In the UAE post-termination restrictions are a common practice and imposed by the employer to prevent that the employee joins a competitor after terminating the employment. Such covenants are lawful, but only to the extent which is necessary for protection of the legitimate interests of the employer.
In order to be considered valid by the UAE courts, the post-termination restriction must be limited in terms of duration, place, and with regard to the business field.
Regarding the limit to the length of time, 6 months are generally accepted as being reasonable. However, a restriction of up to 12 months might be acceptable by the courts if there are unique reasons in relation to the employee and his position that require a wider restriction. Secondly, regarding the geographical restriction, the restriction to the Emirate in which the employee has been working is generally accepted as being reasonable (for instance Dubai), unless there are specific reasons that might justify a wider restriction. Lastly, the employee’s business field and position has to be determined, whereby the activity sought to be restricted should be well defined and specific.
As a general observation, the degree of probability that non-competition clauses are considered valid rises the higher the employee’s position has been, considering that senior employees are more likely to have access to business secrets.
In case of an invalid non-competition provision, the courts strike them out in their entirety if considered unreasonable in time, place and/or business sought to be restricted, rather to “blue pencil” such agreements.
In case the non-compete clause is ignored by the employee, the employer may not stop the employee or physically prevent the employee via court order from joining a competitor, since injunctions to stop working with a competitor are not available through the UAE courts (different in the jurisdictions of DIFC and ADGM where interim reliefs are available).
However, in the event of breach of a non-compete clause, the employer may commence a civil claim for damages. The statute of limitations for labour cases is one year from the date of alleged breach of a non-compete clause. The employer would have to prove any damages and substantiate the actual amount of loss incurred as a result of the employee’s breach of non-compete clause.
In case a liquidated damage clause has been included in the agreement the employer who is seeking compensation under the liquidated damage clause would need to prove the fact that loss was incurred, without substantiating the actual amount of loss. It would be up to the employee to challenge the amount agreed upon in the clause. The court then may vary the parties’ agreement and accordingly set aside entirely the liquidated damages in case of the employer suffering no loss or award lesser damages reflecting the actual loss.
An arbitration case comes to the end with the issuance of an arbitration award to each party. If the losing party does not honour the arbitral award, the enforcement institutions of the state in which the assets of the losing party are located, need to be called.
What the winning party needs to do
In the UAE, the enforcement of an arbitral award requires the submission of request regarding issuance of both – the confirmation of the award and the order to enforce the award (the ‘Enforcement Order’). With the new Arbitration Law, the enforcement proceedings now commence directly before the UAE federal or local Court of Appeal and not before the Courts of First Instance as earlier. With by-passing of the Court of First Instance, the time and cost consuming procedures to challenge the Enforcement Order have been reduced. This is a very positive development.
Said Request for enforcement must be accompanied by the original award or a certified true copy thereof, a copy of the arbitration agreement, a certified Arabic translation of the arbitral award, and a copy of the transcript of filing the judgment with the court.
Within 60 days, the court shall confirm and enforce the arbitral award unless, it finds that one or several reasons for annulment of the arbitral award, as mentioned in Art. 53 of the new Arbitration Law, exist.
The Grievance to challenge the Enforcement Order or the rejection thereof must be filed within 30 days following the date of being notified thereof.
It is important to mention that, besides submitting the request regarding issuance of Enforcement Order, the winning party may and shall seek a freezing order from the civil court to preserve the losing party’s assets until the arbitral award can be enforced.
The losing party’s options
Within 30 days following the notification of the arbitral award, the losing party can file a so called ‘Action for Annulment’ and prove the existence of one or several reasons for annulment as mentioned in Art. 53 of the new Arbitration Law, like the absence of an arbitration agreement, lack of capacity of one of the parties, no proper notice of the appointment of an arbitrator, and/or the violation of the litigation principles, etc.
The judgment rendered by the court upon the Action for Annulment is not subject to appeals. However, the court from which the annulment of arbitral award is sought may – upon request – suspend the annulment proceedings for a period not exceeding 60 days and give the Arbitral Tribunal the opportunity to take any action that may eliminate the causes of annulment without affecting the content of the arbitral award.
We think that the new Arbitration Law achieves a very welcomed shortening of the enforcement procedure. Apart from this, it remains to be seen how the new Arbitration Law will be implemented by concerned enforcement bodies.
Dr. Ghassan teaching ‘international taxation’ at SRH Hochschule in Berlin. The university appointed Dr. Ghassan who is an accredited tax lawyer in Germany as visiting professor for ‘international taxation’. Ghassan’s lecture covers several fiscal aspects of doing business on an international level with a clear focus on Double Taxation Agreements between the Gulf states and European countries.
