LEGAL FUNCTION AND FRAMEWORK IN ADGM
What a year to be investing in the United Arab Emirates! According to statistics published by the International Monetary Fund (IMF), the nation’s GDP hit USD 419,000,000,000 (US Dollars four hundred and nineteen billion) in December 2014 – a 4.8 percent increase on the preceding year. The IMF has predicted a four to five percent growth rate over the next seven years, thus indicating that our economy is forecast to go from strength to strength. And this is something of an achievement, given the continuing recession and economic collapses occurring elsewhere in the world at present, particularly in Europe. The advantages of investing in the UAE are, it seems, increasing, with previously-perceived deterrents, such as the lack of an exhaustive and comprehensive insolvency law, soon to be eradicated by the implementation of new laws and procedures.
Yet the UAE is rife with investment opportunities – with an infinite number of ventures available across a huge expanse of market sectors spread throughout seven Emirates, identifying the most appropriate area in which to invest is by no means a small task. Obviously, the final decision will complement the nature of the activity at hand, but a commercially-astute and competitive investor in the financial market will no doubt want to establish himself in a world-renowned financial center. Until now his choices within the UAE and indeed throughout the Middle East would have been somewhat limited, with the Dubai International Financial Centre (DIFC) dominating the market. But the emphasis here in on the “until now”…
Established pursuant to Federal Law Number 4 of 2013, Federal Decree Number 8 of 2004, Abu Dhabi Federal Decree Number 15 of 2013 and Cabinet Resolution Number 4 of 2013, the Abu Dhabi Global Market (ADGM) is almost ready to open its doors to investors. As a financial free zone governed by three independent regulatory bodies (namely The Financial Services Regulator, The Registration Bureau and The Courts) the ADGM has the ambition of becoming one of the world’s leading financial centers. Despite it’s close proximity to the DIFC the ADGM looks set to thrive on account of Abu Dhabi’s strong and constant financial position, as supported by natural resources. Such factors promise to encourage financiers to seriously consider their options when selecting a Middle Eastern financial center henceforth.
When considering a forum, however, an additional consideration will inevitably be the various rights and restrictions afforded therein. Promising potentials and returns are a strong attraction, but the rules and regulations observed by a center may also play a part in an investor’s decision-making. In due consideration of such a factor, the ADGM states on its website that “In collaboration with other International Financial Centres, global institutions, and regulators, Abu Dhabi Global Market will develop and support member institutions with the regulatory framework, legal jurisdiction and attractive business environment they need for sustainable business growth.”
So what is the regulatory framework and legal jurisdiction of the ADGM? Until very recently the legislative system has been uncertain, but the latest announcements have confirmed that the underlying law of the ADGM will be that of the common law jurisdiction of England and Wales. For clarity, it seems prudent to note here that “common law” is a legal system in which the prevailing rules and regulations have been established as a result of court/tribunal decisions in previous cases. However in the majority of jurisdictions operating such a system (for example Singapore, Australia and England/Wales) the common law glues together a framework of statutes and statutory instruments. In other words, the prevailing law consists of a mixture of statute and common law, with the provisions of common law often created in order to fill gaps in the legislative framework where specific cases raise awareness of the fact that the law is lacking. For the most part, case law does not actually give rise to new legislation – more guides the courts to interpret certain laws in a specific way, owing to the way in which they were applied in the precedent case.
Having two methods in place via which laws are created in the same jurisdiction can inevitably lead to complications, such as case law conflicting with the statute. Yet it is a clear feature of the English legal system in particular that where such provisions conflict, the statutory law will prevail. This is a principle which the ADGM will also adopt, which in turn shall help to solve another obvious problem in application of English/Welsh common law therein – namely, what if certain principles of common law developed by the jurisdiction of England/Wales in keeping with its own needs are contradictory to purpose in the ADGM? For example, what if a particular provision of employment law in force in English/Welsh common law opposes the approach that the ADGM wishes to take with regards to employment? Despite adopting the English/Welsh common law as the basis of its legislative framework, the ADGM shall additionally deploy its own set of rules and regulations in certain areas (which may be either drafted afresh, imported from other foreign legal systems, or both). And, just as statute prevails over case law in England/Wales, so the ADGM regulations will prevail over the common law provisions adopted therein. Of course, just as new laws are introduced from time to time in every jurisdiction across the globe, both the common law of England/Wales AND the ADGM will develop new principles in keeping with requirements. New common law provisions of England/Wales shall have the immediate effect in ADGM, yet these may be superseded by new ADGM regulations overruling the same.
