Abstract

Written by the legal team behind the creation of the Abu Dhabi Global Market (ADGM), this article explains the thinking, process and procedure behind the structure and scope of the innovative new legal regime. In its consideration of various elements of the ADGM legal framework, this article discusses how the rules and regulations were carefully designed to ensure the confidence of global investors by balancing the need for legal depth and breadth, achieved by leveraging the reputation of developed regimes, with the need to remain flexible and responsive to the requirements of a modern financial centre looking to compete on a global scale.

Introduction

It is rare to be asked to assist in producing an entirely new legal regime from scratch. It is rarer still to be called upon to advise on its structure and scope, and to produce its content. The authors of this article did just that. This article examines the bespoke legal regime that has been developed for the ADGM in order to serve its particular needs and the jurisprudential basis on which the new legal system has been established. In particular, it will focus on the specific parts of the new regime which raised interesting and novel concerns and will analyse the way such concerns arose and how they were addressed. The aim of this article is to draw on those experiences and provide potentially useful background to the development of the new regime, which may be of interest to practitioners and, ultimately, the courts.

Abu Dhabi, one of the United Arab Emirates (UAE), through a number of Federal and Abu Dhabi legislative instruments, recently decided to set up a new financial centre to be known as the Abu Dhabi Global Market. The Federal Cabinet of the UAE allocated an island for the purpose, Al Maryah Island. They also provided the ability for the government authorities that govern the island to pass their own civil and commercial laws, and for those authorities to pass regulations to regulate the market on the island. In order for this all to operate, a court was also established as well as a Registrar of Companies (Registrar) and a financial services regulator.

The laws and regulations needed to be attractive to international businesses. Abu Dhabi decided strategically that the system should be based on English common law, even though the existing system in the UAE is heavily influenced by civil law systems, namely, French, Roman, Egyptian and Islamic law. Historically, the UK had administered the UAE under various arrangements, beginning with the treaty with the Trucial Sheikhdoms in 1892, and ending with full independence in 1972, but had not colonised it. Further, the ADGM accepted our advice that the common law should be adopted in its entirety rather than in codified form. This had not been attempted before in such a context but precedents were to be found in legislation in Hong Kong and Singapore.1 Perhaps counter-intuitively, commerce requires more law rather than less. Codified versions of the common law simplify and ossify the law as at the date of enactment, and have all the disadvantages of a civil law system without all the ongoing jurisprudence that is essential to optimise such a system. The ADGM also accepted that the statutory regime should fit in with the UK system and benefit from interactions with the common law case law so far as possible. Thus, for instance, the enactment of a set of companies regulations utilising the latest UK Companies Act should benefit from case law clarifying provisions of that text, thereby reducing legal uncertainty. The result is the establishment of the ADGM pursuant to Federal Law No.8 of 2004 (Law No.8) and by the requisite Federal Cabinet Decree and Resolution2 together with Abu Dhabi Law No.4 of 2013 (Law No.4), and a series of regulations and other legal instruments of the ADGM itself.3 Launched in 2015, the ADGM has a system of civil and commercial laws which aim to offer market participants a world-class legal system and regulatory regime.

New legal systems looking to gain traction must address one overarching question: how can we create a new legal jurisdiction with the infrastructure and flexibility of a modern financial centre looking to be dynamic and competitive on a global scale, but which has the reputational foundation and gravitas to ensure that investors and market participants have confidence in the reliability of the new system? Other systems have begged, borrowed and stolen from established jurisdictions, but the ADGM's novel response to this question has been to leverage the reputation of one of the most trusted legal systems in the world—that of the UK—on an "evergreen" basis and tailor it according to its own specific requirements. Some had suggested that this could not be done.

Constitutional framework—the UAE

The UAE was founded in 1971 as a federation of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain. Abu Dhabi is the capital of the UAE and the Abu Dhabi emirate; the largest of the UAE's seven member emirates.

Under the Constitution of the UAE (the Constitution), each emirate is governed by an absolute monarch. Together, they jointly form the Federal Supreme Council, which has an elected chairman and vice-chairman. By convention, the ruler of Abu Dhabi is the President of the UAE (the head of state) and the ruler of Dubai is the Prime Minister (the head of government).