Following the ratification of the OECD’s Common Reporting Standard (CRS) in July 2014, some 104 countries have now dedicated themselves to financial transparency. While 55 countries, including most EU countries, already started to automatically exchange information beginning January 1st, 2017, the remaining countries will do so a year later.
The UAE is one of the countries that will start collecting data from January 1st, 2017 and will report all data collected during the period of January 1st till December 31st 2017 in September 2018.
Accounts that existed prior to January 1st, 2017 (“Pre-Existing Accounts) will be exempted from the Automatic Information Exchange if the account balance is less than USD 250,000.
What does automatic information exchange mean?
On the basis of CRS, participating countries exchange data on a global scale in order to share information on the assets of income of residents in different countries. The information is obtained by local financial institutions so that local tax authorities automatically exchange with other jurisdictions. The purpose is to track individuals who may have been attempting to avoid paying tax in the country they are resident.
Far-reaching exchange of information
Financial institutions in Dubai are obliged to report all individual accounts and also accounts opened by a financial entity, including financial information on interests, balances, dividends and sales proceeds from financial assets and also information on who owns which company shares.
Information exchange only on non-UAE- residents
As far-reaching as CRS is, it only affects non-residents as it is not bound on citizenship.
The UAE “tax resident definition” provides that an Individual is a UAE resident, who holds:
- A valid Emirates ID and
- A valid Residency Visa.
This allows for many individuals to be exempt from stating personal financial information by getting a UAE resident visa. So far, the “residency test” does not require to provide the bank with a “utility bill” or a lease contract. However, to be prepared for any tightening, one should consider to have such documents in place or to arrange for a tax residence certificate.
Is a Legal Entity subject to the Automatic Information Exchange?
An entity that is incorporated, registered, managed and controlled within the territory of the UAE is not subject to the Automatic Information Exchange.
It seems that in practice even for legal entities a physical address will be required in order to exempt them from the CRS. This practical approach is reasonable as a legal entity without a physical presence would not be able to manage and control the company from the UAE.
In the light of the above, Offshore Companies or the so-called International Business Companies (IBCs) registered in one of the Offshore Jurisdictions in the UAE, such as JAFZA, Ajman Free Zones or RAK ICC (former: RAKIA Offshore), do not have physical addresses in the UAE. A registered address (with the Offshore agent) will naturally not be considered as a physical address.
Free Zone Companies and Mainland Companies do have physical addresses. However, even these entities should take precautious measurements in order to make sure that the requirements are met in order to be exempt from the CRS.
Considering CRS’ high efficiency profile, it is advisable to get professional advice. We will advise and help you with your questions regarding CRS, and assisting you with applying for a resident visa or setting up a free zone company.
Dubai Court Ruling on Non-Registered Distribution Agreement:
- No automatic renewal of a limited-term Distribution Agreement by the continuation of Trade
- No compensation for non-renewal/termination of a Distribution Agreement
Azhari Legal Consultancy successfully defended its client, a German manufacturer (the “Client”), in a lawsuit against a UAE authorized distributor (the “Distributor”) seeking compensation for the termination of an authorized distributor agreement before the Dubai Courts.
The Client appointed a UAE-based trading company as its exclusive distributor for the UAE and other GCC countries. Since the distributor agreement was not registered with the Ministry of Economy, the provisions of the UAE Agency Law did not apply.
The Client and the Distributor entered into a distributor agreement (the “Distributor Agreement”), in 2011, which had a fixed term of 3 years and contained a provision that the Distributor Agreement can be renewed if agreed so by the parties in writing. After the expiry of the Distributor Agreement, the parties negotiated the terms of a new distributor agreement. However, the parties failed to agree on all terms of the new agreement, and consequently, they never signed a new agreement. The Client did not appoint a new authorized distributor in the UAE. Instead, the Client only delivered to the Distributor whenever a purchase order was received from the Distributor.
Later on, as the Distributor failed to pay the purchase price, the Client initiated legal proceedings with the aim to get a judgment regarding its outstanding purchase price amounting to EUR 300,000.
During the legal proceedings the Distributor raised counter-claims requesting an amount of approximately AED 2 million as a compensation for the ‘termination’ of the Distributor Agreement. The counter-claims sought to recover expenses of marketing, costs of training of employees and renting of warehouses as well as a compensation for loss of business and income because of the termination.
