Tag: Dispute Resolution

Asymmetric jurisdiction clauses (or unilateral option clauses as they are also sometimes described) confer on one contracting party the option to bring proceedings in a court or forum of its choosing, while restricting the counterparty’s ability to bring claims to a single jurisdiction. Such clauses could provide, for example, that the party who enjoys the benefit of the provision may unilaterally opt for either arbitration or court litigation to bring a claim, or that its claims may be brought in any court of competent jurisdiction of its choice.

Asymmetrical clauses are commonly found in financing transactions (primarily for the benefit of lenders) and give lenders the discretion to initiate action in whichever jurisdiction best serves their interests. However, such clauses have to be carefully drafted and can be subject to challenge (particularly those that include asymmetrical options to arbitrate). Such clauses have in the past been held to be unenforceable in certain jurisdictions (e.g., France, Russia), usually on the grounds that they violate public policy.

Background

The DIFC Courts, in Lara Basem Musa Khoury v Mashreq Bank Psc [2022] DIFC CA 007 dealt with the question of whether Ms. Khoury could bring a claim against the Bank before the DIFC Court where the right to do so under their agreement was conferred only on the Bank. The relevant provision reads as follows:

“This Agreement shall be governed by, and be construed in accordance with, the laws of the Dubai International Financial Centre (‘DIFC’). The [Claimant] agrees, for the benefit of the Bank, that any legal action or proceedings arising out of or in connection with this Agreement against it or any of its assets may be brought in the relevant courts of the DIFC”.

“The [Claimant] irrevocably and unconditionally submits to the jurisdiction of the relevant courts of the DIFC. The submission to such Jurisdiction shall not (and shall not be construed so as to) limit the right of the Bank to take proceedings against the [Claimant] in the courts of any other competent jurisdiction…”.

It was Ms. Khoury’s contention that, in the absence of a provision dealing with claims that the customer may have against the bank, the forgoing clause should be interpreted such that she was entitled to bring proceedings against the Bank in the DIFC Courts. The Bank argued that the clause gave only the Bank the unilateral right to bring claims against Ms. Khoury in the DIFC Courts, and that the same right was not reciprocally available to Ms. Khoury.

The DIFC Court of First Instance ruled that Ms. Khoury had agreed that claims could be brought against her in the DIFC Courts, but that the Bank had made no such reciprocal agreement. As a result, Ms. Khoury would only be able to sue the Bank in the Courts of Dubai, where the Bank was registered and incorporated. Ms. Khoury appealed the ruling to the Court of Appeal.

The Appeal

The DIFC Court of Appeal, while noting that the asymmetry of the clause “makes for a degree of disquiet, serving to reflect the imbalance between the comparative market power of banks as contrasted with their customers”, went on to dismiss Ms. Khoury’s appeal. The Court rejected Ms. Khoury’s argument that the clause was an ‘opt-in’ clause that conferred jurisdiction on the DIFC Courts by virtue of Article 5(A)2^[1] of the Judicial Authority Law because the agreement lacked a clear and specific provision by which Ms. Khoury could bring her claim before the DIFC Courts, holding that the clause was only for the benefit of the Bank.

The Court of Appeal specifically commented that asymmetrical clauses “are familiar as a matter of international banking practice and, in part at least, serve a legitimate commercial purpose” while citing with approval the English Court decision in AG v Pauline Shipping Ltd [2017] EWHC 161 (Comm), which noted that “[a]symmetric jurisdiction agreements are a long-established and practical feature of international financial documentation…”

Comment

Even though the Bank ultimately succeeded, the extensive debate in the Khoury case demonstrates that asymmetrical dispute resolution clauses can lend themselves to challenge and must be carefully drafted. It is to be noted that the Khoury case turned on the interpretation of the clause, rather than the enforceability of a unilateral option clause as a matter of principle. Ms. Khoury does not appear to have argued that an asymmetrical clause was repugnant per se. Nevertheless, it is clear that this case represents an affirmative acceptance of asymmetric dispute resolution contracts and the validity of such clauses by the Courts of the DIFC. The Courts of the ADGM had also previously adopted the common law approach and affirmed such clauses.^[2]