It, therefore, appears as though English/Welsh law is applicable in ADGM, but is not binding. If ADGM authorities (namely, the Board) consider a particular piece of common law to be contrary to requirements, they may simply draft a regulation deeming it as inapplicable. However, under Section 2(2) of the draft regulations currently proposed by ADGM, decisions made by the UK Supreme Court will have a binding effect on the ADGM courts. Given the fact that the ADGM courts shall neither have official links to any UK courts nor have any right to appeal to them or to challenge their decisions, questions have been raised as to whether compelling the ADGM courts to abide by rulings of the Supreme Court is in the ADGM’s best interests. Yet given that any civil case escalated to the Supreme Court will have been considered by the UK County Court, High Court and Court of Appeal before reaching such a stage, it seems reasonable to assert that, at some point, a final presiding authority should close the matter. Allowing it’s courts to divert from the decisions of the highest judicial authority within its legislative template would leave the AGM's legal system without boundaries, and may discourage participation by investors wary of the fact that the ADGM courts could, in theory, act contrarily to reasoned decisions or fail to establish a clear and precise legal position in relation to any particular matter. It goes without saying that a lack of confidence in a financial center’s rules and laws will act as a huge deterrent, and nominating a final and presiding external authority guaranteeing regulation of the court system will go some way towards alleviating such a risk.
Given that the legal architects developing the framework of ADGM law started with a blank canvas and were free to adopt any provisions that they considered to be appropriate, the decision to apply English/Welsh common law as a live instrument (as opposed to taking the principles thereof and writing them into ADGM law as specific regulations) has been called into question. Why not just “codify” the current common law, thus making the current provisions constantly applicable and more easily accessible? Given its capacity to fluctuate and divert from the statute, common law is often considered as hard to follow – yet despite this, the ADGM Board have decided not to adopt the “hybrid” approach. Although perhaps contrary to the wider UAE’s efforts to implement simple and accessible laws, the ADGM’s proposed approach pays consideration to the fact that the law is a living organism, and will grow and adapt in order to fulfill the needs of its jurisdiction. And just as a common law provision may rapidly be established when a case demonstrates a particular need for the said provision, a second case may just a quickly call for the implementation of an opposing law (such as the Hookway law, which was implemented in England and Wales in 2011 as case law, but superseded by further law introduced within weeks). Codifying case law would cement the law of a jurisdiction into one particular era, which may quickly render its provisions dated and inapplicable in new situations.
We have considered the way in which the ADGM will draft its own unique rules and regulations to operate in conjunction with English/Welsh case law, and have just referenced the codification of common law. But what of the implementation of English/Welsh law (whether common law or statute), amended to suit the requirements of the ADGM? The authorities thereof have recently released a list of UK statutes which shall have effect in the ADGM jurisdiction, many of which are qualified with commentary citing the adaptation or removal of various clauses. Whereas such an approach may defy the point of adopting English/Welsh law (why take the law of a different jurisdiction and amend it to fit? If it doesn’t fit, why not disregard it all together and draft appropriate legislation from scratch?) it pays respect to an underlying principle of common law – namely, that there will always be exceptions, and no one law could possibly extend so far as to cover each and every applicable circumstance. Taking the existing law and adapting the same in keeping with current requirements is, by definition, within the spirit of the common law. Prohibiting the adaptation of statute would be contrary to the purpose of adopting a common law system, which by its very nature allows for change as needs arise.
