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Timestamp: 2019-04-22 20:47:17+00:00

Document:
The present paper aims at exploring the domain and the legal regime of applying the 1958 New York Convention in the jurisprudence of United Arab Emirates (UAE) Courts, given the accession of the country to the international instrument in 2006. Within this 10 years span of time and despite the corundum that the Convention has posed in various legal systems, especially related to the unpopular interpretation of its Art. III by national courts, the UAE legal system has proved a constantly increasing observance of the Convention in the award enforcement stage.
As such, the present paper leaves ipso facto from the premises that the New York Convention is already a part of the UAE municipal law as demonstrated below, in light of the peremptory norms of the UAE legal system and further explores, both in a statutory and practical perspective, which are the limits of applicability and how they are interpreted by the local courts in their enforcement practice. Moreover, the paper approaches in a comparative manner the UAE federal statutory mechanism, as well as the DIFC legislature, in view of making recommendations and proposals of lege ferenda.
Based on such analysis, the present research finds that in the array of decisions of implementation issued by the UAE Courts, the tendencies are towards the application of the Convention with lesser reservations, towards the strict compliance of the foreign awards with the local statutory mechanisms, especially the public policy domain, and towards the. Based on various comparative and inductive models, the paper makes recommendations towards the need of a more substantive and muscular local regulation, aimed at a clearly codified approach towards enforcement and more standardized and prolific application of the New York Convention in UAE.
The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards was drawn up under the auspices of the United Nations in 1958 and became the most important international convention relating to the international commercial arbitration.
“The goal of the Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries”.
The New York Convention requires the contracting states to enforce valid arbitration agreements and has introduced straightforward procedure for obtaining the recognition or enforcement of arbitral award.
Many states ratified the convention at its inception and many followed, by the time UAE acceded to the Convention there were already more than 140 contracting states to the convention.
To be late is better than never, hence, on 13th June 2006 UAE acceded to the New York Convention by Federal Decree No. 43 for 2006.
Indeed, it was a good move towards making the UAE an arbitration-friendly jurisdiction; however, the absence of modern arbitration law, except for the DIFC Arbitration Law, and the short experience of the UAE Courts in applying this important international treaty have hindered in a few occasions the precise and proper application of the Convention. The enforcement seekers could not in the said few occasions obtain straightforward enforcement before the lower courts and had to appeal to the higher courts in order to have the award enforced and recognized. Nevertheless, it is noted that there is greater compliance by the UAE Courts with the Convention in the recent last few years.
(b) that the absence of a modern arbitration law in the UAE may continue to encumber the implementation and application of this world-wide accepted treaty; i.e., the New York Convention of 1958 on Recognition and Enforcement of Foreign Arbitral Awards.
The requirements for obtaining recognition and/or enforcement under the New York Convention are simple.
The original agreement referred to in Article (2) of the Convention or a duly certified copy thereof.
Also a certified translation of the award is required if the language of the award is not the official language of the country where recognition and enforcement is sought.
However, under Article III of the Convention, each contracting state is obliged to recognize the foreign arbitral awards as binding and enforce them in accordance with its rules of procedures. Such rules of procedure may be cumbersome sometimes in some states as is the situation in UAE as will be clarified below and may not facilitate a straightforward enforcement of the foreign arbitral awards as the Convention aimed.
To begin, the New York convention does not allow any review on the merits of the award that is sought to be enforced under the Convention.
“As far as the grounds for enforcement of the Award as enumerated in Article V are concerned, it means that they have to be construed narrowly”.
“Judgments and orders issued in a foreign country may be enforced in the State of the United Arab Emirates on the same conditions as prescribed in the laws of that country for the enforcement of similar judgments and orders issued in the State.
The State courts do not have jurisdiction in the dispute in which the judgment has been given or the order made, and that the foreign courts which issued it have jurisdiction therein under the international rules for legal jurisdiction prescribed in their laws.
That the judgment or order has been issued by a court having jurisdiction under the law of the country in which it has been issued.
That the opposing parties in the case in which the foreign judgment has been given were summoned to appear, and duly represented.
That the judgment or order has acquired the force of an accomplished fact under the law of the court which issued it.
Article 236 of the UAE Civil Procedures Law provides that the above mentioned Article 235 is applicable to arbitral awards issued in a foreign country.
