October 2013 Arbitration: Arbitrability of Franchise Agreements Case Law: New York Convention is UAE Law Legislation: Dubai Rent Committee Abolished
Editorial I would like to welcome our readers back to the beginning of the business cycle in UAE after the summer break, and look forward to another year of growth in the UAE economy and corresponding work for lawyers. Real estate and tourism sectors have experienced growth to levels that are near or above the pre-2008 crises. Just the city of Dubai welcomed almost 5.6 million visitors in the first half of this year, and Abu Dhabi also reported a healthy increase in its passenger traffic. Other sectors of the economy have also experienced favorable growth, as the leading local banks have already paid off their emergency loans taken at the height of the global financial crises, and diversification of the economy away from hydrocarbons is proceeding steadily with investments in manufacturing, transportation, healthcare, and financial services. In our practice we have experienced exceptional growth in international arbitration matters, and in this edition of Legal Pinch we take a look at issues Ali Al Aidarous facing arbitration of franchise disputes in UAE. In fact we are so optimistic about an improving economic environment that we have recently acquired additional office space, expanded our team of lawyers, and created new departments, although without jeopardizing the boutique nature of our practice that ensures delivery of high quality services to our clients. I wish all of you a very successful new business cycle, and hope that our firm can continue meeting your legal services needs. Legislative Update Federal Law Regulating the Profession of Public and Private Notary Publics Federal Law No. 4 for 3013 was issued on June 6, 2013 by H.H. Sh. Khalifa Bin Zayed Al Nahyan, the President of UAE, and replaced Law No. 22 for 1991 concerning Notary Publics. The most significant feature of the new law is that Notary Public services may now be offered by government notaries, as well as private notaries, although there is some difference in the scope of services offered by each. Under the new law, the services offered by the government nominated notary can include: administering oaths, taking declarations and witness statements of persons under oath, authenticating certain types of documents, and affixing execution stamps on documents creating any debt or financial obligation provided that such obligation is due, and fixed. The class of private notaries can constitute practicing lawyer, retired judges, or retired public prosecutors. Save for lawyers, such persons cannot hold a public office, or undertake any commercial activity. In order to act as a private notary, prospective parties must apply to a special committee that will vet their applications before authorizing them to act as private notaries. In terms of the scope of services that may be offered by the private notaries, the main difference is that a private notary public cannot administer oath and take declarations and witness statements of persons under oath, unless he obtains specific permission in this regard from the concerned authority. This law shall come into force after three months from the date of its publication in the Official Gazette. 1
Legislative Update Dubai Rent Committee Replaced H.H. Sheikh Mohammed Bin Rashid Al Maktoum, Vice President of UAE and the Ruler of Dubai issued Ruler s Decree No. 26 for 2013, establishing a Leasing Dispute Resolution Center ( Center ), to perform the judicial functions previously undertaken by the Rent Committee. The Centre will be headed by a Chairman who will have the same seniority as a Court of Appeals judge, and will be appointed pursuant to a decree issued by the Ruler. The Centre will have various departments to enable it to function efficiently, and shall consist of an Administrative Department, and a Judicial Department. The Judicial Department itself will comprise of four sections: the Settlement and Conciliation Department, the First Instance Committee, the Appellate Committee, and the Execution Department. The dispute resolution component of the Centre shall comprise of two levels: the First Instance Committee, and the Appellate Committee. The Centre shall have jurisdiction over all disputes arising between lessors and lessees for all properties located in Dubai, including the free trade zones, except where the free trade zone has its own court or judicial committee, for example he DIFC. However the Centre shall not have jurisdiction over disputes relating to property finance agreements, and long term lease agreements governed by Law No. 7 for the year 2006. The First Instance Committee shall have three members, headed by a retired judge and two other members who are adequately qualified and experienced in real estate matters. The Appellate Committee shall also consist of three members, however at least two members shall be judges. Decisions issued by the First Instance Committee can be appealed before the Appellate Committee, provided that the claim amount involved is AED 100,000 or more, the decision is related to the eviction of the tenant from the premises, or the decision relates to certain other matters specified in the law. The Appeal should be filed within 15 days from the date of issuance of the First Instance Committee decision, or the date on which the decision was notified to the appellant if he did not participate in the proceedings before the First Instance Committee. The Appellant will be required to deposit 50% of the amount adjudged against him, but this requirement can be reduced or completely waived on the orders of the Centre s Chairman. The Decree further provides that the cases currently under review by the Rent Committee shall be transferred to the First Instance Committee for adjudication, and the decisions issued before the Decree comes into force may be appealed before the Appellate Committee within 30 days from the effective date of the Decree. The Decree shall come into force with effect from 60 days from the date of its publication in the Official Gazette. 2