In addition to the Federal Supreme Council, the Constitution provides that the Prime Minister will lead a cabinet, called the Council of Ministers. Further, there is a 40-member national assembly, called the Federal National Council, which is a consultative body whose members are partially appointed by the emirate rulers and partially elected. There is an independent judiciary which includes the Federal Supreme Court.

Under arts 116 and 122 of the Constitution, matters not specifically allocated to the federal level are under the jurisdiction of each emirate. Federal jurisdiction extends to matters such as foreign affairs, security and defence, currency, banking, major legislation relating to the Penal Code, Civil & Commercial Transactions Code, companies law, and codes of procedure before the civil and penal courts.

Constitutional framework—financial free Zones

The Constitution provides for a two-level allocation of legal competence. The federal level covers matters expressly listed in the Constitution. The emirates have jurisdiction over residual matters not governed at a federal level.

Article 121 of the Constitution was amended in 2004 to provide for the establishment of Financial Free Zones (FFZs). This permitted the establishment of zones and the creation by such zones of their own laws on matters which would otherwise be governed by federal law, including matters such as currency, banking, company law and civil law more generally. The constitutional amendment was followed by legislation setting out the mechanism and operation of FFZs:

  • Law No.8 establishes the federal-level machinery for the establishment of a FFZ and sets out what activities may be carried out in FFZs. This Law provides that an FFZ may only be established by Federal Decree. Once established, FFZs are exempt from federal, civil and commercial laws;
  • Federal Decree No.15 of 2013 establishes the ADGM as an FFZ in Abu Dhabi. Al Maryah Island is designated by Cabinet Resolution No.4 of 2013 as the geographical location of the ADGM;
  • Law No.4 establishes the organs of governance in the ADGM, including the Board of Directors, the Registration Authority, the Financial Services Regulatory Authority (the Regulator or FSRA) and ADGM courts, including setting out their powers and duties; and
  • a series of new regulations, passed by the ADGM, pursuant to these authorities.

Legal framework—relationship between ADGM and the UAE

The relationship between the federal legal system of the UAE and the FFZ legal system of the ADGM is complex and the limitations on the ADGM's legislative competency were sometimes an important issue in the legislative and drafting process. The relationship is governed both by way of federal law and at Abu Dhabi emirate level. Though complex, the interplay between federal and state laws is not uncommon in federal systems of government.

Pursuant to Law No.8, entities licensed in the ADGM (FFZ Entities) are restricted in the financial services that they can provide in relation to the UAE (non-FFZ Entities) or in relation to UAE persons. FFZ Entities (i.e. those in the ADGM) are prohibited from carrying out certain activities, including:

  • accepting deposits from the UAE markets;
  • accepting deposits in UAE Dirhams;
  • undertaking foreign exchange transactions involving UAE Dirhams;
  • providing credit in UAE Dirhams; and
  • effecting, carrying out or acting in relation to a contract of insurance in relation to a risk situated within the UAE, unless the risk is situated in the ADGM or the contract is one of re-insurance.

These requirements are reflected in s.26 of the Financial Services and Markets Regulations 2015 (FSMR) and rr.4.3 and 7.2 of the ADGM Conduct of Business Rulebook (COBS).

Additional federal-level protections in the sphere of international law are found in arts 5 and 6 of Law No.8, which provide that FFZs may not do anything which may lead to contravention of any international agreements to which the UAE is a party, but that their authorities may enter into memoranda of understanding with similar entities and parties provided that they do not conflict with the treaties to which the UAE is a party. This provides the FFZ authorities, including, for example, the ADGM, with the ability to enter into Memorandums of Understanding (MoUs) with regulatory authorities in other jurisdictions and countries.

As regards the allocation of powers between Abu Dhabi and the ADGM, the remit of the ADGM's legislative jurisdiction is prescribed in Law No.4, which allocates specific spheres of legislative competence to the ADGM and fleshes out more of the tripartite allocation of competences (federal-level, emirate-level and FFZ-level) established in the UAE constitutional amendment.