It should be noted that, while the two common law courts in the UAE appear to have affirmatively accepted the enforceability of asymmetrical dispute resolution clauses, the position as to their enforceability in the UAE federal courts (or courts of Dubai outside of the DIFC) is far from certain. The civil law courts in the UAE will likely not be as open to enforcing such provisions, and could invoke principles of public policy, requirements of good faith and balance of rights such that a party seeking enforcement would have a higher threshold to meet. The enforcement of unilateral option clauses that confer on one party the exclusive right to opt for arbitration could be particularly problematic, given that the UAE Courts have consistently held that arbitration is an exceptional form of dispute resolution and that, in order to divest the Court from its ordinary jurisdiction, there must exist a clear and unambiguous agreement evidencing the joint intention of the contracting parties to resolve their disputes by arbitration. Whether a unilateral option clause would satisfy such requirement remains to be seen. ■

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[1]Article 5(A)2 “The Court of First Instance may hear and determine any civil or commercial claims or actions where the parties agree in writing to file such claim or action with it whether before or after the dispute arises, provided that such agreement is made pursuant to specific, clear and express provisions.”

[2] A3 v B3 [2019] ADGM CFI 0004

There are a number of reasons why parties who have agreed to arbitrate disputes (ordinarily by way of an arbitration clause in a contract) may later wish to litigate their dispute in the UAE courts. A common reason is the cost of arbitration, which can be quite significant compared to the cost of litigating in the UAE Courts. Further reasons may be that the party wishes to take advantage of the relative unpredictability of outcomes in the UAE Courts, which do not follow a system of binding precedent as understood in common law jurisdictions and, perhaps more importantly, do not award legal costs except in a token amount, thereby minimizing the cost of a failed claim.

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

In a recent judgment issued by the Dubai Court of Appeal, this strategy was comprehensively rejected. The case in question involved a contract for the construction of a pavilion at Expo 2020, which contained an arbitration clause. The contractor asserted several claims against the employer and, in an attempt to bring the matter within the jurisdiction of the Dubai Court, impleaded the employer’s manager as a co-defendant.

The Dubai Court of Appeal saw through this stratagem, and held that the courts have no jurisdiction over the dispute because the proper parties to the contract have agreed to resolve disputes arising out of the contract by arbitration. In its judgment, the Dubai Court of Appeal laid down several clear principles:

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

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

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

Interestingly, while the multiplicity of defendants was the principal argument advanced by the claimant in this case in its attempt to bypass the arbitration agreement, this issue was not the basis of the judgment of the Court of First Instance which held that the courts have jurisdiction. The basis of the judgment of the Court of First Instance was that the amendment to the contract between the parties (necessitated by the delay to Expo 2020 due to the Covid-19 pandemic) did not expressly refer to the arbitration clause, and consequently that it did not meet the requirements of Article 7(2)(b) of the UAE Federal Arbitration Law, which provides that an arbitration agreement shall be deemed to be in writing if there is a reference in a written contract to any model contract, international agreement, or any other document containing an arbitration clause and the reference is such as to make that clause part of the contract. This finding was set aside by the Dubai Court of Appeal, which held that there was no requirement to expressly refer to the arbitration clause as the amendment clearly formed part and parcel of the contract which contained the arbitration clause (i.e. as opposed to standard terms or a different contract containing an arbitration clause which is incorporated by reference). Nevertheless, following the judgment of the Court of First Instance, the prudent practice appears to be to make express reference to an arbitration clause in the main document in all subsequent contractual documents, even where the subsequent document is only an amendment to the contract. ■

Introduction

Recent years have seen the UAE making regular updates to its laws in order to guarantee a legal regime that is forward-looking, and consistent with international standards and principles. The leaders of the UAE have been particularly cognizant of the need to have a robust criminal law regime to encourage legitimacy in business, and dissuade any unscrupulous activities that could reflect negatively on the UAE as a determined and fast-developing economy. This is especially true of Dubai, whose ruler, HH Sheikh Mohammed bin Rashid Al Maktoum, recently unveiled plans to catapult Dubai into the top three cities by economic strength by 2033, and to place it within the top four global financial centres.

