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UAE Announces 100% Foreign Company Ownership

On Monday, the UAE government announced an exciting new reform on the Commercial Companies Law, allowing foreign investors 100% business ownership, effective 1st December 2020.

For decades, most foreign investors in the United Arab Emirates (“UAE”) engaged in commercial trading were under an obligation to be partnered with a UAE national to legally operate their businesses within prescribed areas of the country. This week, a phenomenal reform was introduced by the President of the UAE, His Highness Sheikh Khalifa bin Zayed Al Nahyan, which changes the course in which the UAE is moving.

Under Federal Law No. 8 of 1984, which was effectively replaced by Federal Law No. 2 of 2015 concerning Commercial Companies Law, most foreign investors setting up a limited liability company were obligated to enter into a partnership with a UAE citizen. In such a partnership, the UAE citizen would dominate, holding at least a 51% stake in the company. Now, the new decree abolishes the former business structure and introduces the long-awaited reform.

However, whilst the new reform replaces the old law on the federal level, it simultaneously confers powers to local authorities (i.e. each emirate) to determine exceptions, perhaps based on specific business activities. It will take some time for such exceptions to be announced so the idea of complete ownership is still yet to be confirmed in practice and application within each emirate.

Although the exceptions to the new reform are yet to be announced, foreign investors should take time to consider the possible implications of this change on their existing side agreements, nominee agreements or any other ancillary agreements, whereby their local partner has been remunerated in the form of a fixed fee or other alternative arrangements. For existing businesses, there will be multiple factors to consider before deciding whether to make changes or not.

The new reform demonstrates the UAE’s eagerness to advance in respect of the many commercial and investment opportunities that the country has to offer and this is certainly promising news for anyone looking to set up a new business in the UAE. However, for existing foreign investors, we caution great care and not to hasten in abrogating existing business relationships.

If you would like assistance in reviewing any existing agreements concerning company ownership, or you are looking to set up a new business in the UAE, get in touch on +971 4 441 2031 or by email at info@adglegal.com.

 

Written by Bahriddini Sultan

Egypt’s Economic Transformation

ADG Egypt Series Part 1: Logistics, Manufacturing, Agriculture and Healthcare

Written by Josh Kemp, Dina Assar and Shams Elkodama
June 2020

After several years of instability in Egypt which has brought difficulties for its economy, the country is experiencing a resounding recovery. It has become one of the fastest-growing economies in the region, as the IMF reported that GDP increased from 5.3% in 2018 to 5.6% in 2019. Projections for the 2020-21 fiscal year also remain strong, despite recent events.

Indeed, given the slowdown in the region’s mainstay economies such as the UAE and Saudi Arabia, it is inevitable that Egypt will resume its place as one of the leading economies in the MENA region. The country can maintain that trajectory by strengthening its long-held competitive advantages – its strategic location and intersection with the Middle East, Africa and beyond. Further, revitalising and expanding its infrastructure, including by drawing in more private investment, will play a pivotal part in reshaping its economic progress.

In this first instalment of our multi-part series on Egypt’s growth and opportunities, we take a look at various projects and initiatives across the logistics, manufacturing, healthcare and agriculture sectors, which are tipped to drive Egypt’s growth towards 2030 and will be of interest to investors and practitioners.

1. Suez Canal Economic Zone (SC Zone)

Launched in 2015, the SC Zone was established as part of Egypt’s sustainable development strategy, Vision 2030.

The SC Zone consists of six ports and four industrial zones scattered along the waterway, through which passes almost 10% of world trade, or 18,000 ships a year.

These infrastructure upgrades are aimed towards attracting foreign investment, especially to the country’s fast-growing manufacturing industry, and to transform the Canal area to a global hub for logistics, maritime services, information technology and power industries. The Government has also spoken of its intentions to create an investment arm to channel funds to projects along the Suez Canal, engaging in partnerships with developers, lending and investment banks.

The overall infrastructure project includes a new city (New Ismailia City); an industrial zone; seven new tunnels, improving the existing port infrastructure; and a new canal parallel to the Suez Canal.

The main projects in the SC Zone are at various stages of completion. For example, those recently completed include:

• The two tunnels in Ismailia, which were completed in May 2019.
• Five out of the seven tunnels have been completed, as of 25 April 2020. Most recently, 22 April 2020 marked the opening of the Martyr Ahmed Hamdy Tunnel 2, the two-way tunnel in Suez.
• The Port Said tunnel, completed in November 2019, shortening travel time across the Suez Canal. A trip which previously would have taken days, now takes between 10 to 20 mins.

Some of the zone’s ongoing major projects include:

i. Ports, Transport and Logistics

• Upgrading ports at Adabeya, West Port Said, al-Tor and al-Arish to meet the expected increase in volumes.
• The remaining tunnels to connect the Sinai Peninsula to the Egyptian homeland.
• A new container terminal in Abu Qir port by China’s port operator, Hutchinson Ports.
• DP World’s US$520million container port and container yard Basin 2 is expected to become operational in Q2 2020. The project will nearly double the capacity of the port to 1.75million TEUs per year.
• Construction of Egypt’s first RoRo terminal at East Port Said, by a consortium led by Japan’s Toyota Group. The project scope includes a 600-metre quay and a new 21.2-hectare terminal.
• A US$7billion Russian industrial zone of 5.25m square metres in the SC Zone. The project will be completed in three phases and is expected to be fully operational by 2031.

ii. Power and Water

• Several additional water desalination and electricity-generating plants, to be carried out to 2025.

iii. Tahrir Petrochemical Complex (TPC)

The TPC is a circa US$10 billion project for the construction of a 1.5 million tonne-per-year (t/y) ethylene cracker and a polyethylene facility with a capacity of about 1.4 million t/y, as well as other major petrochemical products. Once completed, it will be the largest naphtha cracker plant in the world, with access to key markets such as Sub-Saharan Africa, Asia and Europe.

