The Legal Viewpoint: How Business In The UAE Can Emerge Stronger (And Smarter) Out Of The COVID-19 Crisis
It's no secret that companies in the UAE have had to deal with a plethora of legal challenges as they made their way through the course of the COVID-19 crisis- now they must find ways to navigate through the aftermath.
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Companies in the UAE have faced numerous legal issues due to the impact of the COVID-19 crisis, and since a few of them have continued to persist as we move into "the new normal," the very first piece of advice that Jehad Kazim, Vice President of Legal Services, Dubai Chamber of Commerce and Industry, wants to offer the country's business community is that they make it a point to stay abreast of the latest requirements and developments on the regulatory landscape.
"The COVID-19 pandemic has impacted companies around the world in an unprecedented way," Kazim explains. "Businesses in the UAE continue to navigate new challenges and address legal issues, such as non-payments and the inability to fulfill contractual obligations among many others, both things that have become more common over the last year." Keeping this in mind, Kazim says business owners in the UAE need to be more proactive when it comes to legal due diligence when entering into new agreements, noting that Dubai Chamber can be a great resource for valuable guidance on key legal issues, as well as mediation services to help them to settle their commercial disputes amicably.
Jehad Kazim, Vice President of Legal Services, Dubai Chamber of Commerce and Industry. Source: Dubai Chamber of Commerce and Industry.
It's no secret that companies in the UAE have had to deal with a plethora of legal challenges as they made their way through the course of the COVID-19 crisis- just ask Suraya Turk, Managing Partner at Legal Circle. Turk does not hesitate when answering that employment matters, from salary reductions to termination and redundancy of employees, have become a predominant topic on her daily to-do lists. "The Ministry of Human Resources and Emiratization Resolution No. 279 of 2020 concerning the employment stability in private sector establishments was issued on March 26, 2020, and it remains in force to help address the employment issues and provide guidance to companies impacted by COVID-19," she says. "The need for this Resolution highlights the prevalence of these issues, but also the UAE's proactive and effective response to managing them."
Rima Mrad, Partner at BSA Ahmad Bin Hezeem & Associates LLC, echoes Turk's sentiment, noting how the unprecedented nature of the COVID-19 crisis took many companies off guard, and some of the decisions made then have led to problems in the long run. "These issues happened especially in the first phase, meaning the second and third quarter of 2020, when employees were requested to work from home," she notes. "Companies at that time were overwhelmed with concern, and they moved ahead with the application of different measures to address the uncertainties relating to the impact of COVID-19 over the long term, which included wages reduction, placing people on annual leave or unpaid leave, and layoffs. Many employees were initially accommodating; however, this created a pipeline of major labor disputes. This has not stopped, especially now that we can note the difficulties that companies are facing to bring employees back to offices."
Another key challenge the private sector faced is now evident through an increase of lease disputes on both residential and commercial properties, which Turk notes is due to tenants either renegotiating, defaulting, or breaching their contracts. Mrad adds that lease disputes were indeed predominant among retailers, entertainment venues, and F&B outlets, since they were the ones most affected by the precautionary measures imposed on them in connection with COVID-19. "Many companies had to default on lease payments, which caused them to be in dispute with their landlords," she explains. "We can see an increasing number of bounced check cases relating to leases, and the ongoing challenge to negotiate COVID-19 relief measures and their relevant timelines."
Suraya Turk, Managing Partner, Legal Circle. Source: Legal Circle.
In addition, Mrad points out that many companies had to be in default as a result of the global impact of the coronavirus pandemic, especially those working in contracting, logistics and trade, as they were affected by the changes to logistical routes as well as delays in shipping, deliveries, and supply. "These defaults pushed companies to be in breach of their contractual obligations, and some of them are still dealing with the exposure that they have been subjected to as a result of this," she explains. "Many companies were also in default of their obligations to settle their due payments to the banks from whom they obtained finance or facilities."
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In the early periods of the COVID-19 outbreak, Turk says, one of the most widely debated topics was whether the pandemic could have been considered a force majeure situation in supply contracts, lease agreements, and "even employment contracts to terminate/ cancel contracts or be used as a defense to limit liability." Mrad adds, "The use of force majeure as a basis to be in default under a contractual obligation had to be used with caution in such circumstances, especially for businesses that were not heavily impacted by COVID-19 restrictions i.e. not required to close down." But in the UAE, whether COVID-19 can indeed be seen as a force majeure event depends on a number of factors.
"With regards to force majeure provisions in contracts, there is no specific definition in the UAE civil code for force majeure, although it is widely utilized in business as well as recognized in the courts," Turk explains. "The Civil Code does provide for certain requirements that must be met for an event to be classified as force majeure in a contract where it renders performance impossible. If it is only partially impossible, then the part of the contract it applies to will be extinguished. Both allow for cancellation of contracts. The UAE Courts have discretion over deciding whether an event can be considered a force majeure event, and they often take into account foreseeability, unavoidability, controllability, and impossibility when making a decision."
Rima Mrad, Partner, BSA Ahmad Bin Hezeem & Associates LLC. Source: BSA Ahmad Bin Hezeem & Associates LLC.
For this reason, Turk's general advice to all businesses today is not stick to using standard contract templates that they have used in the past, but to review and refresh the wording in their contracts in order to reflect the current circumstances. "It is necessary to build contingency clauses into your contracts to ultimately anticipate all the possible commercial and legal risks, and then mitigate those in the most commercially viable way," she says. "The most basic universal premise in commercial law is that the more specific and clear the language, then the more specific and clearer the intent of the parties to the contract. In the UAE, the commercial principle is that that a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith. Therefore, the content of the contract is an imperative consideration, and the clearer the contract, the more likely it is to be enforceable."
