest claim that is asserted frequently, with the least compelling evidence in support. The issue relates to two main things: 1)  information verification, and 2)  smart contracts.

 

Information verification:  the argument is something like this. Companies like Air BnB or Uber are aggregators and middle men that help connect individual users to individual service providers, and their role is essentially one of quality control and oversight of behaviour on their service, and also to accept a measure of responsibility for the product being provided to users. If those services were blockchain-based, listings would be verified by the network and would be fully transparent, so there would be no need for a company to fill the role of supervisor or quality controller. With reliable information at their fingertips, users could rely on the technology instead of an intermediary. Our concern with this proposition again relates to the quality of the source of the information being entered. Simply because the information is verified by the network as having been validly entered does not mean the information is accurate. Nothing would prevent an Air BnB user from posting a misleading description or photographs of a house. At least with an administrator involved there is some level of accountability and a party that actively takes an interest in verifying the quality of listings and organizing them. Absent this, you would presumably rely on comments and feedback against the listing and with those, just as with the listing, you would have no way of knowing whether they were genuine. It may well be that, from a user experience point of view, we would all very much prefer to retain a responsible/trusted third party to organize and police the service. Most users would probably not find the prospect of reviewing entries on a blockchain very appealing, even if it meant they could extract reliable information from it.

 

Smart contracts:  A smart contract is said to be beneficial because it “executes itself” or “executes automatically”, without the need for human intervention, approval or action. For most types of contract, this is simply not true. While it is correct to say that a smart contract contains a certain set of rules to deal with a set of variables (e.g. if Y happens than X must happen), such contracts are not (yet) in a position where they can eliminate counterparty risk in any but the most simplistic and mechanical of transactions. To take a common example, assume that a truck full of fruit is ordered and is being transported from Dubai to Abu Dhabi. The parties enter into a smart contract stipulating that so long as the temperature in the truck has not fallen outside of the permitted range (e.g., -1 to 2) for more than 3 minutes throughout the journey, payment for the fruit will automatically be transferred to the seller. Such an example assumes several things. First, it assumes that the technology on the truck will give reliable temperature readings which are beyond dispute and will transmit them (perfectly plausible). GPS readings will also be sent automatically to confirm when the truck leaves and arrives (also perfectly plausible). These two objective pieces of information are “internet of things” benefits, which are entirely unrelated to blockchain technology. Since that data is online, it can be made available automatically to the blockchain network on which the smart contract resides (i.e., the smart contract will know the temperature and location of the truck, so this is good). However, the example also assumes that the seller has loaded the required type and quality of fruit. This requires human verification, and the smart contract cannot know this unless someone inputs that confirmation to the blockchain network. It also assumes the right quantity of fruit has been loaded. The truck could be weighed, but the weight could be comprised of anything, not necessarily the expected fruit. The factors that a smart contract must rely upon, but which it cannot know without human input, are called “external dependencies”, and as soon as you have even one external dependency, you lose the theoretical benefit of self-execution. This is one example of one type of limitation that affects the viability/usefulness of smart contracts in a conventional commercial world, but there are several others, which we will not elaborate on due to space constraints in this article. Our point is not that smart contracts have no use (they surely do), but rather that their utility is often overstated and that it is important to think critically about how any given smart contract operates.

 

If it’s on a blockchain, it’s impossible to hack. 

 

The security and integrity of a blockchain relies on the underlying encryption and on the fact that a blockchain is a distributed ledger. Each block in a blockchain builds upon the block immediately prior to it, and a would-be hacker would not be able to tamper with the last block without also tampering with all of the previous blocks and also ensuring that each copy of the ledger maintained on at least a majority of the nodes on any given blockchain is uniformly tampered with simultaneously. We have to take the truth of that statement at face value, although as with so many of the accepted benefits of blockchain, we as legal advisors cannot claim to have independently verified that this is accurate from a technical/coding/encryption perspective. Assuming it is accurate, then it is true that in order for a hacker to undertake such an exercise, he or she would require an enormous amount of computing power. It is also true that such computing power is probably not mainstream at present. However, this may change as technology develops and blockchain gains prevalence.  We have no reason to doubt the extreme difficulty of hacking data stored on a blockchain application.

 

You may ask yourself, what about all of the high profile bitcoin and ethereum hacks that have resulted in so many people having their cryptocurrencies stolen? These were not hacks of the underlying information on the blockchain, which in the case of cryptocurrencies records and tracks who owns and transfers how much of the cryptocurrency. Rather, they were hacks of the exchange or the user accounts, which can be thought of as access points to the blockchain such that instructions to transfer appeared to be from a legitimate source. It is comparable to stealing someone’s gmail password:  as far as gmail is concerned the activity appears legitimate, and gmail was not hacked, only your device was hacked.