The application of Article 2 (a) of Article 235 makes it impossible to enforce any foreign arbitral award in the event that the UAE Courts would have jurisdiction to look in the dispute in absence of an arbitration agreement.
On the other hand, the jurisdiction of the UAE Courts set out under Articles 20 and 21 of the UAE Civil Procedure Law is a matter of a public policy as stated in Article 24 of the same law.
Thus, is it really nearly impossible to enforce a foreign arbitral award considering the above mentioned provisions of the UAE Civil Procedures Law?
Prior to the UAE accession to the New York Convention, the answer was “yes”. It was nearly impossible to enforce a foreign arbitral award within the UAE. However, after acceding to the Convention, the enforcement of a foreign arbitral award in the UAE must be carried out as stipulated in the Convention as will be further elaborated below.
What about the Contradiction between New York Convention and Articles 235 & 236 of the UAE Civil Procedures Law?
Unfortunately for those who are not familiar with the UAE legal system, they may feel that there is no certain answer. But the situation is not so.
Here is the clarification and the answer.
The position of the UAE legislative statutes is very clear.
When there is a contradiction between any statutory provisions with an international treaty to which the UAE is a party, the provision of the international treaties shall supersede the UAE Laws.
By the virtue of Article 238 of the UAE Civil Procedures Law which provides as well for the precedence of an international convention to which UAE is a party over any contradicting provisions set forth in Articles 235, 236 and 237 of the UAE Civil Procedures Law.
Therefore, the answer according to the UAE laws, particularly Article 22 of the UAE Civil Code and Article 238 of the UAE Civil Procedures Law is that the provisions of the New York Convention must have precedence over Articles 235 and 236 of the UAE Civil Procedures Law.
“[…] Article 212 (4) of the UAE Civil Procedures Law states: [(The arbitrator’s award must be made in the United Arab Emirates otherwise, the rules prescribed for the arbitrators’ awards, which issued in a foreign country, shall be followed)]……….
Actually, the wrong conclusion by the Dubai Court of First Instance contradicts one of the main purposes of the New York Convention. As a matter of fact, one of the major drawbacks of the Geneva Protocol and the Geneva Convention was that they put the onus on the party seeking enforcement to prove that the conditions required for enforcement were fulfilled. The New York Convention changed that and put the onus on the party who is challenging the enforcement.
Another wrong judgment was rendered by the Abu Dhabi Court of First Instance in case # 410/2008 which was confirmed by the Abu Dhabi Court of Appeal; however, the incorrect judgment that was rendered by the two lower courts was quashed by the Abu Dhabi Court of Cassation in Cassation No. 679/2010.
The lower courts in Abu Dhabi refused the enforcement of an ICC award by operating the provisions of Articles 235 and 236. The Court of First Instance relied particularly on Article 235 (a) of the UAE Civil Procedures Law and stated that a foreign judgment or award is not to be ratified or enforced in the UAE if the UAE Courts would have jurisdiction to hear the case. The said prejudgment of the lower courts came in contradiction of the UAE commitments and duties under the New York Convention, hence, they were overruled by the Abu Dhabi Court of Cassation in Cassation No. 679/2010 in which the Abu Dhabi Court of Cassation affirmed the precedence of the New York Convention over the Articles 235 and 236 of the UAE Civil Procedures Law. The Abu Dhabi Court of Cassation held that the provision of Article 238 binds the UAE courts to abide by the provisions of any international convention to which the UAE is a signatory.
The Abu Dhabi Court of Cassation emphasized that the New York Convention is part of the UAE Legal System and is the applicable law in respect of enforcing foreign arbitral awards regardless the fact that the New York Convention contravenes to Articles 235 and 236 of the UAE Civil Procedures Law.
Leaving aside the above two mentioned wrong judgments of the Dubai and Abu Dhabi lower courts which were overruled by the respective higher courts, the UAE Courts applied the New York Convention in many cases such as case # 35/2010 (Fujairah Court of First Instance).
Affirmed that as per the Article 238 of the UAE Civil Procedures Law the UAE Courts are to abide to the New York Convention when dealing with enforcement of foreign awards.
