GCC Quarterly Review Q3 2021
The third quarter of 2021 saw a number of legal developments in the Gulf Cooperation Council (GCC) region (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Our GCC Quarterly Review – Q3 2021 summarises a selection of the major developments in that period, with links to further reading where available.
Download the PDF version (6 pages) or read online below.
Uncertificated Securities Rules 2021
New Uncertificated Securities Rules 2021 were issued by the Abu Dhabi Global Market (“ADGM”) in September 2021. Related amendments to the Insolvency Regulations 2015, Companies Regulations 2020 and Financial Services and Markets Regulations 2015 have also been enacted. The rules regulate the issue, registration and transfer of securities into uncertificated form, and the procedure for the conversion of certificated securities into uncertificated form and vice versa. Some key points from the rules include that a company must notify the ADGM Registrar before it issues securities in uncertificated form, all securities of the relevant class must be held in uncertificated form, the company must maintain a register (itself or it can delegate such responsibility to a third-party share registrar) of any uncertificated securities and make this available to the ADGM Registrar. The register of uncertificated securities is prima facie evidence of the person who has legal title to the relevant security.
New Data Protection Guidance
The ADGM’s Office of Data Protection has issued guidance to assist ADGM entities in complying with the Data Protection Regulations 2021, which came into force in February (Read more…). The guidance provides an introduction into the new regulations and covers key areas of the new regulations, including the rights of data subjects, the obligations of data controllers and processors and international transfers of data. A suite of templates and assessments have also been published to support ADGM entities.
Cooperation Agreement between the ADGM Arbitration Centre and the Permanent Court of Arbitration
The ADGM Arbitration Centre and the Permanent Court of Arbitration (“PCA”) entered into a cooperation agreement in September 2021. The agreement will see the two arbitration institutions collaborate in promoting the effective resolution of international disputes through arbitration, as well as mutual
assistance and the sharing of expertise. The ADGM Arbitration Centre will provide facilities, services, and personnel to support to the PCA in hearings or meetings conducted in Abu Dhabi. The PCA is an intergovernmental organization with 122 contracting parties (which includes the UAE), headquartered in The Hague. It provides administrative support in international arbitrations involving states and state entities, international organisations and/or private parties.
New Practice Direction enables DIFC Courts to refer cases to mediation
DIFC Practice Direction No.1 of 2021 on the Referral Of Cases To Mediation sets out the circumstances in which DIFC Court Judges may exercise their discretion to refer parties to mandatory mediation to resolve their dispute, or particular issues in it, in accordance with Rule 27.3 of the Rules of the DIFC Courts. The DIFC Court may exercise its discretion on the application of one or more of the parties, or of its own initiative in the following circumstances:
- the referral would more likely than not assist in furthering the overriding objective of the DIFC Courts to deal with cases justly and/or the objectives set out in Rule 27.2 of the Rules of the DIFC Courts, including that mediation would significantly help parties to save costs, save the parties the delay of litigation in resolving their dispute and enable the resolution of the dispute while preserving the parties existing commercial relationships and market reputation;
- the parties have an existing relationship that would more likely than not be permanently affected by the continuation of proceedings, for example where there is a familial relationship between the parties or a longstanding business relationship.
The Practice Direction No.1 of 2021 came into force on 28 June 2021.
UAE Central Bank to launch digital currency
The UAE Central Bank has announced plans to introduce digital currency as part of its 2023-2026 strategy. Central Bank Digital Currencies (“CBDCs”) are an electronic form of central bank money, potentially accessible to all citizens and companies as an alternative to, and introduced alongside, cash. As part of the UAE’s Vision 2021 and the National Agenda, the UAE is focused on developing its fintech sector and the digital transformation of the financial services sector, supported by Government strategies and an enabling legislative and licensing environment. UAE regulators, including the Central Bank and the Securities and Commodities Authority, are increasingly active in regulating in the FinTech sector, particularly payment services.
Earlier in 2021, the UAE Central Bank announced its collaboration on a joint central bank digital currency project for cross-border payments known as the “Multiple Central Bank Digital Currency (m-CBDC) Bridge” with the Hong Kong Monetary Authority, the Bank of Thailand and the Digital Currency Institute of the People’s Bank of China. The UAE is also working towards a new, joint common cryptocurrency, known as Aber, with Saudi Arabia, which is expected to facilitate blockchain-powered financial settlements between financial institutions in the two countries and cross-border payments.
