The Legal System of the Dubai International Financial Centre

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Staff Writer, TLR

Published on July 14, 2023, 17:40:59


Finance, Dubai

On 6th May, His Highness Sheikh Mohammed bin Rashid Al Maktoum issued Law No. (5) of 2021 regarding the Dubai International Financial Centre (DIFC). This new law gave a wider ambit to DIFC, and its objectives now include, advancing economic growth, developing, and diversifying the economy, enhancing the GDP contribution of the financial services sector, attracting international entities to establish a business in the DIFC and promoting investment into Dubai. This law and increased autonomy to the DIFC, is another step in furthering the growth of the DIFC into one of the most critical financial zones in the world. The increased international importance of the DIFC over the years can also be attributed to its unique legal system, specifically curated to cater to international financial transactions. This article aims to explore the legal design of the DIFC and analyse its significance in terms of the economic success of the zone.

Establishing the DIFC

Conducting international business transactions under traditional Islamic legal systems can be complex, since the principle of 'Gharar', which forbids uncertainty in contracts can serve as the source for numerous lawsuits, especially considering the conflict of western business and legal regulations that are mainly based in common law, with those of the Arab World, which are civil and Islamic in Nature. Recognizing the same and wanting to become a world-class centre for international finance, the UAE Government amended Article 121 of the Constitution to empower the federal government to set up free financial systems. Following this, Federal Decree 35/2004 established the Free Financial Zone of Dubai, exempt from all federal, civil and commercial laws and with the permit under Federal Law No.8 of 2004, to create its own regulatory and legal frameworks.

Such a move was necessitated, as other commercial centres such as Singapore and Hong Kong have a common law system aligned with international business practices and more commonly accepted by multinationals. The establishment of a parallel legal system within the Union's territory is a testimony to the legal creativity and ambition of the UAE to establish itself as a global financial centre. While similar legal systems have been curated in countries like Hong Kong and Taiwan under the Chinese rule to accommodate two legal systems within the same territory, establishing such a new zone to facilitate financial growth is without much precedent.

The Laws Involved

Analysing the legal intricacies of the DIFC in depth is crucial to assess its impact on the overall growth and economic success of the zones. Post the creation of the free financial zone, the Dubai and Federal Government passed numerous key decrees and legislations that created the zone's legal blueprint. Among these were Dubai Law No.12 of 2004 and Federal Law No. 5 of 2004, which established the DIFC Judicial Authority and exclusivity of the zone. A Court of First Instance (Article 5A of Dubai Law No. 12 of 2004) and a Court of Appeals (Article 5B of Dubai Law No. 12 of 2004) were created with exclusive jurisdiction of all non-criminal matters within the zone, with binding powers. This system has also been widely accepted by international multinationals and corporations since it broad autonomy to the parties under Article 30 of the DIFC Law No. 10 of 2004, permitting the parties to determine the procedural law to be applied to their dispute. This separates the DIFC from other global financial zones since the principle of lex fori (The law of the land where the jurisdiction lies) isn't applied, and autonomy is given to the parties.

While Article 7 of the UAE Constitution establishes Sharia to be the guiding law of the land, and Article 151 asserts the primacy of the constitution over any other laws of the land, the DIFC and its establishment is in stark contrast to the same. Under Article 8 and 9 of the DIFC Law No. 3 of 2004 the order of application of laws is as follows; The laws of the DIFC and its regulatory bodies, the law of any jurisdiction as chosen by the DIFC, the law of any jurisdiction as agreed upon by the parties, the laws of any jurisdiction as deemed relevant by the arbitrator, and lastly, the laws of England and Wales. The prioritization of common law principles in the case of a jurisdictional dispute over the laws of the UAE or Sharia substantiates the judicial freedom and autonomy of the zone

Another notable feature of the DIFC's legal system is that to attract international entities to promote business in the region, the entirety of the laws is written in English. Judges from international common law jurisdictions have also been invited to serve in the judicial panels with Lord Angus Glennie and Sir Peter Gross as the most recent global additions in 2021.

The UAE and the DIFC, in particular, has also been steadfast in adapting to emerging legal disciplines, including those of commercial arbitration and Alternate Dispute Resolution. By Federal Decree No. 43/2006, it was announced that UAE was acceding to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Upon the Convention coming into force, the DIFC Court of First Instance became bound to recognize and enforce a foreign arbitral award upon the terms set out in the Convention. With many international corporations opting for such alternative resolution mechanisms instead of court proceedings, the adoption of similar practices in the DIFC has assisted in seamless dispute settlements in the region.

The zone also holds a seat for the Small Claims Tribunal, which is empowered to hear civil disputes with a ceiling of AED 200,000 for employment matters and other issues in which the parties submit to the Tribunal jurisdiction. The establishment of this special tribunal to cater to employment disputes sets a leading example and can serve as a security blanket for the migrant workers and the firms working in the region.

While the world witnessed a global recession and economic slowdown due to the Coronavirus Pandemic, the DIFC saw a 20 per cent growth in registrations in 2020, the best performance in its 16-year history. There are now 2,919 firms operating in the region, taking the financial assets booked in the region to 189 billion US dollars, with an economic profit of 125 million.  The zone is the most requested business address, with 94 per cent of its leasing spaces rented out already and more commercial space being built parallelly. It is serving as a financial centre for most legal firms looking to expand in the Gulf region, leading to increased professional workers migrating to the area, along with more brands and companies. The region shows no signs of stopping and appears to be on its way to becoming a global hub for international dispute resolution and finance, according to the governor of the Dubai International Financial Centre, His Excellency Essa Kazi. While witnessing and acknowledging the growth and progress of the zone, it is also essential to underscore the intricate and unique legal system of the DIFC, and its impact in attracting international firms and migrants to the region. The writing of laws in English, freedom to decide the application of statutes, precedence of common laws, legal autonomy to the courts, international judges, and adoption of practices of alternative dispute resolutions and tribunals serves as attractive factors for the leading firms operating in the zone, and legal creativity and accommodation will continue to be a keystone for continued growth and development in the region.

- Sangeet Agarwal