Legal Briefing

Litigating in the DIFC: some initial guidance for the unaware

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UAE | 01 December 2009

The Dubai International Financial Centre (DIFC), a 110-acre free zone that was established by the government of the Emirate of Dubai in December 2004 to promote Dubai as a fully-serviced ‘onshore’ capital market, constitutes an autonomous jurisdiction within the UAE. It has an independent judicial system, with its own courts and an independent judicial authority, which deals with civil and commercial transactions arising from and within the DIFC. The DIFC judicial system is modelled on the common law and inspired, in particular, by the English legal tradition, which explains why the procedure before the DIFC courts is very much akin to the procedure before the English courts. To facilitate its implementation, a whole series of laws, such as DIFC Law No 6 of 2004 on contract law, DIFC Law No 6 of 2005 on implied terms in contracts and unfair terms and DIFC Law No 7 of 2005 on damages and remedies, have been adopted, governing civil and commercial transactions that are carried out within or have a qualifying connection with the DIFC.

Since the opening of the DIFC in November 2005, it has registered a total of around 880 companies, mostly dealing in financial and banking services and products. The DIFC is also home to a vast number of businesses providing ancillary services to the financial and banking activities that make up the core fibre of the free zone’s professional fabric. The DIFC has, in particular, been a magnet of attraction for international businesses with a desire to establish a presence in the Middle East. Dubai, as the main service hub for the provision of specialist financial, banking and other consultancy services, has become the first port of call for any such businesses, and is likely to stand unrivalled in the region for decades to come.

Against this background, anyone who wishes to settle and/or do business in the DIFC particularly is well-advised to gain some familiarity with how the DIFC Court works and what procedural advantages it may offer over litigation before the ordinary courts of the UAE. Even though, in geographic terms, the DIFC may be comparatively small, it does stand out through its high concentration of international businesses. From the perspective of the international investor, the possibility of having to bring or to defend against a case before the DIFC Court is therefore real and should not be underestimated. Statistically speaking, over the past four years, the DIFC Court has recorded 15 enforcement cases, 31 orders and 12 judgments related to various issues ranging from employment, contracts, investment to insolvency matters. With commercial activities in the DIFC increasing year on year, the number of cases before the DIFC Court will no doubt multiply in the next few years.

Structure and Jurisdiction of the DIFC Court

Structure

The DIFC Court is composed of a Court of First Instance (CFI), which hears all claims brought before the DIFC Court by a single judge in the first instance. Appeals lie within the jurisdiction of the Court of Appeal (CA), which ordinarily hears cases by a bench of three judges, one of whom presides. The Chief Justice of the DIFC Court is empowered to constitute one or more circuits for both the CFI and the CA. Importantly, the judges of the DIFC Court are drawn from both common law jurisdictions, as well as the Middle Eastern region, so that an understanding of judicial mentalities in both these spheres no doubt presents a comparative advantage in advocating before the DIFC Court.

Jurisdiction

As mentioned by way of introduction, the DIFC Court only hears matters pertaining to civil and commercial matters that have a relevant link with the DIFC. By contrast, criminal matters in relation to the DIFC will be governed by the relevant federal UAE laws and tried before the competent courts of the relevant Emirate. The DIFC Court will apply the laws and regulations of the DIFC except where parties to the dispute have explicitly agreed on another law to govern their dispute, provided that such law does not conflict with the public policy and public morals as understood under UAE law (article 6, Dubai Law No 12 of 2004). Importantly, the issue of conflicts of laws in the DIFC is further regulated by DIFC Law No 3 of 2004 on the application of civil and commercial laws in DIFC, article 7 of which provides:

‘The objectives of this Law are to:

a) provide certainty as to the rights, liabilities and obligations of persons in relation to civil and commercial matters arising in the DIFC; and

b) allow persons to adopt the laws of another jurisdiction in relation to civil and commercial matters arising within the DIFC.’