Mrad agrees that the drafting of contract templates should not be uniform across the board, adding that having a proper risk assessment on a macro and micro level can equip companies to tailor contracts to fit their needs and expectations. "Overall, COVID-19 has taught us now more than ever that risk management and risk analysis are key for sustainability," she explains. "Risk management means that each company shall address the main threats that could cause interruption or termination of the business, or could at least cause damage. The risks are identified and assessed from probability of occurrence versus expected impact, and then a plan is formulated to contain the risk or to mitigate it where possible. In some instances, companies may decide to accept a risk, which is totally normal, provided they are able to absorb it."
For those entrepreneurs who found the negative impact of the COVID-19 crisis impossible to overcome, bankruptcy became a serious consideration, Turk says. In the UAE, there are three options for a business facing an irresolvable liquidity crunch: preventive composition, restructuring, and formal bankruptcy. "The first is an early remedy, where debtors who are still solvent can reach settlements with creditors and the debtor takes on a more proactive role," she explains. "The second one occurs where a bankruptcy application is brought to court by the debtor itself or by any of its creditors with a restructuring plan. Finally, if the other two options are unsuccessful, the court will proceed with formal bankruptcy of the debtor. The courts may allow the debtor to continue its business until bankruptcy is declared."
However, since the beginning of the COVID-19 pandemic, Turk continues, there have been various various amendments to the Bankruptcy Law brought forth by the UAE Government. In October 2020, the UAE Cabinet approved a further amendment (Amendment Law) to Federal Law No 9 of 2016 (the Corporate Bankruptcy Law), which followed previous amendments of the Corporate Bankruptcy Law in 2019 (pursuant to Federal Law No 23 of 2019). Bankruptcy proceedings were addressed in a new chapter (Chapter 15) to Section Four ("Bankruptcy Proceedings during the Emergency Financial Crisis") of the Corporate Bankruptcy Law.
"This means that The Bankruptcy Law introduced a new chapter for Emergency Financial Crisis, where, if the defaults persist for more than 30 business days as a result of Emergency Financial Crisis, a business is not required to file for bankruptcy, and can instead opt to file an application during an Emergency Financial Crisis," Turk elaborates. "If the debtor files, the Court shall not take any precautionary measures against the debtor's assets that are necessary for operation of business during the crisis period. A debtor may request a period of not more than 40 business days to negotiate a settlement with their creditors, and the settlement period should not exceed 12 months. Once a settlement is reached with creditors holding at least two-thirds of total debt, the agreement becomes binding on all creditors."
With Mrad having observed the most frequent challenges in bankruptcies and the common features between the different scenarios, she believes the best legal approaches that will allow businesses to address bankruptcy and restructuring can be summed up in a few pieces of advice. Firstly, it is to assess the financial and operational challenges on an ongoing basis. "It is very important for businesses to know where they stand, and what their options are," Mrad says. "This will allow them to know how to move forward. We frequently notice that companies tend to make a lot of legal mistakes once they start facing financial problems, and this usually aggravates their situation and accelerates their downfall. Proper management and assessment of the situation could allow companies to prepare and direct their resources on what matters."
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Secondly, Mrad says, companies should anticipate disputes and try to prevent as many problems as possible before they effectively become real. Thirdly, she advises companies in default to try to build connections with their creditors, and aim to follow a clear plan that will allow them to make a serious commitment that they can respect. Her fourth piece of advice -to be close to lenders and banks- supports this sentiment. "Unlike what is usually expected, companies tend to hide from their financial institutions when there is a negative change in their financial situation, and therefore, we can notice that it is common for banks to be among the first creditors to pursue bankruptcy claims against their borrowers," Mrad explains. "By building a strong and trusting relationship with their banks, companies will have a shield that will allow them to address any unexpected financial difficulties, including sudden issues they face in situations similar to the ones that occurred when COVID-19 was confirmed as a pandemic."
Lastly, she would advise any company in default to reach out to private funding or consider the possibility of a merger. "It is very useful for companies to always have a proper and clear systems and controls that will allow them to be appealing to private funding and merge/acquisition opportunities," Mrad says. "This is more relevant for SMEs, as this could be a good strategy to overcome challenging financial situations."
The Executive Summary: Legal tips for entrepreneurs from Suraya Turk, Managing Partner of Legal Circle
1. Get legal advice "Whilst this may seem cliché, if you are serious about being compliant with the laws, it is imperative to seek counsel, as your lawyer's role is to support you to keep up to date, advise on changes and developments, and ensure you are complying with them."
2. Start up right "It is vital that your foundations are solid, and you have thought through your business plan for the short and long term. This will allow you to make strategic decisions on how you establish yourself from your legal structure, to onboarding employees and founders, fundraising through to exit. With a solid and clear plan, compliance requirements are more easily identified, and you can prepare against and mitigate risk."
3. Ready, set, contract "Your contracts are a priority in your business, as these generate revenues, and, of course, if breached, can cause losses. Make sure the terms are clear and specific, and protect your business by anticipating the possible risks and mitigating them."
The Executive Summary: Legal tips for entrepreneurs from Rima Mrad, Partner at BSA Ahmad Bin Hezeem & Associates LLC
1. Don't be afraid to change "Embrace the change that COVID-19 has caused, including digital transformation, and reflect it in the way you deal with their clients, suppliers and employees."
2. Be ready for any risk "Ensure that you are ready to address the risks that your businesses are exposed to post-COVID-19, including cyber threats, data protection, employee engagement, brand visibility and marketing, to maintain or grow your market share."
3. Reinvent and reformat "Revise your business model to address the change in the way products and services are being offered, and cater for your new clients base. This will involve changing overall systems and accommodating usual controls, to the new ways of conducting business operations."
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