The list of applicable UK statues is lengthy, and the scope of considering each in turn enormous. Yet a scan of the titles of the various provisions alone will inevitably alert the reader to the fact that some of the laws included were implemented a very long time ago, with the most historic being the Statutes of Fraud Act of 1677. (Here’s a random point of interest – the Statutes of Fraud Act actually has very little to do with fraud but instead provides certain guidance with regards to the form that various contracts, such as wills and land-related deeds, should take. Fraud is dealt with under the Fraud Act 2006, which applies in both the civil and the criminal courts). Although the current English/Welsh legal framework is vested in and built upon such historic provisions, the actual law in practice has been adapted and developed in accordance with the specific nation’s needs. It consequently has regards to the history, culture and legal ethos of England and Wales specifically. Simply identifying the said law and transplanting it so as to apply in a foreign jurisdiction may, therefore, be a move that is subject to criticism. Although the lawsuits the needs of England/Wales, what evidence is there to suggest that it will suit the needs of the ADGM, which, despite being a free zone, will inevitably be influenced by the culture, religion and social customs of the United Arab Emirates? The legal system of the UAE is founded upon the principles of Sharia Law, and it is therefore likely that incompatibilities will arise between UAE practice and English/Welsh law. This is particularly the case when considering the fact that some of the statutes which the ADGM intends to adopt make specific reference to women (for example, the Law Reform (Married Women and Tortfeasors) Act 1935 and the Law Reform (Husband and Wife) Act 1962). It will be important for the ADGM to preserve the overriding cultural principles of the UAE, despite being legally independent, so as not to deter regional investors.
It seems appropriate here to pay additional consideration to the fact that case law is not always easily accessible. Even when the adaptation of a particular statute meets no opposition, the fact that the provisions of the same may have been amended by case law in practice is not always obvious. This is the case with several of the statutes on the list proposed by ADGM. For instance, the list shows that various sections of the Law of Property Act 1925, including section 53 thereof, will apply in the ADGM. However, this specific provision (namely section 53(1)(c)) is subject to strict qualification owing to the case law of Saunders v Vautier and later Vandervell v Inland Revenue Commissioners. The decisions of the House of Lords in these matters have binding authority in the courts of England and Wales, and therefore will preside in the AGDM courts as well. However it is not clear to the layman that such provisions are in effect, and the inaccessibility of the law may discourage investors, particularly those accustomed to operating in civil law jurisdictions.
The ADGM is currently welcoming commentary on its proposed legislative system, thus implying that amendments to the projected framework are still possible. It may, therefore, be the case that the present list of applicable statutes is amended. The addition of extra statutes seems particularly likely given the fact that more recent laws of corporate significance are notably absent, such as the Bribery Act 2010. Given its wide-reaching juridical scope and provisions tailored towards combatting offences which are particularly prevalent in the international finance market, the omission of the Bribery Act is a little confusing, and its inclusion in the list of statutes at a later stage would be far from surprising (albeit amended so as to provide for penalties enforceable in the ADGM jurisdiction). Although specific regulations pertaining to matters such as employment and real estate have been disclosed, the criminal law of the ADGM remains unclear, yet it is widely anticipated that UAE Federal Law Number 3 of 1987 (the Penal Code) will apply. This follows the position in DIFC and all other free zones throughout the UAE, on account of the fact that the respective Boards do not have the power to criminalize and de-criminalize acts.
