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Dispute Resolution For UAE SMEs: Get It Right The First Time

Dispute Resolution For UAE SMEs: Get It Right The First Time
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This article was co-written with David Pang, Associate, Bracewell LLC, Dubai.

Small print: so often either unread, or misapplied. This is particularly true when it comes to dispute resolution provisions in contractual relationships.

It is vital for any business providing services or goods that it has in place robust terms and conditions, details that are both clear and unambiguous and properly incorporated into the trading relationship with their counterparty.

The fallout from the last financial crisis highlighted many of the problems associated with litigating so-called “back-of-an-envelope” contractual arrangements. Consequently, these days we are seeing more embrace the value of properly drafted legal agreements that are fit for purpose. However, based on our own experiences, this has yet to truly resonate within the small and medium-sized enterprise (SME) business community, whether for lack of legal advice, cost associated with properly drafting contracts, or perhaps a “head in the sand” and deal with it when it becomes a problem mentality. 

Worryingly, we continue to see UAE SMEs conducting business on less than ideal terms and conditions, which are a “ticking time bomb” in the event of a dispute arising. In particular such agreements have led to significantly more complicated and protracted litigation where the underlying contractual provisions between parties are either silent, confused, or both.

Related: The How-To: Licensing Your Business In The UAE

Whilst there are numerous areas that need to be covered off in a well-drafted set of terms and conditions, the purpose of this article is to concentrate solely on contractual provisions relating to governing law and jurisdiction provisions based on the issues that we regularly encounter. 

Problem number one that we regularly witness are contracts that are silent on the issue of governing law and jurisdiction. Whilst this is not a huge issue where the parties to the contract and the performance of the contract are all in the same geographical place, it can become a “mess” where parties are based in different countries and there are arguments about where performance happens. 

Problem number two is where multinationals active in other parts of the world impose terms and conditions in the UAE, or elsewhere in the GCC region, that may operate perfectly in the jurisdiction in which they were drafted, but may not be suitable for the local market. For instance, if both contracting entities are based in Dubai, does it make sense to have to litigate in England and Wales only to have to bring a judgment of the English and Welsh courts back to Dubai, which may not be automatically enforced by the local courts? Furthermore, does it make sense to have litigation outside of the UAE in these instances from a management time perspective, or the costs associated with the appointment of counsel. Perhaps therefore it is much better to consider options for litigation or arbitration in the UAE.

Problem number three that we commonly see is parties not being aware of their options from a dispute resolution standpoint, particularly given the growth in litigation forums in the UAE, with the advent of the common law English model courts in the Dubai International Financial Centre (DIFC) and now the Abu Dhabi Global Market.

Related: The How-To: Setting Up A Business In Abu Dhabi

For the SME community (as for businesses in general) one of the principal day-to-day concerns is getting paid for the provision of goods and services, and what remedies are available where payment is not forthcoming. 

In general, litigation for debt recovery in the local UAE courts is costly and lengthy with the added complication of proceedings being carried out in Arabic and restrictions on the appointment of lawyers as a consequence of rights of audience limitations. Frequently, for smaller debts (i.e. under AED100,000) the cost benefit analysis of pursuing the debt is negligible and for such smaller amounts (which for some start-ups may be the difference between making payroll and not) the cost of recovery will be greater than the debt itself. 

One potential solution in Dubai (at least) is to utilize the DIFC Courts’ Small Claims Tribunal (SCT). The SCT has been specifically set up to deal with small claims (up to AED1,000,000) in an English language, common law court. Importantly, there is no requirement to appoint lawyers to represent parties in a SCT case, albeit it probably makes sense to have a lawyer’s opinion on the merits of a case before pursuing one. Filing fees in the SCT are currently 5% of the claim amount, or a minimum of AED 500.  Consequently, the costs of pursuing a debt are relatively low and there is a greater certainty as to outcome.

Presently, a judgment of the SCT is treated as a judgment of the Dubai courts and is therefore automatically enforceable in Dubai. For a Dubai SME servicing non-UAE governmental or quasi-governmental clients based in Dubai, it would be prudent to elect for the jurisdiction of the DIFC courts and the SCT in particular. Typically in these types of circumstances, such contracts will be subject to English law too. 

Giving careful and bespoke thought to your governing law and jurisdiction clauses can help provide you with the best possible scenario for resolving disputes, minimizing cost, and reducing lost management time.  Governing law and jurisdiction provisions should always be considered on the basis of who your customer is and where their assets are. By undertaking this simple analysis, a significant amount of cost, as well as time, can be saved. 

Related: An Introduction To The Legal Landscape Of The UAE