Having said the above, the Dubai Court of Cassation in Cassation No. 156/2013 confirmed the lower courts’ judgments in refusing the recognition and enforcement of the ICC foreign arbitral award.
Albeit the fact that the Court of Cassation acknowledged and re-affirmed the applicability of the New York Convention when dealing with enforcement of foreign arbitral awards, the Dubai Court of Cassation relied on Article 21 of the Civil Procedures Law and declined the jurisdiction of the Dubai Courts to enforce foreign arbitral award when the respondent does not have any assets or domicile in the UAE and the contract from which the dispute arose was concluded and performed outside of the UAE. The Court of Cassation stated that the provision of the Article 21 of the Civil Procedures Law is a matter of public policy as per Article 24 of the same law.
Many argued that such ruling was a setback. The ruling actually attracted considerable criticism of many commentators; for example, from two lawyers of Herbert Smith Freehills.
Such disappointment by many critics is actually understandable as it is contrary to the prevailing tendency in all arbitration-friendly jurisdictions in considering the grounds for refusal of recognition and enforcement set forth under Article V of New York Convention are exhaustive and are the only grounds on which enforcement may be refused, the Court of Cassation grounded its judgment on Article III of the New York Conventionwhich provides for enforcement of foreign arbitral awards shall be in accordance with the rules of procedures of the country where the award is sought to be enforced.
Such interpretation of Article III of the Convention is inconsistent with the general trend in the friendly-arbitration jurisdictions specially those who adopted the UNCITRAL Model Law. The provisions of Article 36 of the UNCITRAL Model Law, which is almost identical to Article V of the New York Convention states clearly that the grounds set forth under Article 36 of the Model Law are the only grounds for refusal of enforcement.
The question of was the Dubai Court of Cassation the only Court who relied on Article III of the New York Convention in refusing enforcement and recognition bears asking.
In Monegasque de Reassurance SAM (Monde Re) v NAK Naftogart of Ukraine and State of Ukraine 311 F3d 488 (2002), the US Second Circuit refused the enforcement of a Moscow award on grounds of forum non convenience. In the case the US Court rejected the contention that Article V of the New York Convention sets forth the only grounds for refusing to enforce foreign arbitral awards and held that Article III made the enforcement of foreign arbitral awards subject to the rules of procedures of the courts where enforcement is sought. Thus, the Dubai Court of Cassation in Cassation Number 156/2013 was neither the first nor the only court to interpret Article III as an extra ground for refusal of enforcement.
The disappointment of the commentators is understandable, but such rulings cannot be understood as that the Dubai Court of Cassation has refused to apply the New York Convention specially after taking into account the special nature of the case and of the award that remained for more than twenty years unenforced by many other jurisdictions as stated by one who criticized the said decision.
It is obvious from the above mentioned rulings that, despite the unpopular interpretation of the Article III of the Convention by the Dubai Court of Cassation in Cassation case number 156/2013, the UAE Courts considers the New York Convention as a part of the UAE Legal System and relies on it as the applicable law in respect of enforcing foreign arbitral awards.
Backed by a modern arbitration law namely, the DIFC Law No. 1 for 2008 as amended by DIFC Law No. 6 of the 2013 “the DIFC Arbitration Law, the DIFC Courts would not hesitate to recognize and enforce any award regardless of the jurisdiction in which it was issued including the UAE domestic awards. As a matter of fact, the amendment of the DIFC Arbitration Law was introduced in 2013 by means of Amendment Law No. 6 of 2013 for the purpose of complying with the New York Convention.
The DIFC Court of Appeal confirmed that the only grounds for refusing recognition are those set forth in Article 44 of the DIFC Arbitration Law.
Interestingly enough, Meydan initiated a fresh case before the Dubai Court of First Instance seeking annulment of the DIAC Award that was recognised by the DIFC Court. The Dubai Court of First Instance dismissed the claim and declined its jurisdiction to look into a case for setting aside a domestic award!
Meydan appealed the judgment, and the Dubai Court of Appeal dismissed the appeal; however, it altered the grounds of its rejection. The Court of Appeal grounded its rejection of Meydan’s appeal on the ground of res judicata; i.e., the case was already decided by a previous final court judgment as the Dubai Court of Appeal considered that the DIFC Courts are an integral part of the Dubai Courts. Thus, since the case was already decided by the DIFC Courts, a bar was created for Dubai Courts to look into the case again.