The legal question in this case was – inter alia – whether the existence of the trading relationship between the Client and the Distributor after the expiry of the Distributor Agreement constituted an implied extension of the expired Distributor Agreement.
In its final judgment, the Dubai Court opined that (1) the continuation of the trading relationship between the parties did not constitute an implied extension of the expired Distributor Agreement as this Agreement provided that any extension requires to be in written form and (2) the non-renewal of the Distributor Agreement does not give rise to a compensation claim against the Client. Moreover, the Dubai Court regarded the Client as merely a supplier and the Distributor as an independent merchant and compelled the Distributor to pay the claimed amount.
Registered vs Non-registered Commercial Agency
The case decided by a final judgment of the Dubai Courts refers to a non-registered commercial agency.
If the commercial agency agreement would have been registered with the Ministry of Economy, the outcome might have been different in a drastic way for the Client.
The UAE Commercial Agency Law (Federal Law 18 of 1981) has strict requirements that govern the relation between the commercial agent and the principal. For instance, the commercial agent must be a UAE national (or a legal entity 100% owned by a UAE national(s)) and the agreement between the agent and the principal must be attested (notarized) and registered with the Ministry of Economy.
Termination or non-renewal of an agency agreement (or the distribution agreement), once registered with the Ministry of Economy, requires legal ground. Without a justifiable legal ground, which is defined very narrowly by the courts, or mutual agreement, it can be extremely difficult to terminate the agency agreement. Moreover, depending on the circumstances of the termination, the courts may give the agents substantial compensation for the damages suffered as a result of the termination.
In practice, even though the idea of entering the market through a local agent has its perks, such as the agent’s knowledge of the market, it could be more attractive for the principal to enter into an agreement which is not subject to the UAE Commercial Agency Law, as a registered agreement would be extremely difficult to terminate (even if there are fixed terms), would give exclusivity to the agent and ultimately substantial control for the agent over the subject matter of the agreement.
Therefore, it is very crucial to carefully draft an agency agreement, whether subject to the UAE Commercial Agency Law or not, in order to avoid adverse legal consequences.
Azhari Legal Consultancy (“ALC”) is currently representing a significant client, a foreign engineering and architecture company, in an International Chamber of Commerce (“ICC”) Arbitration case in Dubai. In this case, ALC team of attorneys and professional staff is offering its breadth of experience and knowledge to arbitrate a dispute in connection with one of the most distinguished construction projects of the region. We will keep you updated on the progress of the case.
On November 14, 2016, Nima Michael Moshggoo, Esq., attorney-at-law from Azhari Legal Consultancy, held a presentation as part of a seminar in respect of financial planning in the UAE. Titled “Protection and Financial Planning in UAE,” the talk focused on what expatriates in the UAE can do to properly manage their finances and protect their assets. Nima covered the topic of Wills and Guardianship and explained the different solutions for protecting the expats’ assets and children when the family goes through difficult times of losing a loved one.
The UAE has witnessed a rising number of franchise models over the last years. In particular, numerous international and national brands are recognizing the significance of the model and expanding their business to the UAE and other GCC Countries. But also small and mid-size companies are exploring franchise opportunities in Dubai and the UAE.
2. What is Franchise
Franchising is when a business realizes that its products or services and brand have created value that other investors want to replicate its proven concept. In order to benefit from its brand reputation and achieve scalability, the business owner becomes a franchisor. In the franchise model, the franchisor sells the rights to benefit from its business model in a particular territory to a Franchisee.
3. Legal Framework
In the UAE there is no uniform franchise law. Instead, the UAE Civil Transaction Law and the Commercial Transaction Law govern the franchise agreements. Moreover, there is some uncertainty as to whether franchise models are governed by the UAE Commercial Agencies Law (“Agencies Law”).
A Franchise Agreement will only be governed by the UAE Commercial Agencies Law, if the Franchise Agreement is registered with the UAE Federal Ministry of Economy (“Ministry of Economy”). A Franchise Agreement, however, is only eligible to be registered with the UAE Federal Ministry of Economy if it meets the following requirements:
- The Franchisee must be a UAE national or a company wholly owned by UAE nationals;
- The Franchise Agreement must grant exclusivity over all or parts of the UAE; and
- The Franchise Agreement must be notarized.
In practice, however, most Franchisees are not UAE nationals nor companies entirely owned by UAE nationals. Such Franchise Agreements are per se not eligible to be registered with the Ministry of Economy. If, however, the Franchisee is a UAE national or a legal entity entirely owned by UAE nationals, it is, generally speaking, eligible to get registered with the Ministry of Economy.