Despite several delays, the contracts were signed in June 2019 for the project management consultancy (PMC) and engineering, procurement, and construction (EPC). While financial close is understood to be yet to occur, project site preparations and dredging are underway, and recent reports suggest that construction will commence by the end of 2020.

2. The Golden Triangle

The Golden Triangle project (located in the area between Qena, Safaga and Qusair) is critical for the country’s economic recovery. The project aims to establish a new industrial city through assembling a global mining, commercial, agricultural, touristic, industrial, and basic infrastructure zone.

The area is the richest in Egypt in terms of minerals – such as iron, copper, gold, silver, granite, and phosphates – and boasts 75% of the country’s mineral resources. It will offer opportunities to exploit phosphate for fertilisers, raw materials for cement produced from schist and limestone, gold ore and the production of petrol from oil shale.

65% of the project will be composed of modern industrial zones, whilst 35% will be residential, commercial, and touristic. The project will be completed in five-year phases and will be funded by international financial institutions and donors.

In January 2020, Egypt also announced its plan to construct a multipurpose plant in Safaga Port to receive general cargo ships and containers. The sea port of Safaga is considered the most important port for the African continent on the western coast of the Red Sea, and is located on the sea route of the Road and Belt Initiative that extends through the South China Sea, the Indian Ocean and the Bab Al-Mandab strait to the Suez Canal. This is in addition to its connection to a local road network that reaches Sudan through Hadraba land port.

3. Damietta Logistics Project

In 2019, Egypt’s Damietta port signed an MoU with two European companies, Eurogate and Contship Italia, to develop the largest logistics system in the Middle East. The project scope includes a container terminal, a railway line, a dry port, and a cargo distribution area. The total investment is approximately US$825million for the first phase.

The project is expected to be completed by 2022, which will position Damietta port as a critical link for the Eastern Mediterranean region, open foreign markets via direct shipping, and attract foreign investment.

4. Manufacturing Hub

The manufacturing sector is at the forefront of the Egyptian government’s substantive plans for economic growth. The newly expanded Suez Canal and its proximity to Asian, African and European markets, and a number of free trade agreements and special economic zones are key elements which make Egypt a strong manufacturing destination.

The industry has been undergoing a period of growth guided by the Sustainable Development Strategy: Egypt Vision 2030, and the Industry and Trade Development Strategy 2016-2020. Both initiatives have set ambitious goals for the manufacturing sector, including increasing the percentage of GDP to 18%, increasing the manufacturing growth rate to 10%, and increasing high-technology exports as a percentage of Egyptian manufactured exports to 6% by 2030.

Egypt already has well-established manufacturing subsectors such as F&B, steel, pharmaceuticals, and automotive, and is well-positioned to become a premier destination for global manufacturing. Egypt’s strong economic growth (2019 being its highest) has been in part due to an unprecedented number of greenfield foreign investment projects in this sector.

Further, recent infrastructure projects aimed at improving and diversifying the energy supply in Egypt (e.g. Siemens’ megaproject connecting 14.4 GW to the Egyptian national grid and Benban Solar Park) will help significantly boost the manufacturing sector.

5. Agriculture

Agriculture remains an important sector of the Egyptian economy. It contributes nearly one-eighth of GDP, employs roughly one-fourth of the labour force, and provides the country with an important part of its foreign exchange.

Egypt’s investment in agricultural infrastructure will also assist domestically in navigating the Covid-19 crisis.

Noteworthy projects recently completed or currently being developed are:

i. The Mahsamma Agricultural Drainage Treatment Plant

A US$100million, recycling and reuse plant. This is the world’s largest agricultural drainage treatment plant (42,000 m2) and has a capacity of 1 million m3/day.

ii. Canal Sugar Project, Al Minya

Canal Sugar is an integrated Agro-industrial project with 70% Emirati investment and 30% held by Al Ahli Capital Holding. The project will incorporate reclamation and cultivation of 181,000 acres of land, making it the largest agricultural project in Egypt since 1952.

The facility will produce 400,000 tonnes of white sugar per year when it starts production in 2021 and will produce 900,000 tonnes of white sugar by 2023 once it reaches full capacity. The project will cost around US$1billion and intends to fill the domestic supply gap and render Egypt self-sufficient in sugar.

iii. Grains Terminal, Damietta

Canal Sugar, owned by Dubai-based Al Khaleej Sugar Refinery, announced in July 2019 the plan to build a pier and grains terminal in Egypt’s port city of Damietta at a cost of around US$200 million. The new terminal will have a discharge capacity of 3,000 tonnes of grains per hour and will increase Egypt’s grain export capacity.

iv. Development of Greenhouses

Egypt is currently implementing a national project to establish more than 10,000 greenhouses in an area of 100,000 hectares in Matrouh, Sharqiya, Ismailia, Fayoum, Beni Suef and Minya. It is the largest greenhouse project in the Middle East and aims to support 20 million Egyptians. The project is expected to be completed by 2021 and will provide more than 1.5 million tonnes of vegetables and fruits annually to meet the growing production-consumption gap.

6. Healthcare

With the population growing at a rate of 2.2% annually, Egypt will need to improve quantitatively and qualitatively in order to meet the growing demand for healthcare services.

The country recently laid down the foundation stone, with construction commencing on the Capital Med Healthcare City located in Badr City in Cairo. The project is being developed by Egyptians for Healthcare Service and will be the Middle East’s largest integrated private medical city.

The entire project consists of three phases, to be constructed over 7 to 10 years. The project includes a 350-bed state-of-the-art general hospital, clinics plaza, a hotel, and 11 specialised medical excellence centres. Once operational, the medical city is expected to create 10,000 to 30,000 jobs.

There is significant opportunity for foreign investment in the Egyptian healthcare sector. Key factors that make Egypt’s healthcare sector attractive are its growing (and aging) population, increasing insurance penetration, its regional reputation for medical tourism, and the shift towards encouraging private sector investment in healthcare.