In such circumstances, it is particularly important for companies based in and operating out of the UAE to stay abreast of legislation which penalises criminal conduct of directors, employees and other representatives. Crimes that are more relevant for corporate entities would be fraud, bribery, forgery, and money laundering.

Brief overview of the criminal justice system 

All laws in the UAE are codified, and there is no system of stare decisis or binding precedent, as understood in a common law jurisdiction, that is followed. Consequently, each case is decided on its own merits, though previous decisions may serve as useful guide and have some persuasive effect on the courts.

The principle that no one shall be punished for any act which did not constitute a criminal offence under the law at the time when it was committed is safeguarded in Article 27 of the Federal Constitution which states that ‘[l]aw shall define crime and penalties. [n]o penalty shall be inflicted for any act performed or abandoned before the enactment of the law stipulating it.’

Additionally, although the UAE law has not expressly recognised traditional common law standards of proof such as the balance of probabilities test in civil claims, or the beyond reasonable doubt standard for criminal matters, the courts in their decisions have consistently reiterated that allegations in criminal cases must be proven to a degree that leaves no reasonable doubt.

In terms of the Criminal Procedure Code, the public prosecution has exclusive jurisdiction to lodge and pursue criminal cases, excluding cases otherwise specified by law.  Cases relating to any criminal offence will generally be filed and prosecuted by the public prosecution before the criminal courts of first instance (save for example, certain crimes involving national security which will be heard directly by the Union Supreme Court). In practice, when presented with complex crimes or crimes which heavily feature commercial aspects, the court will appoint an expert to conduct an inquiry and submit a report to the court with findings and recommendations. More often than not, the courts adopt the view of the expert, unless there are serious errors which are evident on the face of the record.

Can companies in the UAE be held liable for criminal conduct of employees?

Juristic persons, including companies based in the UAE, can attract liability for offences committed by directors, employees and other agents. Federal Decree Law No. 32/2021 On Commercial Companies (the Companies Law) provides that companies shall be liable for damage caused due to unlawful acts committed by the company’s chairman and board members while managing the company. The Companies Law also provides for personal liability of board members and executive management of companies to the company, shareholders, and third parties, for acts of fraud and abuse of power.

Federal Decree Law No. 31/2021 on the Issuance of the Crimes and Penalties Law (the Penal Code) goes beyond the provisions of the Companies Law which appears to be limited to acts of the company chairman, board, and executive management. Article 66 of the Penal Code provides that juristic persons shall be criminally liable for crimes committed by their representatives, directors, or agents acting on their behalf or in their names. Although the law does not expressly mention “employees”, it is likely that a court in the UAE would interpret “representative” or “agent” to include an employee acting on behalf of the company. The provision clarified that juristic entities may only be sentences to a fine, confiscation and other penalties prescribed by law. Where the law provides for a principal penalty other than a fine, the penalty for juristic persons would be restricted to a fine not exceeding AED 5 million, unless otherwise provided by law.

Corporate criminal liability is also recognised under Federal Decree Law No. 20/2018 on Combating Money Laundering Crimes, the Financing of Terrorism and Financing of Unlawful Organisations (the Anti-Money Laundering Law), which states that the legal person can be criminally responsible for the crime if it is committed in its name or for its account intentionally.

While the position in some other jurisdictions is that only the criminal acts of a senior person representing the company’s controlling mind and will can incur liability on the company, the law of the UAE does not make such distinction. All that is required for a company to attract liability is for the individual concerned to have committed the criminal act in the company’s name or when acting on behalf of the company. As noted above, the courts are likely to interpret the provisions widely to include employees exercising some level of managerial powers and acting on behalf of the company. However, where an employee commits a criminal offence in the pursuance of some personal interest or agenda, the company will not be criminally liable.

Do companies have a duty to report crimes or suspicious transactions?