 

The takeaway to bear in mind is that while blockchain-style encryption is probably extremely difficult to hack, access points remain vulnerable just as with any other application. If your credentials can be misappropriated or authorized users impersonated, information on a blockchain is still vulnerable.

 

As an individual using a blockchain-based application, what will you see or do differently from today?

 

Looking at the actual entries in a blockchain application is not very user friendly, and it is not intended to be read and interacted with by humans. It is back-end infrastructure, upon which user-friendly interfaces are built, just like website interfaces that sit on top of underlying code. The look and feel of interacting with a blockchain application should be no different than the applications and websites we see today. The revolutionary nature of the technology is attributable to its underlying merits around security and transparency, and what will change is how the information is recorded and shared, but it should not require any special skills or learning simply to interact with it as a user. On the other hand, if you wish to learn to read the code that drives a smart contract, this will require learning to read code and will not be intuitive with that skill set.

 

We are optimistic about the benefits that blockchain technology and its uses can and certainly will bring, and we hope that the above is taken in the manner intended, which is only to advise that enthusiasm around all things blockchain be tempered by healthy skepticism and thorough understanding.■

Off-plan sales: risks and rewards

Whether buyers are looking to expand their real estate portfolio or buyers are simply looking to find their ideal home, great deals can be found in Dubai’s off-plan real estate sector as developers face pressure to shift their inventory amid a concern that the market is over supplied.

 

However, it is critical that prospective buyers do their homework; work with a reputable broker and a reputable lawyer who understand the off-plan market in Dubai; and ensure that they purchase a quality off-plan investment.

 

This article discusses the risks and rewards of Dubai’s off-plan real estate sector, and the legal protections afforded to off-plan buyers.

 

Rewards

 

Over the last few years off-plan buyers have had the opportunity to invest and make returns with minimal capital outlay. Investors, in particular, have been able to spread their investments and hedge their purchases over several projects in order to maximize future gains. And while off-plan investors do not see the immediate rental return from those investing in the secondary market, buyers of units in some new communities have been able to attract tenants at the expense of some older communities, which has helped with occupancy rates and attractive yields. The affordable sector in particular has seen strong returns with yields exceeding 8% in the last year in communities such as Jumeirah Village Triangle, Jumeirah Village Circle and International City.

 

For the end user (as well as the attraction of living in a ‘box fresh’ home), low first payments and attractive payment plans have brought home ownership within reach of many residents previously priced out of the secondary market due to the 25% deposit requirement. This has been an important factor in enabling the younger generation to take that all important first step on to the property ladder and has further driven strong demand in the affordable sector.

 

Risks

 

While the Dubai Land Department (DLD) recorded that off-plan transactions were up 36% in 2017, there are signs in recent months that demand in the sector has softened with the pendulum slowly swinging back to the secondary market. A major concern for many is that recent off-plan demand has driven a surge in development, and the potential of significantly increased upcoming supply will have a negative impact on future values. Memories of the 2008/2009 market crash still loom large and the fear is that with 42,000 units under construction, where will the demand for these units come from?

 

It is clear that there is a large amount of supply in the pipeline, but delivery rates may not live up to expectations. Q1 of 2018 saw only approximately 3,500 units handed over, and while that will increase in the coming months, the supply of good quality projects may be more in line with future population projections. But while todays development may be catering for tomorrows population, there is a risk that in the short term poor quality projects may suffer loss in value and those buying off plan should choose their investment carefully.

 

Increased supply creates choice for end users both for the resale and rental of any off-plan investment and the savvy investor will have the requirements of the future occupier of the property firmly in mind when buying. Picking off-plan projects with attractive amenities and services such as schools, shops and recreational facilities, coupled with good transport links and infrastructure, will help future proof any off-plan investment. Build quality and the reputation of the developer are also important factors to consider, especially if you are hoping for the property to be handed over on time.

 

Legal Protections

 

Off-plan real estate investment in Dubai is governed by a set of real estate laws and regulations aimed at protecting buyers’ interests, the most important of which are discussed below.

 

The interim registration law (Law 13 of 2008 (as amended)) requires all sales (and all other disposals) of off-plan units to be registered on the interim real estate register maintained by the DLD. If a sale is not registered, it is considered null and void.