Closing Comments

Egypt’s economy is among the most diverse in the MENA region. The country can continue to capitalise on strategic geographic location, low-cost and relatively qualified labour, high tourism potential, and an abundance of energy resources, to drive it forward through challenging times for world economies. The country has already adopted a variety of policies aimed in part at attracting foreign and domestic investments, such as the 2017 Investment Law and various free zone initiatives.

However, the country’s ability to exploit these advantages, and its economic prosperity will depend, in no small part, by its ability to execute key infrastructure projects.

The Energy and Transport sectors are poised for significant growth in the coming years. Our next instalment covers the plethora of planned and in-progress projects in these sectors.

If you are interested in learning more about Egypt’s economic transformation or require assistance with any related projects, please contact your relationship manager or contact Josh Kemp at jk@adglegal.com.

Pressure on UAE Contractors to Re-Price Projects: Hostages to Fortune?

It has been reported that UAE contractors will have to go through the price negotiation process again, as project promoters insist on re-pricing contracts because of the changed circumstances (Gulf News: ‘UAE construction sector told to re-price projects’, 11 April 2020).

The current lockdown and coronavirus-related health and safety requirements on construction projects are certainly contributing to general anxiety over the bottom lines of contractors and developers. Among other things, there is additional time spent complying with on-site precautions, such as distancing and increased frequency of cleaning and the off-site transportation of workers. All the while, ordinary running expenses of maintaining the workforce and other mandatory expenses are still being incurred.

Employers are also increasingly nervous about the post-coronavirus world; in Dubai alone, the 2020 growth forecast (Fitch Ratings) has been revised down to -2.3%, from 3.8%, and Expo 2020 has been delayed until 2021.

While it has been suggested that employers will be looking to contractors to ‘sharpen their pencils’ and reflect the so-called ‘new reality’ post-coronavirus, there is a significant cause for concern that this is a short-sighted approach. There is good reason to argue that the current imperative to reduce prices is unsustainable in the medium term:

  • Despite the ‘double-shock’ of enormous drops in global fuel demand during the outbreak, together with excess supply, oil prices are on the road to recovery. While some analysts are of the view that the recent deal for production cuts are too little, too late for an immediate-to-short term recovery, others claim that the storm clouds for oil prices will dissipate once lockdowns are lifted. The lag effect could prove positive for world economies, helping to fuel a faster rebound after the virus subsides.
  • Commercial and industrial activity appears to be picking up, as suggested by the recent increase in refinery utilisation in China, and their copper and steel inventories are beginning to fall. While it is right to approach such reports with some scepticism, if the pandemic is brought under control relatively soon, trade and output will inevitably rebound, even though a return to the pre-virus trajectory is not likely to be immediate.
  • The UAE Central Bank has announced an AED 100 billion stimulus announcement, with virtually all other GCC countries adopting similar measures. This stands to affect individuals and SMEs, and ought to cushion the fall in activity. The boost on morale and confidence has been immediate, however, the wider growth benefits are unlikely to be seen until the health crisis subsides.
  • On the infrastructure side, while the effects of the stimulus on public spending are unlikely to be seen until the pandemic subsides, a spike in government infrastructure spending packages may be utilised as a part of the economic response. For example, if countries in the MENA region were to adopt a similar approach to the US, which has announced (with apparently bi-partisan support) a USD 2 trillion package only one week after the USD 2 trillion public stimulus relief package.

Additionally, demands for price reductions based on reduced materials costs, are questionable. According to sources reported by Gulf News, UAE contractors say they are seeing no shortages of key building materials, even those coming in from China, and the prices of key materials too – cement, steel products – are as steady as they have been for some time.

Naturally, much depends on the duration of the protective measures. According to analysts, on the assumption that the pandemic eases in the second half of 2020, there should be a marked rebound in growth, albeit a return to pre-virus levels is not expected until late 2021, but the uncertainties surrounding these forecasts are extremely high. If a longer lockdown period is required, that prediction must be pushed back.

There is a significant risk to contractors agreeing on any price reduction that is fixed during this period of uncertainty. As we have seen in the past, undue focus on the (temporary) burden of un-utilised overheads and a so-called imperative to ‘keep busy at all costs’ may result in increased future losses and business failure.

Should you need help with the terms of any renegotiation, advice on how to approach a contractor for a price reduction, or if you are a contractor faced with such a demand, please contact Josh Kemp on jk@adglegal.com.

Written by Josh Kemp

New Commercial Courts In Abu Dhabi

Al Dahbashi Gray has recently obtained a judgment issued by the newly established Abu Dhabi Commercial Court (Commercial Court). The Commercial Court was formed by Decision No.28/2019 on 4 September 2019 and comprises of minor, major and appeal chambers. The Commercial Court is completely independent and exclusive from the Abu Dhabi Court of First Instance.

It should be noted at the outset that prior to the establishment of the Commercial Court, all cases in Abu Dhabi were registered as ‘commercial’ without much attention being paid towards the commercial or civil nature of the cases. For simplification purposes, commercial cases relate to disputes between businesses while civil cases involve individuals.

Al Dahbashi Gray represented the Defendant and obtained a favourable judgment on its behalf. The Court dismissed the case for lack of jurisdiction and ordered the case to be transferred to the relevant Abu Dhabi First Instance Court due to the civil nature of the case. This judgment confirms that the Commercial Court has only jurisdiction over commercial disputes.

The Decision No 28/2019 further confirms that the Commercial Court shall have jurisdiction over disputes, motions, and cases arising in connection with the application of the following laws (even if the transaction is civil for one party and commercial for the other):
– Commercial Transactions law
– Commercial Companies Law
– Commercial Agencies Law
– Emirates Securities & Commodities Authority and Market
– Copyright Law
– Industrial Property Protection Law for Patents and Industrial Designs
– Transactions and Electronic Commerce Law
– Consumer Protection Law
– Competition Regulation Law
– Bankruptcy Law
– Central Bank Law
– Foreign Investment Law
– Maritime Trade Law
– Air Transport Law and Rules

Furthermore, the scope of Commercial Court’s jurisdiction will cover enforcement of foreign judgment or arbitral awards provided such judgments or awards are of commercial nature.