Despite being far from mutually exclusive of one another, the legal system and the court system are two separate areas of discussion. We have thus far concentrated on the way in which the ADGM law will be structured – but what of how it will be implemented? In other words, how will its courts be organized? How will they operate? The DIFC notably operates a two-tier system, with a Court of First Instance and a Court of Appeal, thus allowing parties to a matter to challenge the decision of the Court of First Instance in the permitted circumstances. Although the ADGM have revealed that there will be no right to appeal to any UK court, it is not yet clear as to whether an internal court hierarchy will provide any scope for challenging an initial ADGM court judgment. Moreover, there is at present no information available with regards to the enforceability of awards secured outside of the jurisdiction. For example, at present arbitration awards made in the Dubai International Arbitration Centre (DIAC) may be enforced via the DIFC courts as per section 42(1) of DIFC Law Number 1 of 2008. This extends so far as to cover the enforcement of awards made by arbitration tribunals outside of the UAE, particularly where the UAE has entered into a treaty regarding the mutual enforcement of judgments such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). However, it was suggested in the case of Meydan Group LLC v Banyan Tree Corporate PTE LTD that the execution of a judgment pertaining to assets held outside of the DIFC will be exceptionally difficult to conduct, as the cooperation of external authorities such as the police may be required. As yet there has been no announcement regarding the ADGM’s powers to enforce awards made in the courts of Abu Dhabi or further afield and, more pressingly, no indication has been given as to any cooperation between the ADGM and other local authorities. Relationships with the Abu Dhabi police force and other significant authorities may, therefore, be an area on which the ADGM should concentrate prior to commencing operations, as this would permit a wider execution capacity.
Just as the DIFC’s common law basis incites many entities to nominate DIFC as its dispute resolution forum of choice, so it is expected that the ADGM will be a popular forum for those familiar with such a system. However as with any free zone, ADGM will take time to develop and grow, and although companies may begin to incorporate therein as soon as the doors are open for business, it will inevitably take some time for commerce to mature and disputes to rise accordingly. It is therefore likely that the ADGM courts will remain relatively quiet initially – unless, of course, the jurisdiction is opened up to entities operating outside of the ADGM. This is a realistic possibility given the fact that, pursuant to Law Number 16 of 2011, the DIFC jurisdiction became accessible to ANY party wishing to refer a dispute as of 31 October 2011, providing that both parties to the dispute had mutually agreed to submit to the jurisdictional authority of the DIFC in writing. When considering the benefits that this has afforded DIFC (in terms of both financial income and the weight carried by judgments issued therein) the ADGM may wish to implement such a strategy with immediate effect. This may be further encouraged by the way in which the DIFC courts are often favored above the Dubai Courts due to the approach they take with regards to awarding legal expenses. Although the UAE Civil Procedures Code allows a successful party to claim legal expenses from the other party this is rarely put into practice in the Dubai Courts, whereas the DIFC courts are proving themselves more likely to apportion expenses in favor of the successful litigant.
Regardless of the scope of the jurisdiction of the ADGM courts, the tribunal shall be a “court’ in the traditional sense – namely a forum in which disputes are heard by a judge or panel of judges, and an executable judgment handed down. The details of any presiding judges are yet to be released, but it is of note that DIFC seats a number of internationally-acclaimed judges, qualified in a number of jurisdictions including the UAE. However, despite the prevalence of traditional litigation as a common dispute resolution mechanism, agreements between parties to refer disputes to arbitration have increased dramatically (particularly in joint venture agreements, given that arbitration is the dispute resolution mechanism favored by parties to construction contracts using FIDIC models). The inclination towards arbitration incentivized DIAC to establish its own arbitration center, the DIFC LCIA Arbitration Centre, founded as a strategic partnership between DIFC and LCIA and operating under the rules of the latter. However in May 2014 Law Number 7 of 2014 announced the establishment of a central Dispute Resolution Authority within DIFC – namely, a singular body creating a “one-stop shop” for dispute resolution by uniting the three independent centres (the DIFC courts, DIFC LCIA Arbitration Centre and Dubai World Tribunal), presided over by the current president of the DIFC courts. No timeline for this unification has been announced, but it remains to be seen what position the ADGM will take with regards to arbitration. Although it may do well to heed to approach soon to be adopted by DIFC, it may be that the emergence of centers therein leaves space in the market for an independent arbitration center within a financial center.
Despite the fact that the ADGM’s proposed legal system differs greatly from that of the UAE it bears striking similarities to that of DIFC in many respects. Given DIFC’s high ranking in the world league of financial centers, it seems reasonable to assert that the ADGM is on the right path not only to ensure its own success but also to assist the Emirate of Abu Dhabi in achieving the Abu Dhabi Economic Vision 2030.