By operation of Articles 238 of the UAE Civil Procedures Law and Article 22 of the UAE Civil Code as clarified and implemented by the UAE Courts, the New York Convention is considered to be a part of the UAE Legislations and Legal System. It was re-affirmed many times by the Dubai Court of Cassation and by the Abu Dhabi Court of Cassation that the applicable law in respect of enforcing foreign arbitral awards is the New York Convention. Notwithstanding the above and considering the unpopular interpretation of Article III of the New York Convention by the Dubai Court of Cassation in Cassation number 156/2013, it is advisable to be prudent when seeking enforcement of a foreign arbitral award against a debtor who does not have domicile in the UAE and the contract from which the dispute arose was concluded and performed outside the UAE.
The confusion created by few wrong judgments of the Dubai and Abu Dhabi lower courts indicates how urgent and important is to have a new modern arbitration law in the UAE considering the outdated related provisions to the arbitration in the UAE Civil Procedures Law and considering the fact that some of those provisions were actually repealed by the ratification of the New York Convention by the UAE.
By contrast, recognition and enforcement of foreign arbitral awards would go smoothly before the DIFC Courts regardless of the jurisdiction in which they were issued. Thanks to the modern and comprehensible DIFC Arbitration Law.
 Capper, Philip, International Arbitration: Handbook, Third Edition, Lovells, London, Singapore 2004, p. 18.
 Scherk v. Alberto-Culver, 417 U.S. 506, 520 n.15 (1973).
 List of the contracting states to the New York Convention, dates of ratifying and reservations made, if any, is available on: http://www.newyorkconvention.org/.
 Federal Decree No. 43 for 2006 signed on 13th June 2006 by the President of United Arab Emirates, His Highness Sheikh Khalifa Bin Zayed Al Nahyan, published in the Official Gazette on 18th June 2006.
 Blackaby, Nigel; Partasides, Constantine; Redfern, Alan; Hunter, Martin (2009), Redfern and Hunter on International Arbitration, Fifth Edition, Student Edition, Oxford University Press, p. 638.
 New York Convention, Art IV (1).
 New York Convention, Art IV (2).
 New York Convention, Art III.
 Blackaby, Nigel; Partasides, Constantine; Redfern, Alan; Hunter, Martin (2009), p. 638.
 Ibid. p. 641. Also see New York Convention, Art v (1).
 New York Convention, Art v (2).
 UNICITRAL Model Law, Art. 36.
 UAE Civil Procedure Code, Federal Law No. 11 for 1992 as amended.
 Art. 236 of UAE Civil Procedures Code: “Provisions of the preceding article shall apply to the arbitration decision passed in foreign countries. Arbitration decisions must be passed on a matter which may be decided on by arbitration according to the law of the country and must be enforceable in the country it was passed in”.
 Art. 20: “Except for the cases involving property outside the country, the Courts of First Instance shall have the jurisdiction over the cases filed against citizens or foreigners who have a home of place of residence in the country”..
 Dubai Court of First Instance- case number 274/2011 filed by a successful party to enforce Award number 128/2009 issued by Singapore International Arbitration Centre (SIAC).
 Geneva Protocol of 1923 and Geneva Convention of 1927 signed under the auspices of the League of the Nations. See: Capper, Philip, International Arbitration: Handbook, Third Edition, Lovells, London, Singapore 2004, p. 17.
 Dubai Court of Appeal, Appeal number 531/2011.
 Abu Dhabi Court of Cassation, Commercial Cassation No. 679/2010, dated 16th June 2011.
 Dubai Court of Cassation, Cassation No. 132/2012.
 Dubai Court of Cassation, Cassation Number 156/2013, Construction Company International and Compagnie Francois d’Entreprises S.A V Ministry of Irrigation of the Government of Sudan.
http://kluwerarbitrationblog.com/2013/10/21/recent-ruling-of-dubai-court-of-cassation-on-enforcement-of-foreign-arbitral-awards-back-to-square-one-it-is/, [last accessed on May 9 2016].
 Stuart Paterson, Mike McClure (2014), p. 1.