Several countries are picking up speed on developing CBDCs, notably the US and China. Earlier this year, the European Central Bank also launched its digital euro project (Read more…). You can read about developments in the fintech sector in our blog, FintechLinks.
UAE Court decision relating to valid arbitration agreements
A recent decision of the Dubai Court of Cassation highlights the importance of incorporating a stand-alone arbitration agreement in a contract, rather than incorporating by reference an arbitration clause in a related contract. In a recent judgment, the Dubai Court of Cassation determined that parties to a contract may not be bound by an agreement to arbitrate which is incorporated by reference. Express agreements to arbitrate are important, as UAE law considers that arbitration is an exceptional mode of dispute resolution and a waiver to the fundamental right to have access to court.
Dubai clarifies no capital requirements attached to greater foreign investment
The Dubai Department of Economic Development (“DED”) has reportedly clarified that, where a locally incorporated company is wholly- or majority-owned by foreign investors, there is no requirement for the foreign investor to contribute a minimum amount of capital or to provide a bank guarantee. To date, we are not aware of any other Emirates imposing specific terms and conditions attached to foreign investment.
Following a change in law earlier this year, shares in companies incorporated in the UAE may owned by foreign investors with no limit on the percentage of a company’s share capital that they may hold, subject to Federal restrictions protecting strategic sectors and applicable Emirate-level requirements. Companies incorporated in Dubai which are engaged in any of the non-strategic activities specified on a list of over 1,000 commercial and industrial activities published by the DED are open to full or majority foreign ownership (Read more…). We understand that other Emirates, including Sharjah and Ajman, are following the approach of Dubai and Abu Dhabi in the scope of the commercial and industrial activities which are permitted to be carried out by companies whose shares are majority or wholly owned by foreign investors.
Many companies across the UAE which are eligible for increased foreign ownership are taking steps to facilitate greater foreign ownership of their share capital, whether through adjustments to traditional nominee structures, or raising foreign ownership limits on the financial markets to broaden their investor base.
Dubai Court refuses to enforce Chinese arbitral award
The Dubai Court of Cassation has refused to enforce an arbitral award issued by the China International Economic and Trade Commission in 2020, according to reports. The successful party sought to enforce the award against the losing party’s assets located in the UAE in the Dubai courts. Following a challenge by the losing party, the Court of Cassation (on appeal) rejected enforcement of the award on the basis that the arbitral award was not properly signed and the requirement for an arbitral award to be signed by the arbitrator was a matter of public policy.
The decision is surprising as, under UAE law, a UAE Court should enforce a foreign final arbitral award, without review of the merits of the award, in accordance with the New York Convention 1958 and UAE rules of civil procedure. In practice, the enforcement process may be challenging and unpredictable, despite the modernisation of the rules of UAE-based arbitral institutions and national arbitration laws in recent years, including the introduction of the new UAE Arbitration Law in 2018.
The DIFC and the ADGM have become an attractive option for users of international arbitration, not least because awards issued following arbitration proceedings seated in DIFC and ADGM should offer a smoother enforcement process onshore in the UAE than is the often the case for foreign awards.
Dubai Court overrides valid arbitration agreement
In proceedings in connection with a suite of related construction transaction contracts with differing dispute resolution provisions, the Dubai Court of Cassation held that all disputes relating to the transaction under the various contracts should be determined in a single forum – the Dubai Courts (Dubai Court of Cassation Case No. 290 of 2021).
Under UAE law, the UAE Courts should recognise and give effect to an agreement to arbitrate in a contract and should dismiss or stay any proceedings brought before them in breach of that agreement (provided that the other party objects at the first hearing). In this case, a valid agreement to arbitrate between the parties to one of the contracts (but which was not binding on all of the parties to all of the contracts) was not upheld, as on the facts of the case, the Dubai Court considered that was in the interests of justice that all disputes relating to the transaction should be determined in one forum. This approach was intended to avoid concurrent proceedings which could arise in inconsistent judgments and awards relating to closely connected contracts, where the determination of claims in proceedings relating to certain contracts were dependent on the determination of claims in proceedings relating to other contracts. Parties should carefully consider the dispute resolution provisions in related transaction documents, and whether such provisions can be aligned to enable related disputes to be heard in the same forum.
Foreign-owned companies required to comply with Anti-Commercial Concealment Law
Businesses in Saudi Arabia in which foreign nationals and companies have invested should ensure they are in compliance with the Anti-Commercial Concealment Law (Saudi Arabia Royal Decree No. M4/1441 dated 19 August 2020 and Saudi Arabia Cabinet Decision No. 785/1441 on the Approval of the Anti-Commercial Concealment Law). The grace period for rectification of breaches, which was due to end on 23 August 2021, has been extended to 16 February 2022.