If the Franchise Agreement is registered with the Ministry of Economy, the Franchisee may enjoy – inter alia – the following rights and privileges:
- As long as the Franchisee is registered with the Ministry of Economy, the Franchisee may block parallel imports by instructing the UAE ports and custom authorities to prohibit any goods covered by the registered Franchise Agreement to enter the UAE.
- The Franchise Agreement is difficult to terminate by the Franchisor, who needs to have a “justifiable cause.” As such, termination clauses have to be drafted cautiously.
- The UAE Courts have exclusive jurisdiction, i.e. registered Franchise Agreements and other registered agency agreements are not arbitratable.
The DIFC-LCIA Arbitration Rules have been slightly amended with effective date of October 1, 2016. In a nutshell, the new DIFC-LCIA Arbitration Rules have incorporated provisions regarding the access to emergency arbitrator (see Article 9B); provision for multi–party disputes (see Articles 1.5 and 2.5); measures to increase efficiency and avoid delays in proceedings (see Articles 9C, 10 and 11); and online filing and commencement of proceedings (see Articles 1.3 and 2.3). It seems clear that the amendments have the purpose to expedite and simplify the arbitration proceedings.
However, the introduction of an ‘Emergency Arbitrator’ gives a party access to interim relief even prior to the constitution of the Arbitration Tribunal.
What is an Emergency Arbitrator?
The constitution of the Arbitration Tribunal, i.e. the appointment of the arbitrators, inevitably can be time-consuming. A problematic situation might arise where interim relief is needed by one party before the tribunal has been constituted. In order to bridge this time-gap, most arbitration rules contain provisions for the appointments of an emergency arbitrator. As such an emergency arbitrator deals with requests for urgent interim relief, such as an interim injunction, before the main tribunal is constituted.
In light of the above situation the newly included Article 9 B provides:
- 9.4 Subject always to Article 9.14 below, in the case of emergency at any time prior to the formation or expedited formation of the Arbitral Tribunal (under Articles 5 or 9A), any party may apply to the LCIA Court for the immediate appointment of a temporary sole arbitrator to conduct emergency proceedings pending the formation or expedited formation of the Arbitral Tribunal (the “Emergency Arbitrator”).
- 9.5 Such an application shall be made to the Registrar in writing (preferably by electronic means), together with a copy of the Request (if made by a Claimant) or a copy of the Response (if made by a Respondent), delivered or notified to all other parties to the arbitration. The application shall set out, together with all relevant documentation: (i) the specific grounds for requiring, as an emergency, the appointment of an Emergency Arbitrator; and (ii) the specific claim, with reasons, for emergency relief. The application shall be accompanied by the applicant’s written confirmation that the applicant has paid or is paying to the DIFC-LCIA Arbitration Centre the Special Fee under Article 9B, without which actual receipt of such payment the application shall be dismissed by the LCIA Court. …..
- 9.8 The Emergency Arbitrator shall decide the claim for emergency relief as soon as possible, but no later than 14 days following the Emergency Arbitrator’s appointment. This deadline may only be extended by the LCIA Court in exceptional circumstances (pursuant to Article 22.5) or by the written agreement of all parties to the emergency proceedings. The Emergency Arbitrator may make any order or award which the Arbitral Tribunal could make under the Arbitration Agreement (excepting Arbitration and Legal Costs under Articles 28.2 and 28.3); and, in addition, make any order adjourning the consideration of all or any part of the claim for emergency relief to the proceedings conducted by the Arbitral Tribunal (when formed).
The application fee is fixed at AED 50,000 (appr. USD 13,600) and the Emergency Arbitrator’s fee amounts to AED 120,000 (appr. USD 32,700)
By inserting Article 9 B the DIFC-LCIA Arbitration opens the door for granting interim relief for the parties of an arbitration prior to the constitution of the Tribunal.
The Enforceability of an Emergency Arbitrational Award
The practical impact of the introduction of an “Emergency Arbitrator” seems to be limited, as the nature of an interim injunction normally requires a sudden and immediate execution, e.g. in the case of an attachment of certain assets. If, for example, the claimant fears that the respondent will dissipate assets outside a specific jurisdiction, a request for an interim injunction before an Emergency Arbitrator might even increase this risk, as Section 9.4 of the DIFC-LIAC Rules 2016 requires that the Applicant and the Arbitration Centre respectively have to notify the Respondent with the request to issue an interim junction. By doing so, the Respondent will be aware of the request and has sufficient time to defeat the purpose of the interim measure, i.e. transferring his funds to a safe haven.