 Blackaby, Nigel; Partasides, Constantine; Redfern, Alan; Hunter, Martin (2009), Redfern and Hunter on International Arbitration, Fifth Edition, Student Edition, Oxford University Press, p. 639.
 UNICITRAL Model Law, Art, 36.
 DIFC Law No. 1 for 2008 as amended by DIFC Law No. 6 of the 2013.
 DIFC Courts of Appeal, Banyan Tree Corporate PTE Ltd v Meydan Group Claim No. ARB- 003-2013.
 Dubai Court of First Instance, Commercial Case number 2127/2014.
 Dubai Court of Appeal, Appeal number 577/2015.
The best and most common practice for business partners in recording their rights and obligations on dividing the profits and losses, managing the business and similar issues is to document their understanding in a form of a written agreement called “shareholders’ agreement”.
The present paper approaches the topic of Shareholders’ Agreements along with its legal definition and meaning in general, along with the rationale and explanations regarding the legal regime of the Shareholders’ Agreements. The paper also explains and clarifies the domain of a certain type of shareholders’ agreement which is very common in United Arab Emirates (UAE) called a “Side Agreement” and discusses the effectiveness and legality of side agreements under UAE Jurisdiction. As an application of the issues under debate, the paper makes a series of viable recommendations and draws conclusions regarding such agreements, in light of the newest legislative developments and court practice under the UAE jurisdiction.
A Shareholders’ Agreement [sometimes referred to in the United States (U.S.) as a stockholders’ agreement] has no crystallized definition. It has been given different meanings in different legal regimes. However, one can generally define a Shareholders’ Agreement, as its name suggests, as an agreement amongst the shareholders of a company.
Hence, a shareholder’s agreement is, generally speaking, a contract between two or more shareholders and is treated as a regular commercial contract. It is subject to the articles and by-laws of the corporation and the provisions of the relevant corporate laws.
The agreement may allocate the rights to certain stakeholders to be a director on board as well as decide the composition of the Board.
Roles and obligations of each shareholder.
Financing requirements, quorum requirements and veto rights.
Restrictions on transfer of shares (right of first refusal, right of first offer).
Forced transfer of shares and curtailing of further issue of shares.
Defining Shareholding Threshold: There can be a minimum shareholding a party must have to enjoy the rights as under the Shareholding Agreement.
Under the U.S. law, the shareholders’ agreement is not required to be registered or notarized. Shareholders need to file the Articles of Incorporation and make regular annual filings, as requested in the applicable corporate laws. Furthermore and reiterating, a shareholders’ agreement is an agreement between parties just like any other business contract and is used for internal purposes only. It should be stored in the company’s minute book.
By comparison, under the UAE law, although mandatory to notarize and register the Memorandum of Association (MOA) of the company, the latter shall contain all major points such as the shares in the ownership, the distribution of the losses and profits, the responsibilities and liabilities of the manager, etc.; however, it is not prohibited for the shareholders to establish an even more detailed shareholders’ agreement as far as it is not in contradiction with the laws.
There are many good reasons for having a shareholders’ agreement despite the fact that the officially registered Articles of Association are, in general, sufficient to prove the general rights and obligations of the partners. The shareholders’ agreement regulates the internal structure of the company in more details and grants the partners more flexibility and privacy in documenting their understandings.
One can easily highlight three reasons for having a shareholders’ agreement in addition to the Articles of Association of a business set-up.
The understandable logic behind using a shareholders’ agreement in addition to the Articles of Association is the fact that the shareholders’ agreement is a private document between the parties. It can be made subject to express confidentiality restrictions and tailored to meet the shareholders’ needs. By contrast, the Articles of Association is a public document available for inspection by members of the public in the Companies Registration Office. This makes the Articles of Association an unsuitable means for dealing with matters such as the remuneration of directors or other sensitive internal management matters.
The Articles of Association can only bind a shareholder in his capacity as shareholder. By contrast, shareholders’ agreements may be used to give rights and impose obligations on shareholders; e.g., binding a person in his capacity as director or as a creditor or agent. However, one needs to be very careful in imposing obligations on a party in his capacity as a director in the context of the duties required by a director to the company.
The Articles of Association can be amended by way of a special resolution. By contrast, unless a shareholders’ agreement expressly provides for a specific variation mechanism, it can only be varied by unanimous agreement of the parties.