The application of article 7 has recently been tested in Rasmala Investments Ltd v various defendants [2009], in which the DIFC Court was asked to decide whether the federal UAE labour law (Federal Law No 8 of 1980) applies to a dispute between several employees and an employer where the employer is a DIFC-registered company and their employment relationship is essentially governed by DIFC Law No 4 of 2005 on employment. The claims against Rasmala were separately filed by six former employees at the DIFC Small Claims Court for damages on grounds of unfair dismissal. The labour contracts of five of the employees stated that DIFC law was to be the governing law but where the DIFC laws and regulations did not cover the subject-matter of the dispute between the parties, the governing law shall be the laws and regulations of the UAE. The sixth labour contract specified the governing law to be the laws of the UAE.

The respective claimant employees obtained judgments against the defendant from the Small Claims Court, ruling that the UAE labour law governed the parties’ contractual rights and obligations, and that the dismissals had been arbitrary within the meaning of article 122 of that law. The defendant appealed against the six judgments on the question of whether the finding of the Small Claims Court was correct in law.

Tan Sri Siti Norma Yaakob J, rendering the DIFC Court’s judgment, first acknowledged the fact that the DIFC employment law of 2005 makes no provision for an employee to claim for unfair dismissal. In interpreting the application of article 7 of DIFC Law No 3 of 2004, she then invoked articles 8(1) and (2)(a) of that law, which provide:

‘1) Since by virtue of article 3 of Federal Law No 8 of 2004, DIFC Law is able to apply in the DIFC notwithstanding any Federal Law on civil or commercial matter, the rights and liabilities between persons in any civil or commercial matter are to be determined according to the laws for the time being in force in the jurisdiction chosen in accordance with paragraph (2).

2) The relevant jurisdiction is to be the one first ascertained under the following paragraphs:

a) so far as there is a regulatory content, the DIFC Law or any other law in force in the DIFC.’

On this basis, Yaakob J found that: ‘In substance the employment law has a regulatory content and is the only law that governs the employee who works for an establishment having a place of business in the DIFC.’ Since the employer was such an establishment, Yaakob J ruled that:

‘As such disputes arising from an employer and employee relationship must be governed by the employment law and there is, therefore, no basis to adopt any other law to determine the rights of the respondents claimants. It is for this very reason that although the respondent claimant in CFI 003/2009 [relating to the third respondent claimant] had opted for UAE law to apply as the governing law, they cannot run away from the fact that they were an employee who had worked for a company with a place of business within the DIFC. Their contractual relationship with the appellant defendant is very much regulated by the employment law’.

This decision illustrates the DIFC Court’s approach to a conflict of laws between the DIFC and the UAE. So long as there is regulatory content enacted under the applicable DIFC laws, the DIFC Court is reluctant to apply any other laws (even if those laws may be more specific), whether as a matter of the parties’ choice or by default. Even where article 8(2)(e) of DIFC Law No 3 of 2004 allows, as a last resort, the application of the laws of England and Wales by default, the DIFC Court will carefully examine whether there are not some corresponding DIFC regulations that are to apply with precedence under DIFC law.

In the earlier case of Forsyth Partners Global Distributors Ltd, Forsyth Partners Group Holdings Ltd and Forsyth Partners (Middle East) Ltd [2007], the DIFC Court was asked to decide on the applicable law relating to preferential debts. The DIFC insolvency law provides for the issuance of regulations providing for the order of preferential debts, but no such regulations have been issued to date. The liquidators invited the court instead to apply either UAE law or English law. Michael Hwang J, rendering the judgment of the DIFC Court, declined to do so on the grounds that failure on the part of the DIFC authority to establish which debts are preferential does not mean that UAE or English law applies by default. Accordingly, he concluded that since the UAE legislative intended to establish a regime for preferential debts under DIFC law, there was neither need nor leeway to apply another system of law relating to preferential debts. Hence, until such regulations on preferential debts are promulgated in the DIFC, there will be no preferential ranking of debts under the DIFC insolvency law (DIFC Law No 7 of 2004).