It is important to note that the Penal Code imposes a general duty on all persons who have knowledge of a crime to report it to the competent authorities, and failure to do so is a punishable offence. Where there is concern of potential money laundering, the Anti-Money Laundering Law imposes a specific duty on financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs) who suspect, or have reasonable grounds to suspect, that a transaction or funds constitute proceeds of crime, to report to the Financial Intelligence Unit (FIU) of the Central Bank “without delay” and provide it with a detailed report including all data and information on such transaction and the connected parties. The Anti-Money Laundering Regulations define DNFBPs to include independent legal professionals and independent accountants. Article 251 of the Companies Law imposes a separate obligation on auditors of Public Joint Stock Companies to notify the Securities and Commodities Authority within 10 days of detecting any crime. Article 104 (1) of the Companies Law provides that the provisions on Joint Stock Companies apply to Limited Liability Companies (LLCs) to the extent they are consistent with their nature. Therefore, auditors of LLCs may also be bound by the obligation to report crimes under Article 251.

Is it still money laundering if the proceeds were obtained overseas?

The provisions of the Anti-Money Laundering Law apply where any person willfully does any of the acts mentioned under Article 2 (1) with proceeds or funds having knowledge that the proceeds or funds are the proceeds of a Predicate Offence. The law defines Predicate Offence as any act which constitutes a felony or misdemeanor under the UAE law, whether it is committed within the UAE or elsewhere, provided it is punishable in the State where it was committed as well as in the UAE.

When should a crime be reported?

The Penal Code is silent on the time-frame within which a crime must be reported. The Anti-Money Laundering Law only states that financial institutions and DNFBPs (which includes independent auditors) must report suspicious transactions to the FIU “without delay”, and does not specify any further.  On the other hand, the Companies Law requires company auditors to report any crime within 10 days of detecting the crime. Read with the Companies Law, it is likely that the duty imposed on independent auditors to report “without delay” under the Anti-Money Laundering Law means that the report must be made within 10 days or less.

It is also important to note that while the Penal Code and the Companies Law require crimes or violations of the law to be reported, the duty to report under the Anti-Money Laundering Law is much wider and requires the relevant persons to report upon suspicion. This is in keeping with the intention of the drafters of the Anti-Money Laundering Law, that is the strict deterrence of any money laundering activities in the UAE. ■

The UAE has introduced a new law on civil procedure (Federal Decree-Law 42/2022) which repeals Federal Law No. 11 of 1992 on civil procedure and its executive regulations issued under Cabinet Resolution No. 57 of 2018. The new law came into force on 2 January 2022.

As a firm that has an extensive practice before on-shore UAE Courts, the routine advice given to a client on the UAE Court system is that an appeal to the court of appeal is generally available as a matter of right (provided the monetary threshold of the claims are met), and that there is no concept of ‘leave to appeal’, as can be seen in other jurisdictions.

While it appears that this position remains, the new law provides for an added level of scrutiny of the appeal, where the court of appeal is required to deliberate on the appeal in chambers (Article 167 of the new law). This deliberation occurs after the appeal is referred to the judge by the Case Management Office. Generally, the Case Management Office is required to ensure that summons is served on the appellee, and that the appellee is given an opportunity to respond to the appeal.

The new law imposes a 20-working day time-line for such deliberation, and the court may either decide on the appeal, or schedule a hearing for the examination of the merits. If the court decides that the appeal is inadmissible or that the judgment appealed is to be affirmed, the court is required to render a reasoned judgment.

Parties therefore will need to ensure that its submissions filed before the Case Management Office are comprehensive, as there is a possibility that the appeal will be decided based only on the submissions filed before the Case Management Office.

Apart from this additional level of scrutiny, Article 167 of the new law clarifies the following:

• relief that has not been sought before the court of first instance cannot be included in the court of appeal – Article 167(5);

• addition of parties to a dispute, including applications to intervene are not permitted in the court of appeal – Article 167 (6); and

• an appeal to the court of appeal necessarily entails a re-trial, where all decisions and judgments rendered in the court of appeal will be reviewed. ■