 

The interim registration law (Law 13 of 2008 (as amended)) also governs the developer’s right to terminate a sale contract for an off-plan unit in the event that the buyer falls into default, and sets out: (i) the termination procedure to be followed; and (ii) the monies that may be retained by the developer in the event of termination which is linked to the percentage of completion of the off-plan unit as follows:

 

• if the percentage of completion of the unit exceeds 80%, the developer may retain up to 40% of the price of the unit specified in the off-plan sale contract;

 

• if the percentage of completion of the unit is between 60% and 80%, the developer may retain up to 40% of the price of the unit specified in the off-plan sale contract;

 

• if the developer has commenced construction work on the project as per the designs approved by the competent authorities and the percentage of completion of the real estate unit is less than 60%, the developer may retain up to 25% of the price of the real estate unit specified in the off-plan sale contract; and

 

• if the developer has not commenced the execution of the project for reasons beyond his control and without negligence on his part, the developer may deduct not more than 30% of the amounts paid by the buyer.

 

Furthermore, the trust account law (Law 8 of 2007) protects buyers by requiring developers selling off-plan units to be registered with the Real Estate Regulatory Agency (RERA), and to deposit all amounts paid by purchasers into an escrow account with an escrow agent accredited by the DLD. The amounts deposited in the escrow account are exclusively allocated for the purposes of construction of the particular real estate project (and directly related activities) and may only be withdrawn by the developer on application to RERA in accordance with the law.

 

Finally, pursuant to the jointly owned property law (Law 27 of 2007) and the Directions released in 2010, developers must disclose all relevant information pertaining to their off-plan development in a “Disclosure Statement” to prospective buyers as well as have a jointly owned property declaration describing the common areas and the rules and regulations associated with them including the calculation of service charges.

 

Although off-plan buyers can take comfort in the protections afforded by the legislation described above, we recommend that purchasers check that:

 

• the real estate project is registered with RERA;

 

• there is an escrow account for the real estate project;

 

• the percentage of completion of the real estate project and the expected date of completion;

 

• the developer is registered with RERA;

 

• the developer owns the land or there is a development agreement between the owner and the developer; and

 

• the developer has the required permits and approvals from the DLD and RERA to sell units off-plan in that particular real estate project.

 

Conclusion

 

Dubai’s off-plan real estate laws and regulations serve to increase investor confidence and attract more foreign investment.

 

With respect to the market, there are some excellent deals to be had from developers in Dubai today and off-plan enquiries remain high. However, today’s off-plan buyers should not expect immediate gains, but should shop around and choose a quality product that will deliver long term sustainable returns, or provide a stable, affordable home for themselves and their family.

 

Dubai remains an attractive proposition for domestic and international investors alike with globally high rental yields and relatively low prices per square foot. Dubai itself continues to attract hard working and entrepreneurial people from across the world and the market place is maturing as more people choose to settle and raise families in the UAE. There is much to be positive about regarding the future of the Dubai property market and the off-plan sector will continue to play a big role in such market. ■

 

The new UAE Pledge Law – promulgation of regulations that make registration available

UAE Federal Law 20 of 2016 (Regarding the Pledge of Movables as Security for a Debt) (the Pledge Law) introduced a new regime for registering a pledge over moveable assets which are pledged as security for the repayment of a debt. We reported on this law in our inBrief of January 2017, New UAE Pledge Law Over Moveable Assets, and our Legal Alert of 19 February 2018, The New UAE Pledge Law – Security Registration.

 

The Emirates Development Bank has been appointed as the registrar, and the registry is known as the Emirates Movable Collateral Registry (the Registry).

 

The actual registration of pledges was subject to promulgation of the implementing regulations under the Pledge Law. The implementing regulations have now been issued by way of Cabinet Resolution 5 of 2018 dated 1 March 2018 (the Implementing Regulations). In addition, Ministerial Resolution 42 of 2018 dated 19 March 2018 provides detailed instructions relating to registration of security over movables (the Instructions).

 

We are examining the Implementing Regulations and the Instructions and will report separately on the contents of the same. In the meantime, we have made enquiries to the Emirates Development Bank concerning the new regulations, and we have been informed as follows:

 

• Registration establishes priority but is not required for the creation of a valid security interest.

 

• Any movable asset located in the UAE (other than the free zones) may be registered, including bank accounts, assignments of receivables and guarantees.

 

• Assets in the free zones are outside the coverage of the Registry.

 

• The holder of the security interest may be a UAE entity or a foreign entity.

 

• The security agreement need not be notarized and need not be in Arabic.

 

• When a security interest is registered, the holder of the security interest is required to notify the provider of the security, which party then has a fixed period of time to file its objections.

 

It was previously required that holders of security interests predating the Pledge Law would have to register their security interests under the Pledge Law by 15 March 2018. This deadline is no longer in effect. Instead, Emirates Development Bank expects to notify banks of the new deadline in the near future. ■