Rights of audience before the DIFC Court

The DIFC Court allows the registration of practitioners from any jurisdiction provided they have been admitted to practice in their respective home countries. This allows litigants to have access to unlimited expertise from all around the world. Most recently, the DIFC Court has launched a code of professional conduct (go to www.difccourts.ae/about_the_courts/attending/code_of_condact.html) for legal practitioners registered with the DIFC Court, which came into effect on 1 November 2009. The code focuses on six core areas: the courts’ governing principles, duties owed to the courts, duties owed to clients, duties owed to other practitioners, general duties and sanctions for breach of the code. A breach of the code by legal practitioners can be investigated and sanctioned by the DIFC Court either with private or public admonition, fines, suspension or removal from the DIFC Register of Practitioners.

Proceedings before the DIFC Court

Proceedings before the DIFC Court are conducted in accordance with the rules of the DIFC Court (RDC) (go to http://difccourts.complinet.com/en/display/display.html?rbid=2725&element_id=2), as supplemented by the Practice Directions and Registrar Directions (go to http://difccourts.complinet.com/en/display/display_main.html?rbid=2725&element_id=3476) issued by the Court and/or the registrar from time to time. Where the RDC are silent, express provision is made for reference to the English Admiralty and Commercial Courts Guide 2002 and the English Civil Procedure Rules (CPR), and any associated practice directions (Rule 2.10, RDC).

Proceedings are commenced by issuance of a claim form by the DIFC Court at the request of the claimant. The claim form is then served on the defendant. Service has to be effected:

  1. i) within four months after the date of issue where the form is to be served within the DIFC or Dubai; and
  2. ii) within six months after the date of issue, only where the form is to be served outside the DIFC or Dubai.

In response to the claim form, the defendant will either make an admission of the claims advanced against it or serve a defence. To the extent that the defendant makes an admission of any of the claims made against it, the DIFC Court will enter summary judgment. As a general rule, the defence has to be filed:

  1. i) 14 days after service of the particulars of claim; or
  2. ii)28 days after service of the particulars of claim where the defendant has filed an acknowledgment of service.

In Anna Dadic v Orion Holdings Overseas Ltd [2008], the DIFC CFI affirmed the calculation method under the RDC, according to which days are to be read as clear days, which exclude non-business days and official public holidays in the DIFC.

Disclosure

The parties are subject to standard production of documents, whereby each party is required to submit to the other party all documents it seeks to rely on during the course of the proceedings within the time ordered by the Court. The parties may further make requests to produce, identifying a specific (category of) document(s) they wish the other side to disclose and setting out why the (category of) document(s) is relevant to the outcome of the case and the reasons why it is believed to be in the other party’s possession. The Court will make disclosure orders accordingly. The Court may also request a party to produce specific documents which it considers to be material to the outcome of the case. If a party fails to produce a document, the Court may draw adverse inferences.

Overriding Objective

Importantly, the RDC operate on the basis of an ‘overriding objective’, according to which the DIFC Court is required to deal with cases justly and the litigating parties are required to assist the Court to achieve this. There are no formal pre-action protocol procedures before the DIFC Court. However, drawing on the spirit of the CPR, the RDC make express provision for the use of alternative dispute resolution as part of the overriding objective. More specifically, the DIFC Court is required to further the overriding objective by actively managing cases before it, including:

  1. i) encouraging the litigating parties to use an alternative dispute resolution procedure; and
  2. ii) assisting the parties in settling the whole or part of their dispute (Rule 1.8, RDC).

Part 32 Offer

A defendant may make a so-called Part 32 offer, ie an offer to settle in accordance with the requirements contained in Part 32 of the RDC, before the commencement of the proceedings or at any time during the proceedings until 21 days prior to the trial date. This procedure is similar to a Part 36 offer under the CPR.

A Part 32 offer essentially consists of an offer to pay a certain sum of money in settlement of the claim, which may be accepted by the claimant within 14 days from the date of the offer. In the event that the Part 32 offer is not accepted and the claimant is awarded less than the amount initially offered (ie where a claimant fails to obtain a judgment ‘more advantageous’ than the Part 32 offer, in accordance with Rules 32.49 to 32.54 of the RDC), the claimant will be liable for the legal costs of the proceedings starting from the date on which the offer was rejected, plus interest. A Part 32 offer will be treated ‘without prejudice except as to costs’, which means that the Part 32 offer cannot be communicated to the trial judge until a judgment is obtained and the issue as to costs has been heard. Part 32 offers can also be made by a defendant, in which case the rules set out above apply mutatis mutandis.