Severe penalties may be imposed where a company which makes use of side arrangements that enable foreigners to carry on business activities which they are restricted from carrying on under the Kingdom’s foreign investment regime. The severity of the penalties will depend on whether or not the breach constitutes a criminal offence. Supervision and enforcement of the Anti-Commercial Concealment Law is to be a co-ordinated response between the relevant licensing authorities in Saudi Arabia and a new Anti-Commercial Concealment Committee. Where an offence may have been committed, public prosecutors have the right to investigate and refer any suspect activity to the criminal courts. Any contracts entered into in breach of the Anti-Commercial Concealment Law are deemed to be void. Read more in our recent note.
Supreme Court decision on the impact of the pandemic on contracts
Due to the ongoing Covid-19 pandemic, many businesses are confronted with serious commercial consequences, such as delays in the delivery of goods and services and may look for ways to mitigate the impact on contractual performance. In this situation, they may be faced with difficult legal questions about whether and to what extent force majeure and related provisions in their contracts, and applicable laws and Shariah principles, may be implicated.
A decision issued by the General Assembly of the Saudi Supreme Court in December 2020 (Decision No. M/45 dated 08/05/1442 (corresponding to 23/12/2020G)) set out guiding principles for the courts to apply when assessing the impact of Covid-19 on contractual relationships.
Parties analysing the effect of Covid-19 related disruption to their contractual arrangements should consider the key points set out below, as well as their specific circumstances and any relevant industry customs. The Court determined that the Covid-19 pandemic may be considered an ‘emergency circumstance’ if a party cannot perform its contractual obligations without incurring atypical losses and may be considered a ‘force majeure event’ triggering force majeure provisions in the event that contract performance has become entirely impossible due to the pandemic. The Supreme Court imposed several conditions which must be satisfied before these concepts can be invoked in relation to a contract:
- the contract must have been entered into before the pandemic and the term of the contract must be continuing;
- the pandemic must have had a direct and unavoidable impact on the contract;
- the pandemic’s impact on the contract must have not been affected by any other factors;
- the affected party must not have waived its rights under the contract; and
- the impact and loss caused by the pandemic must not be addressed by a specific law or decision by the competent government authority.
A Saudi court has the discretion to vary the contract (for example by reducing the contractual obligations) in order to achieve justice between the parties, according to the circumstances. The court should analyse the degree to which the contract was affected, the proportion and duration of the impact. The calculation of damages should not exceed the duration of time during which the pandemic affected the contract. This calculation should be carried out by one or more specialized experts.
In cases where a delay in the performance of contractual obligations has occurred due to the pandemic, the courts should consider dis-applying penalty clauses or fines (in full or in part), depending on the situation. Contractual provisions limiting liability in the case of an emergency circumstance or force majeure will have no effect. The party which has failed to perform its obligations bears the burden of proof in establishing that such failure was caused by the pandemic.
Kuwait restricts registration of property ownership to companies owned by nationals
According to reports, the Ministry of Justice in Kuwait has suspended the registration of real estate in the name of listed Kuwaiti real estate companies unless the company provides proof that it is wholly owned by Kuwaiti nationals and does not have any foreign shareholders, in a change to the Ministry’s usual practice. Foreign investment in Kuwait is restricted primarily by Kuwait Law No. 74 of 1979, but the government’s is taking active measures to attract foreign investment to the country.
Global Interest rate reform: LIBOR transition deadline approaches
Banks, asset managers and corporates are focussing on preparations for the cessation of interbank offered rates (“IBORs”), such as LIBOR, and the transition to new “Risk Free Rates” as benchmarks to calculate interest payable on financing transactions, or profit amounts payable on Islamic finance arrangements such as Murabaha and ijara.
All GBP LIBOR benchmark settings will cease immediately after 31 December 2021. The cessation of GBP LIBOR will impact all contracts which reference the rate. While all businesses affected must execute their transition plans before the end of the year, the Working Group on Sterling Risk-Free Reference Rates has encouraged active conversion of legacy contracts by 30 September 2021.
There are some key steps to consider in navigating the transition away from IBORs. You can find our more in Linklaters updated Global Interest Rate Reform Guide that summaries the key elements of these critically important reform initiatives and outlines key action points.