Accordingly, it is now imperative for law firms and/or litigants to ensure that they register their cases before the appropriate court systems. Registering a civil case with the Commercial Court would most likely be dismissed resulting in needless time and costs spend on litigation.

If you need any help in understanding the changes and the potential impact of the recent amendments, please contact us on info@adglegal.com.

COVID-19 Employment Law Update: Common Questions Answered for the UAE

We have been receiving a flood of employment-related enquiries since the outbreak of COVID-19, and the situation is changing almost on a daily basis. We have set out below our answers to some of the most frequent questions we have been asked.

  1. What are the employer’s obligations with regards to the safety of their employees?
  • Employers operating under the UAE Labour Law, DIFC and ADGM laws must provide their employees with ‘adequate means of protection’ and must ensure the health, safety and welfare of their employees.
  • To control the spread of the virus, we recommend employers to carry out risk assessments and take precautionary measures, such as holding educational seminars and actively encouraging their employees to work from home.
  • We also recommend employers to circulate up-to-date information on best hygiene practice and provide any equipment to facilitate this, such as hand sanitizers and facemasks.

 

  1. Can employees be terminated due to COVID-19?
  • In our experience, UAE Courts will only consider termination to be valid if a) the employee is guilty of one of the specified violations listed in Article 120 (which, amongst others, includes violations such as disobeying safety instructions issued by an employer, defaulting on the terms of the employment contract, and revealing any confidential information to competitors) of the UAE Labour Law or b) if the employer has documentary evidence to prove the employee is a poor performer.
  • Therefore, termination merely due to COVID-19 itself will be considered arbitrary (and therefore unlawful) under Article 122 of the UAE Labour law, as it does not relate to the employee’s work performance. However, since many businesses are currently facing financial difficulties, it is unclear whether courts will consider termination due to economic or financial downturn to be a valid reason for termination. We will have to wait and see how the courts deliberate on this.
  • In addition, on 26 March, the UAE issued a resolution (Ministerial Decision No. 279/2020 (the Resolution)) for all private sector employers to register their employees on the Virtual Labour Market (VLM) which enables jobseekers to search for jobs in the UAE. More information on VLM can be found here.
  • Furthermore, employers will need to settle their employee’s dues as outlined in the relevant law and employment contract before finalising their termination.
  • Comparably, DIFC and ADGM laws allow employers to terminate employment contracts without cause if they provide sufficient notice. The notice period may vary depending on the terms of the employment contract.

 

  1. Does an employee have the right to work from home?
  • The UAE’s recent decisions to enforce strict measures to contain the spread of COVID-19 on a 24/7 basis means that only employees that work in certain sectors will be permitted to attend the workplace (Exempted Sectors). Some of the vital Exempted Sectors are healthcare, telecommunications, media and banking & finance (a full list of the Exempted Sectors can be found here).
  • Unless an employee works in one of the Exempted Sectors, they must work from home.
  • Employers (that fall under the list of Exempted Sectors) can decide which of their employees attend the workplace. However, there are guidelines for employees to prioritise working from home (e.g. pregnant women, older employees, and employees with chronic diseases).

 

  1. Can an employee be forced to take their paid annual leave?
  • Yes, provided employees have enough leave balance available.
  • UAE Labour Law, DIFC and ADGM laws employers have the right to compel employees to take annual leave and determine the date of its commencement.
  • DIFC and ADGM require employers to give 7-days’ notice before doing so. This is not a requirement under the UAE Labour Law.

 

  1. What happens if an employee is infected or becomes ill?
  • As per the UAE Labour Law, DIFC and ADGM laws, COVID-19 will be treated in the same manner as any other sickness, in terms of payment.
  • The Labour Law stipulates that an employee is entitled to 90 calendar days of sick leave. The first 15 days are payable at full pay, the next 30 at half pay and the remaining 45 days are unpaid.
  • DIFC and ADGM laws provide employees with a maximum of 60 business days of sick leave. The first 10 days are payable in full, the next 20 days half pay and the remaining days as unpaid.
  • While these are minimum requirements under each of the jurisdictions, an employer may provide more generous entitlements.

 

  1. Can employers compel employees to take unpaid leave?
  • The UAE’s recently issued Resolution (279/2020) gives employers effected by COVID-19 the option to take the following gradual steps as precautionary measures, in their respective order:
  1. Working remotely
  2. Paid annual leave
  3. Unpaid leave
  4. Temporary salary reduction
  5. Permanent salary reduction (approval required from the Ministry in accordance with the normal procedures)
  • As discussed in Q3, employees that do not fall under the list of Exempted Sectors are required to work from home.
  • Furthermore, the Resolution applies only to non-UAE national employees and is applicable only during the duration for which the precautionary measures are in place in the UAE. It is also applicable only to onshore companies who are subject to the MOHRE regulations.
  • The newly issued Resolution does not provide any guidelines for the duration of unpaid leave. Therefore, our advice to employers is to try to minimise the impact on employees as much as possible. We recommend employers to place their employees on unpaid leave, only if they are actually facing losses and not just decrease in profits.

 

  1. Can an employer make salary reductions?
  • The UAE’s recent Resolution affirms that employers who wish to temporarily reduce salaries during the period of precautionary measures may draft a “temporary supplement” to the employee’s employment contract. More information on this can be accessed here.
  • If the employer wishes to introduce permanent salary reductions, it must obtain permission from the Ministry. This step must only be taken if all the other four steps (as mentioned in Q6) have been exhausted and in accordance with the normal rules of changing labour contracts.
  • DIFC and ADGM employers need to consider that non-payment of salary may result in the penalties specified under respective employment laws, which may be severe.

Final Comments

Employers need to be careful to strike the correct balance between protecting its workforce and business continuity, while simultaneously preventing undue panic.