Feature Article Challenges Facing Arbitration of Franchise Disputes Introduction Similar to the situation in many jurisdictions, there is no specific legislation regulating franchises in UAE. Therefore, in practice franchise agreements are regulated under the laws applicable to commercial agencies and distributorships. However, this situation raises an interesting issue concerning whether dispute resolution clauses of such franchise agreements that that may provide for arbitration, can be considered valid. Is a Franchise Dispute Arbitrable? One of the main challenges of treating a franchise as an agency is the arbitrability of the franchise dispute: A. Registered Franchise: In the event the franchise agreement is registered, as all commercial agency agreements are required to be, then the law provides for the exclusive jurisdiction of the local state courts over such dispute, and any agreement to the contrary is treated as be null and void. For example, Article 6 of UAE Commercial Agencies Law, reads as follows: The commercial agency contract shall be deemed to serve the mutual interests of the contracting parties, and any dispute arising from its execution between the principal and the agent shall solely come to the jurisdiction of the State s courts, and any agreement otherwise shall be considered null and void. B. Unregistered Franchise Contracts: Although the UAE Agency Law requires that the registration of commercial agency contracts, and stipulates that any unregistered commercial agency will not be recognized under the law, and no case can be heard by the state courts in respect of this agency (Article 3 of the UAE Commercial Agency Law), practically speaking considerable number of agencies are not registered, and on many occasions the courts have accepted hearing cases relating to such unregistered agencies, where they apply the substantive provisions regulating an agency in the Federal Law No. 18 of 1993 concerning Commercial Transactions (the Business Law ). The Dubai Supreme Court on various occasions has established that: if the case is relating to the claim for compensation filed by the agent in respect of the effort he has exerted and the expenses he has incurred in promoting the subject of the agency and loss of profit, a decision which does not require the application of the agency law, then this dispute will be subject to the general rules of the law, and such case can be heard by the state courts. (Appeal No. 148/2007 (Commercial) issued on June 26, 2007). By analogy, one may surmise that the unregistered franchise contract should also be recognized; as a result it should not be subject to the restrictions imposed by the Agency Law (non-arbitrability of the agency contract, Article 6 of the UAE Commercial Agency Law). Notwithstanding the above, the arbitrability of the unregistered agency/ franchise still faces certain challenges: 1. Restrictions of the Business Law on the Unregistered Agencies: a) The Business Law in UAE, provides for the jurisdiction of the court in the precinct of which the agency activity was conducted, exceptionally to the jurisdiction rules provided in the Civil Procedures Code (Article 226 of the UAE Business Law, and Article 191 of the Egyptian business law). If the unregistered franchise contract is considered as an unregistered exclusive distributorship agreement (agency), then the question arises whether the restriction imposed by Article 226 above is applicable, i.e., whether the unregistered franchise contract is arbitrable? 3
b) One may however argue that the provision of Article 226 is an exception to the general jurisdiction rules laid down in the UAE Civil Procedure Code, and it does not mean that the dispute over unregistered agency/franchise contract is not arbitrable. In support of this argument, one may state that whereas Article 6 of the Agency Law provides for UAE jurisdiction over any dispute concerning agency, and explicitly considers any agreement to the contrary as null and void, however there is no such restriction on the provision in Article 226. Notwithstanding the above, there do not appear to be any Supreme Court precedents in UAE that deal directly with the recognition of the foreign arbitral award in a franchise dispute Though many arbitration cases have been concluded or are proceeding in respect of unregistered franchise contracts, but none of them seem to have been tested before the courts to establish a pattern where one can say they will be recognized by the national court, and only future developments will answer this question. 2. Enforceability of Foreign Franchise Arbitral Award: a) Assuming the unregistered franchise agreement is recognized and is arbitrable, subject to the aforementioned qualifications, however the main challenge remains the enforceability of the franchise arbitral award. The law imposes strict requirements for enforcement of foreign court s judgments as well as arbitral awards, and one of these requirements is that the state court ordering the enforcement of foreign judgment/arbitral award should first satisfy itself that one of the state courts was not competent to hear the case (Article 235(2)(a) of the UAE Civil Code). In a decision the UAE Federal Supreme Court declined recognition of a foreign arbitral award dealing with the agency, as the court considered that since an agency matter is subject to the jurisdiction of the UAE court and not arbitrable, hence any foreign arbitral award dealing with the agency shall not be recognized (Appeal No. 713-Civil of the 27 th Judicial Year, issued on May 6, 2009). b) The Federal Supreme Court precedent cited above involves an application before UAE court filed in 2004 for recognition of a foreign arbitral award, i.e., before the UAE became a member of the New York Convention in 2006. Hence, the