United Arab Emirates: Lexis Nexis Middle East Law Alerts Case Focus On DIFC Case No. 006/2016

Case No ....DIFC Case No. 006/2016

Jurisdiction ...Dubai International Financial Centre

Court ....Dubai International Financial Centre Courts

Recommended by ....BSA Ahmad Bin Hezeem & Associates

WHAT IS IT ABOUT?

On 20 March 2017, the DIFC Court of Appeals issued a precedent in its judgment in Frontline Development Partners Limited v Asif Hakim Adil [2016], DIFC Case No. 006/2016. This judgment was the first DIFC Court of Appeal decision to interpret penalties under Article 18 of DIFC Law No. 4/2005. This provision states a DIFC employer must pay all wages and any other amount owing to an employee within 14 days of the termination of employment. If an employer fails to pay wages or any other amount owing to an employee in line with Article 18(1), the employer must then pay the employee a penalty equivalent to the last daily wage for each day they are in arrears. Prior to this case the Article 18 penalties had been applied only by the DIFC Small Claims Tribunal and in one other Court of First Instance Case, Lys v Elseco Ltd, DIFC Case No. 012/2014, which is also being appealed. The employee, Asif Hakim Adil had been Managing Director of Frontline Properties for three years before the termination of his employment contract. There was then a dispute on the amount of his final settlement and it was not paid in the specified 14 days. Frontline Properties believed they had fair and reasonable cause for not providing the payment within 14 days of the termination, because there was a genuine dispute between the parties on the amount owed and the termination was justified 'for cause'. The company was then sued for withholding the payment. The Court of First Instance decided the employee had not been terminated 'for cause' so was entitled to an award, among other things of a contractual six months' payment in lieu of notice and a gratuity equal to 21 days wages for each year he had been with the company. Their argument that they had fair and reasonable cause for non-payment was rejected. In addition, the Court ruled under Article 18 of DIFC Law No. 4/2005, the employee was entitled to one days' wage for each day the payment had been withheld, after the 14 day deadline.. The original sum owed was approximately $360,000. However, because of the strict interpretation of Article 18(2) it was ruled the employer must pay a $1,500,000 penalty which was almost five times the awarded arrears.

As a result, Frontline Properties appealed the decision on the grounds the penalty awarded was far greater than the original sum owed and so was grossly disproportionate. The Court unanimously dismissed the appeal, upholding the Court of First Instance's strict interpretation of Article 18. It also ruled the employer must pay the full penalty amount to the employee, even if the penalty was grossly disproportionate.

WORDING OF ARTICLE 18

The Court refused the employer's request to modify Article 18's language in order to apply judicial discretion to the penalty amount. It stated the Article wording was clear in its effect, so there could be no alleviation of the penalty, despite there being a reasonable excuse for delaying the payment and the harsh consequences of the penalty. The Court also noted it did not have the discretion to modify a statute where its intent and meaning was clear. This right was reserved for the legislature.

WHY'S IT SIGNIFICANT?

Article 18 of DIFC Law No. 4/2005 can no longer be applied by the courts inconsistently. The Adil judgment must also now be binding on all future DIFC Court Small Claims Tribunal and Court of First Instance cases. There is therefore a question of what this more consistent application will mean for employers. In fact, there are already media reports that the DIFC is considering launching a consultation on amending this Article which could either alter the limitation period for bringing a claim under Article 18 or grant the Court discretion on penalty amounts.

Case No ....DIFC Case No. 001/2016

Jurisdiction ....Dubai International Financial Centre

Court ....Dubai International Financial Centre Courts

Recommended by ...DLA Piper

WHAT'S THE RELEVANT LAW?

Following the issue of Dubai Decree No. 19/2016 a new Judicial Committee was established to determine jurisdictional conflicts between the onshore and DIFC Courts, draw up rules on this area and propose new rules to avoid such conflicts. Unfortunately, this Decree was short on detail and was not accompanied by any commentary, guidance or procedural rules. As a result it has created uncertainty, and there have been fears it has effectively been established to rein in the DIFC Courts' jurisdiction.

FIRST DECISION

The new committee handed down its first decision in Daman Real Capital Partners Company LLC v Oger Dubai LLC, DIFC Case No. 001/2016. This case involved a dispute following the construction of the Daman Tower, a high-rise building in the DIFC. Oger won the subsequent DIAC arbitration, which was located in onshore Dubai and sought enforcement of the award against Daman, which was a DIFC company in the DIFC Courts. Daman then started annulment proceedings in the onshore Courts, which were the courts with supervisory jurisdiction over the arbitration and the DIFC Courts ordered a stay of the enforcement action in the DIFC proceedings pending the outcome of the annulment action in the onshore Courts. However, applying its own law and procedures this was only on condition Daman paid security into the court. So when Daman failed to comply with this order, the DIFC Courts proceeded to recognise and enforce the award, and (following a further application) ordered Daman be wound up. At the same time, in the onshore Courts, the Court of First Instance and the Court of Appeal, which heard Daman's annulment case, decided they had no jurisdiction to do so as the DIFC Courts had already determined the award was enforceable. As a result, Daman applied to the Committee on the grounds a conflict of jurisdiction had arisen between the Dubai Courts and the DIFC Courts. In its decision, which was handed down in December 2016. The Committee agreed with Daman there was a conflict of jurisdiction between the two courts and ordered the case be remitted for trial to the Dubai Courts. It was also stated the DIFC Courts 'should cease from entertaining the case'. However the Committee stated in its decision 'there is no similarity between this case and the case when it's sought to enforce or annul a foreign arbitral award in several jurisdictions pursuant to the New York Convention 1958', which may indicate it will take a different approach when considering the enforcement of arbitral awards which are rendered outside of Dubai.

WHY'S IT SIGNIFICANT?

The DIFC's power to act as a so-called 'conduit' jurisdiction for the enforcement of arbitral awards rendered in mainland Dubai has been severely restricted by this Decision. When enforcing against award debtors based in onshore Dubai, domestic award creditors are now unlikely to be able to take advantage of the significantly more efficient and reliable enforcement regime available in the DIFC until the award has been finally ratified by the onshore courts (which is generally a time-consuming process). However, this decision only affects arbitral awards rendered in onshore Dubai, so it is still possible for parties seeking enforcement of foreign awards and judgments to use the DIFC Courts as a conduit jurisdiction for enforcement against parties and assets located in onshore Dubai. However, it is worth noting the judicial committee is also presently considering these categories of 'conduit' cases.

In reality, this is not a true 'conduit jurisdiction' case, as Oger's intention was to enforce the award against Daman and its assets in the DIFC itself (and not to take the resulting DIFC judgment back to the onshore courts for enforcement). However the Committee's decision will adversely affect these cases. Given the lack of precision of the Committee's ruling that the DIFC Courts 'should cease from entertaining the case', it is currently difficult to form a definitive view on the appropriateness of its decision (indeed, the DIFC Courts have themself requested the parties' submissions on the decision's effect). If the Committee intended the DIFC Courts to dismiss the proceedings before it, then it would be a very surprising (and indeed alarming) result in circumstances if the DIFC Courts clearly had exclusive jurisdiction to recognise and enforce the award in the DIFC under their own arbitration law, not least as Daman was a DIFC-based defendant with assets located in the DIFC.

However, this ruling has been followed in subsequent decisions including Dubai Waterfront LLC v Chenshan Liu, DIFC Case No. 002/2016, Marine Logistics Solutions LLC and other v Wadi Woraya LLC and others, DIFC Case No. 003/2016 and Gulf Navigation Holding PJSC v DNB Bank ASA, DIFC Case No. 005/2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.