The key takeaways are:

  1. There should be regular and consistent communication in place between employers and employees and employers should ensure employees understand the rules as they are evolving.
  2. The employer must continue to undertake risk assessments on an ongoing basis to both minimise the spread of the virus and ensure the smooth functioning of the business.
  3. Employees should review their employment contracts to be mindful of its provisions in the event they are terminated or placed on sick/annual leaves.
  4. Employers need to be aware of the restrictions on their ability to reduce salaries, force leave and to terminate employees.

To assist clients to navigate this crisis, we have set up a Special Purpose Hub enabling clients and potential clients to contact a member of the team to obtain preliminary or in-depth advice. Enquiries can be sent to covidqa@adglegal.com

MOHRE’s Decision in Response to COVID-19

Since COVID-19 precautionary measures were implemented, we have been flooded by employment inquiries from both employees and employers who have been affected.

We have always tried to balance our advice pragmatically and know that it is important to allow businesses to continue running and vital to ensure employees’ wellbeing and survival remains a top priority. Our advice varies based on the size of the employer, the current circumstances, and the tolerance level of both the business and its human capital.

On 26 March 2020, the Ministry of Human Resources and Emiratization came up with the Ministerial Decision no. 279/2020 which addresses a number of these concerns. This decision included two main provisions:

A. Applicable measures employers may take in response to the precautionary measures

  1. The Ministry advised employers to apply the following measures on a step by step basis:
  2. Working from home methodology;
  3. Granting paid leave to employees;
  4. Granting unpaid leave to employees;
  5. A temporary decrease in salaries, with a requirement to enter into an addendum in the form provided by the Ministry which shall expire by the end of its period or by the end of the precautionary measures, and which should be in two copies: one to the employer and one to the employee, available for the Ministry to check whenever required;
  6. A permanent decrease in salaries, which should follow the normal procedures set out by the Ministry

While there is no guideline on the time period required to move from one step to another, we advise clients to apply the reasonability test. This means that less severe measures should be applied when there is an opportunity to do so. Further, as these measures decrease employees’ benefits, they should be taken only in response to actual losses incurred or expected to be incurred by the employer. A decrease in profit would not constitute a reason for decreasing the benefits.

B. Virtual Labour Market (VLM)

Separately, the Ministry advised employers with excess employees to register them on the VLM to show their availability to other potential employers. The current employer shall remain responsible for all allowances (except salaries) until the employee leaves the country or joins another employer.

For those employers who wish to recruit new employees using the current pool available on the VLM, they may apply for new permits, temporary permits, and part-time permits as applicable.

During this tough time, everyone must co-operate in the best interests of our society. A number of our clients have already started planning initiatives to employ idle talents during this period to fulfil the increased need for specific areas of work and to satisfy corporate social responsibility towards our communities.

If you like more information about this decision, the measures applicable, or assistance on how to plan your measures, please contact us at covidqa@adglegal.com.

Effects of COVID-19: Cross-Border Contracts and ADG’s Dedicated Advice Hub

The following article considers the treatment of force majeure and other forms of relief under contracts in numerous key jurisdictions around the world. While it is to be hoped that these unique circumstances lead contracting parties to find workarounds such that neither benefits or suffers more than the other, there will inevitably be occasions when a party relies upon its legal rights – regardless of the social considerations in play.

As the coronavirus outbreak continues to wreak havoc on markets and industries, businesses are now confronting significant and unique challenges. Successful navigation of these challenges will require thoughtful and comprehensive planning for the conduct of all activities by business and institutions, from the administration of justice, the exercise of individual freedoms, the performance of existing contracts, to the continuation of business operations.

Al Dahbashi Gray is providing in-depth advice to clients on the adverse effects on their businesses due to the occurrence of COVID-19. Through our core team of lawyers and our associated firms, we are well-placed to cover – directly or indirectly – many jurisdictions, including UAE and GCC, Egypt, UK, US, Australian, Russian, French, Italian, most African, and many others.

ADG Online Hub

To assist clients to navigate this crisis, ADG has set up a Special Purpose Hub enabling clients and potential clients to contact a member of the team to obtain preliminary or in-depth advice. The Hub can be accessed by directing enquiries to the following email address dedicated to cases of business disruption due to COVID-19: covidqa@adglegal.com.

The Hub is particularly aimed at those industries which are facing delayed or aborted corporate transactions, disrupted supply chains, sharp decreases in corporate earnings, concerns over the commercial viability of contracts, major event cancellations or a fall in customer numbers because of the pandemic.

Guidance on Navigating the Effects of COVID-19 under Cross-Border Contracts

Many supply, construction, privatization, infrastructure, aviation, transportation and oil and gas agreements are already significantly affected by the occurrence of a catastrophic event which is unprecedented.

Energy and natural resources contracts are generally characterised by lengthy durations and often have international components, as with commodity contracts (including iron ore, coal and copper), LNG contracts, shipbuilding contracts, supply contracts for textiles, foodstuffs and mechanical equipment, contracts for electrical equipment and electronic components and medical equipment manufacturing contracts.

Due to the long-term nature of these agreements, they are highly vulnerable to changes of circumstances within political, economic, legal and even technical spheres. In such cases, comprehensive contracts have proved to be the best shield against the intervention of harsh, sudden and unforeseen contractual distortions and imbalances. Hence, hardship clauses have been developed and inserted in many types of contracts, including power purchase agreements (PPAs), SWAP agreements, concessions, public-private partnerships (PPPs) and sale agreements.

The disruption caused by material shortages, the impossibility for specialized workforces to reach affected countries, lack of coordination on-site and lack of financing granted by banks, will inevitably mean that contracts need to be reviewed and possibly amended to deal with these circumstances, whether or not a force majeure has been triggered.

If your agreement does not provide for renegotiation through a hardship clause, it may be possible to make a case for impossibility of performance or to rely on a force majeure clause (discussed below).