A shareholders’ agreement generally provides more flexibility with respect to changing arrangements between shareholders. It is, hence, easier to amend the shareholders’ agreement than to change the constitutional documents of a company.
In the UAE, the un-registered or unofficial shareholders’ agreements (internal agreement between the partners) sometimes include provisions that contradict with the mandatory laws, as well as contradicting the provisions of the registered memorandum and Articles of Association (the company’s constitution). This type of hidden and internal agreement is generally called a “side agreement”. The predominant meaning of the side agreement in the UAE is that in the side agreement document, the real shareholders of a business set-up deal may be in contradiction with the provisions of the Company’s constitution or what is called the Memorandum of Association (MOA). The MOA of the company, which has to be notarized and registered at the Commercial Register, must be in accordance with the Commercial Companies Law that provides for certain restrictions for foreign ownership in companies that are incorporated on the mainland. Foreign investors usually trust a local person to register the majority of the shares (51%) under his name in order to satisfy the minimum quantum that is required to be owned by UAE nationals in a mainland company and at the same time they sign with such UAE citizen what is called a “side agreement” in which they document the real shareholders and their rights and obligations.
Therefore, the side agreements represent the prevailing and most common way-out for many foreign investors operating in the UAE in order to overcome the prohibition of 100% foreign ownership in mainland companies. In order to surmount a foreign investors’ lack of control over an LLC and protect their investment, a custom has developed pursuant to which foreign investors enter into side agreements with the UAE national that hold the 51% of the LLC’s shares.
The side agreements are drafted in many different ways, either simply stating the actual ownership or more complicated. Regardless of the way it is drafted, it is in reality a trust and sponsorship arrangement, pursuant to which the UAE national agrees to act as trustee and holds 51% of the shares of the LLC for and on behalf of the foreign investor as the beneficial owner thereof.
The UAE national is paid an annual sponsorship fee.
The foreign investor contributes the entire minimum statutory required share capital, but in reality the foreign investor is the one that holds 100% of the share capital.
When a dispute arises between a foreign investor and the fictitious UAE partner, the crucial matter of concern is which agreement the court shall recognize. Is it the MOA officially notarized and registered in the Commercial Register; i.e., “the apparent agreement” or the side agreement?
In order to answer such a question, the relevant laws and legislations must be checked, mainly the UAE Civil Code, the Commercial Company Law (both the old one, Law number 8 of 1984, and the new one, Law number 2 of 2015, the provisions of the new law yet to be tested in the courts), and the Anti-Fronting Law. Most importantly is to examine the practice of the UAE courts in applying these laws.
Article 22 of the old Commercial companies Law, Law number 8 for the year 1984, which has been recently abolished and replaced by Law number 2 for the year 2015, provided for the UAE nationals’ shares to be at least 51% of the total shares in any LLC established on the mainland.
The Civil Code, being a general law, refers to the “true contract” that reflects the actual relation as the binding agreement between the contracting parties.
The UAE courts have been countless times seized with actions to recognize the side agreement that contradicts with the registered MOA. The practice of Dubai Court of Cassation and the High Federal Court, except in few occasions, has been to recognize conditionally the true and actual contract between the parties (the side agreement).
“…the plea is rejected, because – as it has been established by the practice of this court (the Court of Cassation) – the meaning of fictitious contract is that of an agreement between the contracting parties to conceal the true relation by an apparent contract. Thus, by applying the provision of article 395 of the Civil Code, the apparent contract has no existence between the parties and the true and hidden contract is the valid contract between them. And whereas the apparent contract conceals a contract that contradicts the law, such true and concealed contract shall be null and void.
The Court of Cassation has recognized the side agreement, the true and actual contract, but it has also mentioned two important points.
Such side agreement, which provisions are in contradiction with the law, is null and void.
“….the share of the UAE national must not be less than 51% …and whereas it is proven that what was stated in the MOA is not what is the actual situation, ….which was made in order to have the company established in accordance with the law, ……., thus the company shall be considered null and void and it is just an actual partnership between the disputants, …, therefore the appellant has the right to claim from the respondent in the latter personal capacity any right he might have…., and whereas the appealed judgment did not consider such fact, such judgment is overruled”.