strict requirements imposed by the national civil procedure laws for recognizing a foreign award have been eased. Conclusion The situation has changed with the UAE becoming a member of the New York Convention in 2006 (Federal Decree No. 43 of 2006), and in a recent precedent established by the Dubai Supreme Court (Appeal No. 132/2012 (Commercial), issued on September 18, 2012), the Court confirmed that the provisions of the New York Convention became national legislation, and recognition of a foreign arbitral award will be subject to the provisions of the Convention, and not to the provision of the national Civil Procedures Law. Nonetheless, there still remain many challenges in enforcing a foreign arbitral award relating to franchise contracts, and in particular the provision of Article V(2) of the Convention that gives the national court before which the recognition of a foreign arbitral award is sought great discretion to ensure that the subject matter of the foreign arbitral award is arbitrable under the national law, and the recognition of the foreign award would not be contrary to the public policy of the country. Having stated the above, there is always a risk that a party opposing the recognition of the foreign arbitral award may plead that the franchise contract is in fact a commercial agency agreement which is not arbitrable under the UAE law, and the foreign arbitration was an attempt to circumvent the mandatory rules of the country which is tantamount to violation of a public order. Although progressive steps have been taken in the region relating to recognition of a foreign arbitral award, the arbitrability of a franchise contract is still not tested by the national courts on a wide scale, apart from isolated cases which cannot be relied upon to draw a general inference relating to the arbitrability of the franchise dispute. 4
UAE Courts are Bound to Apply The New York Convention The Dubai Supreme Court, in a decision certain to strengthen international investors confidence in the UAE s legal system, has confirmed the application of New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards by the UAE courts. The facts of the case are that the Claimant and Respondent had entered into a contract whereby the Claimant had agreed to sell steel sheets to the Respondent. However, a dispute arose between the parties, which was referred to DIFC-LCIA arbitration pursuant to the contract s dispute resolution clause. The arbitrator found in favor of the Claimant, but the Respondent failed to settle the Award. The Claimant therefore initiated a suit before the Court of First Instance for the recognition of the arbitration Award, while the Respondent filed a counter-claim to set aside the Award on several grounds, including among others that the Court of Appeal made an error in upholding the Court of First Instance s finding that it had no jurisdiction to hear the Respondent s counter-claim as such jurisdiction rested with the arbitrator, and the Court had only a supervisory role limited to ensuring that an arbitration award did not contravene Federal Decree No. 43 of 2006 by which the UAE joined the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Award (the Convention ). The Supreme Court held that the rules of arbitration set out in the UAE Civil Procedure Code indicate that only domestic arbitral awards fall within the jurisdiction of national courts, and not foreign awards. It also held that Article 238 of the Civil Procedures Code provides that treaties that have become enforceable legislation in the UAE by virtue of ratification shall apply as domestic law in the UAE to disputes concerning the enforcement of foreign court decisions and arbitral award. Therefore, the Supreme Court found that the Court of Appeals correctly concluded that jurisdiction belongs to arbitrator that issued the Award, and that the effect of the Federal Decree No. 43 of 2006 is that all UAE Courts shall recognize and enforce foreign arbitral awards in the territory. 5
Events Dubai, the Capital of Islamic Economy The forum attracted international academic and professional delegates from various countries. The speakers presented papers on different topics such as, the role of auditing standards for Islamic compliant products, and development of the Halal brand. The Fifth International Annual Forum of Legal Experts in the Islamic Finance Industry, sponsored by the International Islamic Center for Reconciliation and Arbitration, was held on October 23 24, 2013. The event was well attended, and His Excellency Mohammad Abdulla Gergawi, the Chairman of the Higher Committee for the Development of Islamic Economy in Dubai, was the guest of honor at the opening ceremony. Mr. Ali Al Aidarous was also one of the delegates invited to speak at this event, and his presentation focused on the suitability of arbitration as a dispute resolution method for disputes arising from Islamic finance transactions, as well as the advantages of choosing Dubai as the seat of Islamic arbitration. American Business Council Networking The American Business Council of Dubai & the Northern Emirates (ABC) hosted the quarterly Inter-council Networking Event on September 22 at the JW Marriott Marquis Hotel. As our firm is a longstanding member of ABC, our team members, Naved Naqvi and Rabeia Chassebi, attended the function and introduced the firm to professionals from over 20 business councils representing various industry sectors such as retail, travel and tourism, business consultants, and legal. Our team informed the participants about the boutique character of the firm s practice, and a policy of selecting limited number of assignments, which allows the firm to treat each matter in depth and remain in close communication with clients. This message was well received by the participants that demonstrates a maturing of the legal market in Dubai where high quality service is being recognized and eagerly sought after. 6
Eid Mubarak