Governing Law and Force Majeure

Most of the contracts referred to above are indeed cross-border contracts, with parties located in different jurisdictions. The choice of governing law for those contracts is highly material, and particularly so for parties established in jurisdictions (such as many in Africa) that lack legislation or an advanced body of case law for dealing with events that may trigger force majeure, hardship and other similar doctrines.

The difference in approaches to these questions can cause great confusion for contracting parties who are called upon to perform certain obligations in jurisdictions that have been more severely affected by the pandemic (with different government responses) and whose legal systems may deal with the consequences more or less favourably to them than the governing law under the contract. This brings significant risk if parties take steps under a particular contract without consideration to the likely position under associated contracts.

Depending on the governing law nominated, the treatment of such a pandemic (force majeure or otherwise) can be radically different. For example:

The UAE and GCC Countries

If there is the permanent impossibility of performance in a bilateral contract, this will lead to automatic cancellation under Article 273. According to the jurisprudence of the Court of Cassation, the relevant event must have been unforeseeable.

  • If there is the permanent impossibility of performance in a bilateral contract, this will lead to automatic cancellation under Article 273. According to the jurisprudence of the Court of Cassation, the relevant event must have been unforeseeable;
  • For partial impossibility, the relevant part is severed, and the affected party may elect to terminate;
  • Where performance is not rendered impossible but seriously more onerous – or if the impossibility is only temporary – the court or tribunal may adjust the obligations of the parties to relieve hardship. However, establishing entitlement to additional costs may be difficult to navigate due to the general principle under the code that the other party will not be responsible for making good the other party’s loss if he played no part in it.

For those contracts governed by DIFC and ADGM law, the position will be similar to English law as discussed below.

Similarly, all GCC countries recognize the legal doctrine of force majeure in some form, when an obligation under a contract is rendered impossible to perform due to an external event. In certain circumstances, even where an event is not a force majeure event, the laws of most GCC countries permit the court to reduce (but not necessarily fully excuse) a parties’ liability where the imposition of a contractual obligation would be onerous due to unforeseen circumstances.
Europe

France and Italy expressly have in their respective civil codes a well-defined concept and procedure for the declaration of force majeure. Germany, however, does not. Rather, force majeure must be construed by reference to other statutes and vast case law.

Common Law Countries, e.g. the UK and the US

In most common law countries, there is no recognised legal doctrine of force majeure and hardship; these are merely creatures of contract. It is therefore up to the parties to negotiate any force majeure provision, the definition of a force majeure event, the notice obligations, and other relevant provisions.

Neither the UK nor the US has any specific legislation dealing with force majeure and hardship. However, certain statutory provisions operate in a similar manner. For example, concerning contracts for the sale of goods, in certain circumstances concepts similar to the force majeure concept may be implied.

In contracts for the sale of goods between countries that are parties to the UN Convention on Contracts for the International Sale of Goods (CISG) (and if the CISG has not been excluded in the agreement), section 79 of the CISG provides a remedy similar to a force majeure clause. It provides that a party is not liable for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and that it could not be reasonably expected to have taken the impediment into account at the time of the contracting. Similarly, contracts for the sale of goods under the Uniform Commercial Code (UCC) in the US are subject to section 2-615 of the UCC, which excuses performance under a contract if performance, as agreed, has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption upon which the contract was made.

Further, the common law doctrine of frustration may be relevant, although under English law is still very difficult to establish. It requires an unforeseen subsequent event outside the control of the parties, rendering it impossible to perform, or so radically different from that intended that it would be unfair to hold the parties to it. The fact that performance has been made more difficult or costly is not enough. Even if it can be established, frustration would rarely be commercially desirable because its effect is to bring all parties under the contract immediately to an end.

For this reason, many English law contracts (and those governed by similar systems) contain force majeure clauses. However, these are variable in quality and breadth and may be construed against the drafting party in “standard terms” cases.

Asia

Hong Kong
Following English law, Hong Kong law does not imply the concept of force majeure into commercial contracts. It is entirely up to the parties to negotiate whether or not there should be a force majeure clause in the contract, and if so, its scope and the circumstances in which it can be exercised.

People’s Republic of China
The PRC can, to a certain extent, be considered a civil law country. Under PRC General Provisions of the Civil Law (promulgated in March 2017), force majeure is generally recognized as an excuse for not performing civil obligations. Force majeure exists as a doctrine under Article 180 of the General Rules on the Civil Law and Articles 117 and 118 of the PRC Contract Law. The regime applies automatically to commercial contracts governed by PRC law where the contract contains no force majeure provisions.

If a contract does not include a force majeure provision, it will be implied. If a contract includes a force majeure provision, a party can rely on the force majeure provision or resort to the protection offered by the general law if the scope of the contractual remedy is considered to be limited. To be eligible for force majeure protection under PRC law, the affected party must demonstrate that the relevant situation is unforeseeable, unavoidable and cannot be overcome, and also that it is the cause of the affected party’s inability to perform its obligations.

However, under the Contract Law, force majeure does not apply: (1) where the contract is entered into after the force majeure event; (2) to non-performance of monetary payment obligations; or (3) if the force majeure event occurs after the affected party delays performance.

The China Council for the Promotion of International Trade has been issuing force majeure certificates to companies that claim they are unable to meet their contractual obligations to protect them from potential breach of contract claims by counterparties. These certificates would not automatically satisfy the “test” for force majeure for a contract governed by English, PRC or another law; these certificates would at best provide evidentiary support for the affected party’s force majeure claim, but the specific requirements of the force majeure provision must still be satisfied.

We understand that there is pressure on the China International Trade Commission to stop issuing force majeure certificates for companies as the Chinese Government is keen to revive the economy as soon as possible. State-owned enterprises have been instructed to resume operations and recall all employees back to work. While these orders may be resisted in some instances, it is widely thought that without governmental support, there will likely be fewer force majeure claims made by Chinese companies. Numerous force majeure claims involving a Chinese buyer or supplier have already been reported in the worldwide media and it seems likely that claims with a wider ambit will follow as the ripple effects of the outbreak spread globally.