The main advantages of a Part 32 offer in the DIFC are as follows:

  • Part 32 offers are a formal offer registered with the DIFC Court and must follow strictly the procedures laid down in the RDC.
  • Either party may use Part 32 offers to save costs and time in avoiding full trial.
  • The offeror of a Part 32 offer can exert pressure on the offeree as rejection of a Part 32 offer will have serious cost implications for the offeree.
  • A Part 32 offer can be made either on the whole or part of the claimed amount and, if accepted, will result in a strike-out of whole or part of the claim in accordance with the offered terms.
  • The claimant and the defendant can make as many Part 32 offers as they wish before commencement of the trial.

To date, there has been no decided case on the DIFC Court’s interpretation of the meaning of a ‘judgment more advantageous’ than a Part 32 offer. It is submitted, however, that the DIFC Court may rely on the recent English case of Carver v BAA plc [2008] on the same issue, in which the English Court of Appeal held that the test of whether an award of damages is ‘more advantageous’ than an offer is broader than a simple comparison of the financial value of the award with the financial value of the offer. In Carver, the court decided not to apply CPR 36.14 (equivalent to rules 32.49 to 32.54 of the RDC), where the claimant was awarded £51 in excess of the defendant’s Part 36 offer.

Interim Relief by DIFC Court

The DIFC Court has wide-ranging powers to make orders for interim relief, including interim injunctions, freezing orders, search and inspection orders, orders for production of documents, and attachment orders. Such orders may be made at any time, including before commencement of the proceedings.

The DIFC Court has powers to strike out a statement of case if it appears to the Court that the proceedings brought are essentially vexatious and there are no reasonable grounds for bringing or defending a claim. In those circumstances, the Court will conclude the proceedings by way of summary judgment. Failure by a claimant or a defendant to attend at trial will produce similar consequences in relation to the relevant claims or counterclaims, as the case may be.

Enforcement of DIFC judgments

Judgments issued by the DIFC Court may be enforced before the Dubai courts provided:

  1. i) the judgment has been translated into Arabic; and
  2. ii) the judgment is final and appropriate for enforcement (article 42(2), DIFC Courts Law No 10 of 2004 and article 7(2), Dubai Law No 12 of 2004 in respect of The Judicial Authority of the Dubai International Financial Centre).

Importantly, the Dubai and DIFC courts have recently signed a memorandum of understanding, whereby they are intending to establish a closer mutual co-operation promoting the rule of law in Dubai (2009 memorandum of understanding between Dubai courts and DIFC courts, entering into effect as from 16 June 2009). Furthermore, according to the recent Protocol of Enforcement between Dubai courts and DIFC courts more specifically (‘Summary of The Protocol of Enforcement between Dubai Courts and DIFC Courts’), DIFC judgments and orders should, essentially, be more easily enforceable before the Dubai courts and vice versa, provided they are final and appropriate for enforcement before the originating court. It should be cautioned that the memorandum of understanding cannot bypass the application of the relevant provisions of the federal law on civil procedure and that the actual legal status of the memorandum currently remains untested before the UAE courts. In particular, a judgment creditor should be alert that to be appropriate for enforcement before the UAE courts, a judgment will have to be Shari’ah-compliant.

Conclusion

In light of the above, there can be no doubt that the DIFC has been developing into a leading ‘onshore’ capital market. Any international conglomerate that is intending to do business in the DIFC will be well-advised to consult local counsel to ensure that it is fully aware of and familiar with the new legal environment it is settling into.

By Gordon Blanke, senior associate, and Muhammad Syamsulfaiz Zainuddin, senior associate, Habib Al Mulla & Co.

E-mail: gordon.blanke@habibalmulla.com;

muhammad.syamsulfaiz@habibalmulla.com.