It also means that the side agreement is null and void, thus the provision of articles 274 and 275 of the Civil Code shall apply; i.e., restore the situation that was existing prior to the two contracting parties have entered into a null contract.
It is worth noting that the practice of the Dubai Court of Cassation in recognizing the concealed contract; i.e., the side agreement and setting aside the apparent contract; i.e., the MOA, has been always conditional to have such side agreement documented in writing.
Albeit the fact that the commercial transactions can be proved by all methods of proof according to Article 35 (1) of the UAE Code of Proof (Law number 10 for the year 1992), the Court of Cassation, relied on Article 10 of the old Commercial Companies Law (Law number 8 for the year 1984) to decline any attempt to prove anything that is contradicting with what it is stated in the MOA, unless it is made in writing.
Hence, we can say that the Dubai Court of Cassation made it clear that as an exception to what is provided for in sub-clause (1) of the Article 35 of the UAE Code of Proof, the only way to prove anything that is in contradiction with the MOA, such as what is usually stated in the side agreements, is to have the side agreement documented in writing.
Having said the above and before quickly concluding that it is still safe to rely on the side agreements as the courts are recognizing them as far as they are in writing, a conscious consideration must be made, particularly in light of the promulgating of the New Commercial Companies Law number 2 for the year 2015 and in the light of the Law on the Combating of Commercial Concealment number 17 for the year 2004, which implementation was adjourned.
The new Commercial Companies Law, Law number 2 for the year 2015, in contradiction to what was hoped and expected, continues to prohibit the 100% foreign ownership in the mainland companies, and repeated in Article 10 (1) of the new law the same proviso that was stated in Article 22 of the old law. Both of which provides for a minimum of 51% of the shares to be owned by a UAE citizen.
(a) Adding the new provision in Article 10 that replaced Article 22 of the old law, stating clearly in sub-clause (3) of the former article that any agreement to the contrary shall be considered null and void.
(b) Under the new Law (Article 353) the company shall be fined of minimum AED 20,000 and maximum AED 200,000 if it was agreed between the partners that the UAE nationals’ ownership is in reality less than the minimum quantum of 51%. In other words, under the new Commercial Companies Law, the side agreement is considered a crime punishable by monetary fine.
One may say that the side agreement was also considered null and void under the old law as it contradicts the mandatory provision of Article 22 of the said old law, and also it was punishable by a fine of minimum AED 10,000 and maximum AED 100,000 as per Article 323 (4) of the old law. Thus, why now an extra consideration must be paid before interring into a side agreement or practicing business in contradiction with the new commercial companies’ law?
Concealment: to enable the foreigner – whether natural or juristic person to practice any economic or professional activity that is not permissible for him/it to be practiced in accordance with the law and decrees of United Arab Emirates, whether for his/its account or in participation with others, or to enable him/it to evade all liabilities entailed on him/it.
Concealer: any natural or juristic person that enables the foreigner – whether a natural or juristic person – to practice any economic or professional activity which is not permissible for him/it to practice within United Arab Emirates.
Concealed Person: any foreigner, whether a natural or a juristic person, practicing with the assistance of the concealer any economic or professional activity that is not permissible for him/it to practice within United Arab Emirates.
Article 2 of the law specifically prohibits a UAE national from concealing a foreigner or allowing a foreigner to use his or her name or license. A UAE national who contravenes the law faces a fine of up to Dh100,000 (per concealment), for a first offence, and a maximum prison sentence of two years and an additional Dh100,000 fine for each repeated concealment. The foreigner will be subject to the same penalties and deportation after serving the prison sentence. In addition, a conviction will result in the revocation of the UAE national’s license and a ban on carrying out the activity listed on the license for a period of two to five years.
Cabinet Resolution 22912/2007 has postponed the implementation of the law until December 31 2009. The announcement for implementation of the Law has not yet been made. People at that time concluded that although the Concealment Law was enacted and from a theoretical point of view is enforceable, in practice, its enforcement was adjourned to allow anticipated and hoped for changes in legislation to provide improved protection for both UAE businesses and foreign investors. Such hoped for changes in legislation, in the light of the new commercial company’s law was not introduced so far, hence, it is unpredictable when the anti-fronting law will be implemented.