Practical Steps for Contracting Parties

Despite the potentially different outcomes under the different governing laws, it is possible to devise a course of action that should be followed to not only react to but to pre-empt the different permutations as the situation continues to unfold.

We recommend that parties consider the following:

  • Carefully review your contract to determine whether the contract includes a force majeure provision and, consider:
    • The definition of a force majeure in that contract to determine whether events such as pandemic situations are included and, if not, whether the general language is sufficient to include COVID-19 and its consequences;
    • The nature of the triggering event and the effects necessary for it to be triggered;
    • The procedure for any renegotiation and the desired outcome;
    • The remedies available if renegotiation fails (these might include resorting to a judge or arbitrator, or termination of the contract);
    • The conditions that must be met to resort to termination.
  • Consider whether the contract provides any form of partial relief from obligations, even if force majeure cannot be invoked;
  • Consider those aspects of the relevant contract that you are not able to perform and satisfy yourself that the inability to perform is due to the consequences (direct or indirect) of COVID-19;
  • Review financing or other related agreements to determine whether there are cross-clauses and notice provisions that must be complied with concerning anticipated or actual force majeure or hardship claims;
  • Determine whether insurances, such as business interruption insurance or force majeure insurance, may cover any of the expected losses;
  • Consider whether you have taken steps to mitigate the effects, such as substitutions in supply;
  • Identify all notice provisions and review whether you have promptly given those notifications and are updating them as the effects evolve.

If in doubt on any of these matters, we suggest immediately taking legal advice. Questions can be submitted to covidqa@adglegal.com.

Further details of our expertise, countries of qualification and geographical coverage are available on our web site at www.adglegal.com.

Written by Roberto Cornetta, Josh Kemp and Shams Elkodama

Managing Cross Border Risk, a Collaboration with IR Global

We were delighted to be asked to contribute to an IR Global publication ‘Managing Cross Border Risk: A Jurisdictional Guide of How to Manage Risk in Multi-Nationals’, sharing our extensive corporate knowledge of the UAE jurisdiction. Associate Dina Assar drafted the section, which we share with you below. For the full report, visit the dedicated page on IR Global’s website here.

1. When representing a client with significant business activities in foreign jurisdictions, what are the key risk-related concerns that arise in a cross-border context and how can a parent company minimize such risk?

The UAE being one of the most active international business hubs in the region, we come across many multinational clients with diverse business portfolios that stretches across multiple regions and jurisdictions. When representing those clients, we are generally faced with problems related to the application and interpretation of the law, as well as jurisdictional and inherent cultural challenges. These may relate to public policy misinterpretation, judge’s understanding and / or expertise in relation to our clients’ line of business (being different to typical business in the country).

The challenges can be summarized as follows:

  1. Laws being vague with varying levels of ambiguity and room for interpretation;
  2. When there is clearly written law, the judicial or administrative authorities may opt to take what appears to be a contradictive approach. Some government agencies follow practices that are inconsistent with certain provisions of law or are subject to a different interpretation of such provisions;
  3. Local courts can still take jurisdiction over certain disputes presented to them, even though the parties may have contracted to submit the dispute to a jurisdiction outside the UAE;
  4. Culturally, people are reluctant to say “no” in Arabic cultures (making some tasks seem simple when explained but more challenging in practice).

Accordingly, we always advise our clients not to rely solely on written law, but rather to take an appropriately practical approach. This must consider local customs in terms of interpretation provisions. It is helpful to rely on judicial precedents in the UAE (even those not strictly binding, especially ones issued from the court of Cassation, as they are often followed by judges in the courts of First Instance and Appeal.

2. What degree of control should a parent company have over its overseas subsidiaries? How does the degree of control impact the risk exposure level and how can control issues be managed to minimize liabilities?

Parent companies based in jurisdictions outside the UAE are advised to keep tight control over their UAE subsidiaries to mitigate the different risks that may arise from operating in an environment that is legally and culturally different.

Such control would initially start from the inception of the subsidiary entity in the UAE – or the Middle East – where we advise clients on the ideal type of company formation, depending on their business activities and other economic factors. Appointment of management and delegation of authority is a critical part of the process.

After the company is formed, we advise and support our clients to maintain a strong corporate governance program for their UAE and Middle East entities. For example:

  1. Functional AGMs;
  2. Ensuring provisions of commercial companies law and tax law (if any) are adhered to, especially in terms of timelines, statutory disclosures and submissions to governmental authorities and regulators;
  3. Maintaining accurate financial records, as per the provisions of the commercial companies law and the subsequent financial laws of the UAE; and, most importantly,
  4. Oversight on management and control over their authorities.

3. What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?

By having a subsidiary in a foreign jurisdiction, parent companies are automatically assuming certain risks and exposures inherent to such jurisdictions. We support our clients to reduce these risks, prioritizing the development of a risk mitigation plan which balances risk and liability and focuses on enhancing preventive measures.

A very common example in the UAE would be if a company took the Dubai International Financial Centre (“DIFC”) as a place to operate. This will – in most scenarios – automatically expose them to other means of common law principles which might negatively affect the style or direction of the client’s business. Nonetheless, for international clients, a place like the DIFC allows them to operate comfortably with common international laws and standards.

4. What are your 3-5 key considerations for multinationals operating in high-risk industries and jurisdictions?

  1. Make sure the jurisdiction is the right jurisdiction to operate in;
  2. Choose a reliable local partner;
  3. Take best measures when appointing management and delegate them precise authorities;
  4. Make sure to visit the jurisdiction to understand the culture and interact with people on the ground.

Roberto Cornetta and John Leopoldo Fiorilla Join the Team

We are pleased to announce that Al Dahbashi Gray will be joined in February by Roberto Cornetta, a senior Italian lawyer of over 30 years’ experience, as an Of Counsel Partner in our Dubai office and his long-time colleague John Leopoldo Fiorilla di Santa Croce, a senior US and Italian lawyer with vast corporate experience, as Of Counsel.