In contrast, in most jurisdictions the national courts issue interim junctions without notifying the Respondent about the request to issue an interim junction, so called ex parte (without notice). Arbitration tribunals, however, never hear ex ante or make ex parte orders.
If the national courts issue an interim junction, it can be executed immediately and it reaches the Respondent without any warning. As such, interim junctions issued by national courts, have – compared to an interim junction of an Emergency Arbitrator – more “bite” and are more effective.
Moreover, the enforceability of an award of an Emergency Arbitration cannot be compared with the recognition and execution of final arbitral awards. The recognition and execution of a final arbitral award is governed in most jurisdictions by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“The New York Convention”). As the award of the emergency arbitrator is not (even) binding for the Tribunal that will at a later stage deal with the dispute, it is at least controversial whether an Emergency Award is governed by the Convention. Thus, if it comes to an award of an Emergency Arbitration one has to consider the position of the local courts that have jurisdiction regarding the execution whether they will enforce such award.
In light of the above, the appointment of an ‘Emergency Arbitrator’ still might make sense in the following cases:
- An interim relief of an ‘emergency arbitrator’ serves its purpose in ongoing contractual relationships mostly in construction case, e.g. an application for specific performance under an existing agreement or the release of an interim payment under a construction contract.
- The Appellant seeks to keep the entire dispute confidential.
- It is clear or expected that the Respondent will apply voluntarily with the interim injunction of the Emergency Arbitrator
- The competent local courts are inefficient or might be partial
In this context, it is worthwhile to mention that Article 9B provides that it shall not prejudice any party’s right to apply to a state court or other legal authority for any interim or conservatory measures before the formation of the Arbitration Tribunal.
The practical impact of emergency arbitration will be limited due to the above mentioned practical obstacles. In certain situations, it will be a case by case decision whether Emergency Arbitration is worth the candle.
An important means for Employers to protect their business, confidential information and secrets from departing employees is the arrangement of so-called post termination restriction clauses.
Article 127 of the Labour Code of the UAE provides that an employer may agree on a post-contractual non-competition clause with an employee who, due to their employment with the employer, has knowledge of the clients of the employer or confidential information or business secrets, as long as the employee is at least 21 years of age. A valid non-competition clause must be limited in time and is restricted both geographically and to a specific business area. In addition, the severity of the non-compete clause must be necessary in order to protect the legitimate interests of the employee.
Alongside this – with fewer restrictions for the employee – the following post-contractual clauses can also be agreed upon:
- Non-Poaching Clause: Undertaking by the employee not to poach any other employees in the event of leaving the employer;
- Non-Solicitation Clause: Prohibition against soliciting customers of the employer to oneself or to a new employer, following departure from the company; or
- Non-Dealing Clause: Prohibition against maintaining professional contact with clients of the employer, independent of the question of who established the contact.
A violation of a Non-Competition Clause or of the other above-mentioned Post-Termination Restrictions may lead to claims for damages of the employer against the (former) employee. The burden of proof – for instance, of a violation of the Non-Competition Clause – and of the damages lies with the (former) employer. As a general rule, the violation of the Non-Competition Clause can be proven relatively easily. This is not the case with the damages or the amount of the damages, as the existence of damages is not sufficiently demonstrable in numerous cases, as a result of which the (former) employer would lose the case.
However, there is a possibility that in a contract, in addition to the Post Termination Restriction, a contractual penalty is agreed upon for the case in which the Post-Termination Restrictions have been violated by the employee. Insofar as a contractual penalty of this kind has been agreed upon, the burden of proof will be reversed. The employer now only has to prove the violation of the restriction clause and will demand the agreed contractual penalty from the (former) employee. The employee now has to demonstrate that these agreed damages have not arisen, or are disproportionate. As the Civil Code, with regard to contractual penalties, contains provisions whereby a judge may ‘open’ a contractual penalty clause, caution is advised in the formulation of a contractual penalty.
The claim for damages against a former Employee must be made at the competent Labour Court. In this case it is important that before the commencement of the lawsuit – as in all matters of employment law – the parties have to take the case to the ‘Labour Department’, which will attempt to bring about an amicable settlement. It is only when these ‘conciliatory proceedings’ have failed that cases can be taken to the Labour Court. It should be emphasized that the ‘Dubai Court of Cassation’ has decided that failed ‘conciliatory proceedings’ due to unpaid wages do not entitle the employer to make claims for damages due to the violation of a Post-Termination Restrictions by a (former) employee. Separate ‘conciliatory proceedings’ are to be carried out for this purpose.