The new Commercial Companies Law, once issued, continues to ban 100% foreign ownership in the companies that are established on the mainland, and at the same time it is clearly stipulating, without any ambiguity, that certain activities and concealment are criminalized with applicable penalties. The anticipated and hoped for legislative changes were not introduced; however, it is likely to start implementing the Law on the Combating of Commercial Concealment number 17 for the year 2004 as well as for the public prosecutor to start prosecuting the companies with their ownership structure is in contradiction with the law.
Given the fact that the UAE is a civil law legal system and not a common law legal system which is driven by the notion of stare decisis, the UAE Courts are not bound to follow the cassation courts’ decision as precedents; hence, the practice of the courts may change and can lack uniformity.
We can recapitulate that the shareholders’ agreement is a very useful and advisable manner, in specifying in more details with more flexibility the rights and obligations of the partners towards each other; however, a careful consideration must be made before entering into the certain type of shareholders’ agreement; i.e., the side agreement which is very common in UAE and which usually documents facts and agreements to the contrary of the requirements of the law.
The practice of the UAE courts till date is to recognize the true contract between the parties with respect to their rights and obligations towards each other even if such true contract, the side agreement, is rendered null and void. However, the violation of the national ownership requirement which usually is documented in a side agreement could attract fines and penal sanctions under the Anti-Fronting Law and the Commercial Companies Law. Therefore, if the shareholders’ agreement is intended to be used in the UAE, it must be conducted in a careful manner from the foreign shareholder perspective. Because the law requires a minimum 51% Local Shareholding, even if there are a number of mechanisms that can apply, there will always be a risk involving a UAE National silent partner’s 51% shareholding.
The foreign investor can enter into alternative common UAE market business set ups, including Foreign Branch, Free Zone Company, and Commercial Agency or practice the professional activities that can be 100% foreign ownership.
On the other hand, in an emerging economy such as the UAE and considering the vast developments achieved in all aspects including the legal system in a very short period of time, there is still strong optimism to have soon further legislative amendments to allow more friendly environment for 100% foreign ownership investment on the mainland in addition to the free zones or at least to restrict the requirement of minimum 51% UAE national ownership to certain number of sensitive economic activities.
 Art. 22 of the Federal Law no. 8 of 1984- Without prejudice to commercial activities reserved only to nationals, as may be prescribed herein or in any other law, it is a requirement for the establishment of a company to have one or more national partner(s) whose share in the company’s capital is not less than 51%.
Art. 10 of the New Commercial Companies Law, Federal Law no. 2 of 2015: Any company established in the Emirate shall have one or more UAE partners holding at least 51 per cent of the share capital of the company.
Any transfer of the title of any share of a partner that may affect the percentage as set out above shall be invalid.
 Article 274. – If the contract is cancelled automatically or by the act of the parties, the two contracting parties shall be restored to the position they were in before the contract was made, and if that is not possible, compensation shall be ordered.
Art. 275. – If the contract is dissolved by reason of being void or cancellation through any other cause and each of the parties is obliged to return that which he has obtained, it shall be permissible for each of them to detain what he has received as long as the other party has not returned what he has received from the former, or provided security for such return.
 See note 6. Also, Art. 353 of the New Commercial Companies Law provides that: A fine of at least AED 20,000 (twenty thousand), but not more than AED 200,000 (two hundred thousand) shall be imposed on every company that violates the provisions in connection with the percentage of contribution by the UAE nationals in the capital of the companies or the percentage of UAE Directors in their Boards. By comparison, Art. 323 of the Old Commercial Companies Law provided that: Without prejudice to a more severe punishment prescribed in any other law, he shall be punished with a fine of not less than ten thousand Dirhams and not more than one hundred thousand Dirhams: […] 4) Any company who violates the provisions concerning the established portion of the U.A.E nationals in the company capital share or the manager or Chairman of the board of directors therein.
Although published in 2017, this article has been written in 2015, before the entry into force of the New Commercial Companies Law (CCL). We will post new articles and updates on the relevant applicable legal provisions and their regime, as reflected in the New CCL.

References: v. 
 Art. 36
 Art. 236
 Art. 20
 Art. 22

Art. 10

Art. 275
 Art. 353
 Art. 323