REUTERS | Ahmed Jadallah

GCC investment laws: to arbitrate or not to arbitrate, that is the question (Part 2)

Part 1 of this blog provided a brief introduction to the existing landscape of investment legislation in the Gulf Corporation Council (GCC) countries, highlighting that Bahrain is presently the only country that remains without a precise investment regime. This Part 2 aims to provide an overview of the main provisions of the United Arab Emirates (UAE) Federal Decree Law No. 19/2018 on Foreign Direct Investment (FDI Law), which entered into force on 1 October 2018, including its dispute resolution provisions. The FDI Law is dedicated to the promotion of inflows of foreign direct investment into the UAE. As such, the FDI law aims for both industrial and service-sector diversification in anticipation of steadily diminishing oil resources. It does not apply to the free zones, whether financial (such as the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM)) or non-financial (such as the Dubai Multi Commodities Centre (DMCC)). Article 2(3) of the FDI Law allows the acquisition of 100% foreign ownership in digression from the general rule under the UAE Commercial Companies Code that restricts foreign onshore ownership to 49% and requires a majority local partner.

Investments under the FDI law

Investments under the FDI Law are restricted to a number of sectors, contained in a so-called positive list, which is presently under preparation by the UAE cabinet. Pending publication of that list, applications for investment projects are invited by qualifying investors in relation to projects that are not contained in the so-called negative list (Article 7(2), FDI Law). The negative list contains sectors of the economy that are presently excluded from foreign direct investment and that are reserved for local investment only, such as:

  • The exploration of oil and production of petroleum products.
  • Financial and banking services.
  • Insurance services.
  • Utilities.
  • Postal services.
  • Land and air transport.
  • Printing and publishing services.
  • Commercial agencies.
  • Medical retail services.

This list is disconcertingly wide and arguably imposes greater limits on foreign direct investment than the other GCC investment laws. That said, the FDI Law embraces a wide definition of foreign capital that may be invested in licensed investment projects by foreign investors, including the following (Article 4(1) and (2), FDI Law):

  • Cash assets.
  • Profits from foreign direct investment and reinvested in an investment project.
  • Local and foreign securities and commercial papers.
  • Fixed assets.
  • Intangible rights, in particular intellectual property.

Investment benefits and guarantees

A qualifying investor enjoys the following benefits and guarantees:

  • Free transfer out of the UAE and repatriation of funds generated from the investment project, including in particular net annual profits, the proceeds from the liquidation or sale of the investment project; the free transfer of salaries and employment-related entitlements outside the UAE (Article 8(2)-(3), FDI Law).
  • Transfer of ownership of the investment company to a third party (Article 8(5), FDI Law).
  • Protection from expropriation, subject to public interest considerations and fair compensation (Article 9(1), FDI Law).
  • Protection of the usufruct rights of the investment (Article 9(2), FDI Law).
  • Protection from confiscation, sequestration or freezing of any funds used in the investment project (Article. 9(3), FDI Law).

The FDI Law does not contain any investment incentives, such as tax exemptions or exemptions from customs duties, nor does it contain any provisions on equal and non-discriminatory treatment between local and foreign investors, provisions that are a common staple of the bilateral and multilateral investment instruments at both regional and international level.

Dispute resolution

One of the core benefits under the FDI Law is the availability of alternative dispute resolution (ADR) in the event of a dispute between a licensed investment company and the UAE as the host state:

“Article 12 – Settlement of Disputes

1. Without prejudice to the right to litigate, disputes and conflicts that may arise in relation to a Foreign Direct Investment Project may be settled by alternative dispute resolution.

2. The cases of Foreign Direct Investment Projects shall be heard expeditiously by the competent courts in the United Arab Emirates.”

The term “alternative dispute resolution” or “ADR” is arguably used in its wider sense and as a ready reference to any form of dispute resolution that may operate as an alternative to litigation. In the UAE, the right to court, that is the right to litigate, is understood as a fundamental right, to which recourse to any form of ADR operates as an exception. In this sense, ADR is generally taken to be an exceptional form of dispute resolution in digression from recourse to the courts. Thus, ADR within the meaning of the FDI Law is likely to encompass arbitration as well as other forms of ADR, such as mediation (or conciliation) and expert determination.

That said, it is not clear how an arbitration process is intended to operate under the FDI Law. A closer look at the dispute resolution clause reveals that it is fraught with a number of pathologies and as such is unlikely to work seamlessly in practice (unless both the licensed investment company and the UAE agree on the terms under which their dispute is to be referred to arbitration):

  • ADR/arbitration: is only an option in the terms of Article 12(1), FDI Law (“may be settled by alternative dispute resolution”), which remains subject to the fundamental right to go to court; in other words, even if a licensed investment company triggered arbitration under Article 12, FDI Law, the UAE could still insist on subjecting the dispute to the competent UAE courts instead (“[w]ithout prejudice to the right to litigate”).
  • UAE courts: remain a mandatory forum for the resolution of disputes under the FDI Law under Article 12(2), FDI Law (“cases of Foreign Direct Investment Projects shall be heard […] by the competent [UAE] courts […]”).
  • State consent: would be required for a valid reference to arbitration; in practical terms, this means that a licensed foreign investment company will not be able to take a respondent UAE state entity to arbitration without the UAE’s express agreement to arbitrate (for example, Article 36 of Dubai Law No. 6 of 1997, which requires exemption from the Ruler of Dubai for a dispute resolution provision contained in a government contract and providing for arbitration abroad read together with Dubai Instruction Order of 6 February 1998; Articles 8 and 9 of Dubai Law No. 32 of 2008; and Council of Ministers Decision No. 406/2 of 2003, dated 15 September 2003, which requires the prior approval from the Council of Ministers after review of the Ministry of Justice of any arbitration clause contained in a contract concluded by a federal government department).
  • Arbitration process: would be ad hoc and as such conducted under the UAE Federal Arbitration Law, rather than under the auspices of an arbitral institution (with all the appurtenant procedural difficulties).

However, it is important to bear in mind that some emirates require a formal notice to be served on the Legal Affairs Department before suing a governmental authority, whether in arbitration or before the courts (for example, for the situation in Dubai: Article 3D of Dubai Law No. 3 of 1996, as amended by Dubai Law No. 10 of 2005). If the Legal Affairs Department does not reply within 30 days from the filing of the notice, the claimant may commence proceedings before the UAE courts or the competent arbitral forum. In addition, there are a number of limitations on securing attachments over or enforcing awards against governmental property (for example, Article 247, UAE Civil Procedures Code; and Article 103, UAE Civil Code). That said, arbitral awards are readily enforceable against government-owned private incorporated entities, such as LLCs owned by, for example, the Ruler of Dubai.

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