Roberto graduated in Law at Yale Law School and worked for six years in New York City. He then went on to become the founder and CEO of Norton Rose Italy, where he remained for 12 years in their European PF group. 8 years as CEO of Paul Hastings in Italy followed, where his focus was on large real estate, hospitality, finance and cross border M&A in Europe, India and China and Africa.  He also spent six months in Hong Kong and six months in Colombia for the Italian Electricity Company. Roberto has had several referrals from large US law firms and clients and has been appointed by Stanford University as the sole European member of their “Seeds for Africa” program in recognition of his experience in both professional and pro bono work.

John received a J.D. from the University of Pittsburgh School of Law, where he was Managing Editor of the University of Pittsburgh Law Review, and a Master of Laws in International Legal Studies from New York University School of Law. Before joining Al Dahbashi Gray, John practised in the New York and London offices of Sullivan & Cromwell, as well as with Brosio, Casati e Associati in Milan. In addition to his new role with Al Dahbashi Gray, John will still serve as Managing Partner of the Arabian Gulf Fund, a boutique private equity firm based in Nassau and New York City, and holds a number of other notable posts.

“The addition of Roberto and John to Al Dahbashi Gray is a great contribution to our goal of becoming a world-class local firm with a truly international service. Their considerable experience will be a boon to our clients and will expand the breadth of the Firm’s transactional practice.” – Co-Managing Partner Mohammed Al Dahbashi

“We believe that Roberto and Join will prove a great fit with our expansion into Africa and look forward to continuing our developments in the region with new energy and experience.” – Co-Managing Partner Peter Gray

New Employment Regulations Issued by ADGM

By Dennis Varghese

On 28 October 2019, the Abu Dhabi Global Market (“ADGM”) published its new employment regulations (“New Regulations”) which will come into effect on 1 January 2020. In this article, we examine the key changes and contrast them to the current employment provisions in operation in the ADGM (“2015 Regulations”).

The changes are aimed to strengthen ADGM’s employment framework in the interests of both employers and employees, in order to meet international best practices. The Dubai International Financial Centre (“DIFC”) took a similar step in August of 2019 when it also adopted an updated employment law. For more information on the new DIFC employment law, please click here.

ADGM’s New Regulations can be read in full here.

Summary of Key Changes

Overtime Payment

2015 Regulations: The Regulations stipulate that the maximum working week is 48 hours “unless the Employer has first obtained the Employee’s consent in writing”. There is no provision for overtime pay for hours worked in excess of 48 hours.

New Regulations:

  • Employees are now entitled to overtime compensation in respect of time worked in excess of 832 hours over a period of up to 4 months. Calculations are done on a pro-rata basis;
  • Overtime compensation can either be monetary or by time in lieu, as decided by the employer. Monetary overtime is the employee’s daily wage plus 25% of the hourly rate (or 50% of the hourly rate for overtime between 9.00 pm – 4.00 am);
  • Employees in positions where it is reasonably expected within that industry internationally that overtime time compensation is not paid (such as managers and supervisors), are exempted from overtime compensation.

Sick Leave/Pay and Repatriation Flight Tickets

2015 Regulations:

  1. An employee is entitled to 60 business days paid sick leave in any 12-month period;
  2. No provision with regard to repatriation flights.

New Regulations:

  1. The number of sick leave days remain at 60 business days. However, amendments have been implemented to reduce the sick pay to the following (the change matches the minimum requirement under DIFC employment law):
  • full pay for the first 10 business days;
  • half-pay for the next 20 business days; and
  • no pay for the remaining 30 business days.
  1. The New Regulations now require employers to provide, upon the termination of the employee, with a one-way repatriation flight ticket to the employee’s home country unless:
  • the employee obtains an alternative employment or visa sponsorship in the UAE within 30 days; and
  • the employee has been dismissed with cause.

Discrimination

2015 Regulations: Prohibited discrimination against an employee on the grounds of sex, marital status, race, nationality, religion and disability.

New Regulations: The New Law has widened the scope of the previous anti-discrimination provisions by including discrimination on the basis of ‘colour’.

Termination

2015 Regulations: Required the Employer to submit a notice to the employee prior to termination of employment in the following manner:

  • 7 days’ notice if the period of continuous employment is less than 3 months;
  • 30 days’ notice if the period of continuous employment is 3 months to 5 years’;
  • 90 days’ notice if the period of continuous employment is over 5 years’.

New Regulations: A written notice is now required to be submitted by the employer. Additionally, employers are no longer required to submit a 90 days’ notice in cases of over five years of employment; as such employer or employee need only give 30 days’ written notice. Hence, notice is now required in the following manner:

  • 7 days’ notice if the period of continuous employment is less than 3 months; and
  • 30 days’ notice if the period of continuous employment is more than 3 months.

Powers of ADGM Board

2015 Regulations: Stated that the ADGM Board may make rules setting out applicable fines.

New Regulations: Now expressly refers to powers of the ADGM Board to issue rules setting out fines. These rules have been issued alongside the New Regulations and will also come into force on 1 January 2020. A full copy of the rules can be viewed here.

Data Protection

2015 Regulations: Included comprehensive data protection provisions.

New Regulations: Data protection provisions set out in the 2015 Regulations have now been removed as ADGM does not have a stand-alone data protection law.

Youth Employment

2015 Regulations: Prohibits employers employing a youth below 15 years of age.

New Regulations:

  • New Regulations provide clarity on the employment of youth: employers can now hire youths between 15 and 18 years of age;
  • New Regulations also widen the scope of protection offered to youth employees, obligating employers to take all appropriate measures to ensure the conditions of employment are safe and reasonable.

Conclusion

Changes introduced by the New Regulations are not substantial in terms of the number of amendments but it is important that companies in the ADGM review their existing policies, procedures and employment contracts and make any necessary amendments to ensure the provisions in the New Regulations are complied with before 1 January 2020.

If you need any help in understanding the changes and the potential impact of the recent amendments, please contact us on info@adglegal.com.

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