Criminal Law

Broadly, the ADGM has legislative capacity with respect to civil and commercial laws for the FFZ. Jurisdiction in respect of criminal law is not vested in the ADGM but is rather a federal matter. Federal criminal law addresses areas such as criminal penalties for insider dealing, money laundering, fraud and dishonesty. As such, although not specifically developed for the ADGM, federal criminal law in most cases supports the proper functioning of the ADGM in respect of both common and financial crimes.

ADGM regulations support federal criminal law in the FFZ context by requiring participants to comply with their obligations under federal law. This was achieved by imposing—as a matter of ADGM regulation—legal obligations on market participants in the ADGM, for example, in relation to anti-money laundering obligations and taking measures to detect and prohibit market abuse. Such activities, therefore, not only constitute criminal activities under existing federal criminal law but also constitute breaches of ADGM regulations. This dual reinforcement provides for a robust enforcement culture, designed to ensure market confidence in the integrity of the zone.

Sharia Law

Applicability of Sharia law:

  • art.7 of the Constitution provides that "Islam shall be the official religion of the Union. The Islamic Shari'ah shall be a principal source of legislation in the Union";
  • Sharia is therefore a source of law throughout the UAE. Prohibitions under Islamic law, such as gambling, are therefore reflected in the Federal Penal Code. Sharia law also governs matters such as inheritance for Muslims in accordance with Islamic tradition; and
  • UAE law does not prohibit persons conducting commercial transactions from entering into contracts such as Western lending and derivatives agreements. Consistent with this, the ADGM allows both Western and Islamic products to be offered. Usage of these models is therefore left to consumer choice.

Legal framework—common law

The ADGM took the decision to root its new legal framework in the common law, taking as its primary source the English common law. Common law, as opposed to civil law or mixed systems, is the leading choice of law in most major international financial centres and the governing law for most commercial contracts. This pre-eminence is reflected by the fact that the legal systems of the top four leading financial centres (London, New York, Singapore and Hong Kong) are all derived from the common law. These centres dominate not only the core financial sectors such as banking, securities and derivatives, but also other commercial sectors such as insurance, shipping, international trade, commodities and logistics. They also provide the governing law and dispute resolution system for these activities and the commercial agreements entered into. Given the aim of the government of Abu Dhabi is to encourage financial services, commodities trading and logistics, the adoption of a common law-based legal system was seen as a logical choice.

The ADGM took the decision to move away from a more codified model adopted by other FFZs, such as the Dubai International Financial Centre (DIFC). The legal structure of the DIFC is also based on common law but was realised by way of a plain language codification of English common law, rather than adoption of a common law case law system in its entirety. For example, the DIFC contract statute attempts to codify the common law principles of contract, with specific sections on offer and acceptance, termination and damages.4 This simplifies the common law, denuding it of judicial authority in areas of complexity and uncertainty and ossifies the common law as at the date of enactment. Another drawback to the DIFC approach is that its ability to leverage off developments in other jurisdictions is limited. This is because, as noted in the DIFC courts' Enforcement Guide, the DIFC "might be described as sui generis".5 This means that, in order to interpret that law, one needs to guess the likely views of the DIFC courts, with their relatively limited throughput of cases, rather than being able to rely upon decisions flowing regularly from the most sophisticated common law courts in the world.

The ADGM instead developed an evergreen approach to common law, adopting English common law and incorporating it—as it stands from time to time—into ADGM regulations. This approach is designed to allow the ADGM to tap into the significant numbers of qualified common law lawyers from around the world. They can review and advise on ADGM law and, if suitably qualified, argue cases in ADGM courts. Similarly, textbooks written on English law and on systems derived from it, such as Australian, New Zealand and Singapore law, can provide guidance on points of uncertainty. Instead, therefore, of relying on a local bar of a small number of expatriates, the ADGM system taps into the vast infrastructure of advisers and commentators on the common law from around the world.

Legal framework—English law in ADGM

Following a detailed review of various models, the ADGM adopted the Application of English Law Regulations 2015 (Application of English Law Regulations), which provide that "the common law of England (including the principles and rules of equity), as it stands from time to time, shall apply and have legal force in, and form part of the law of, the Abu Dhabi Global Market".6

In addition, the decision was taken to adopt UK statutes as the basis for the legislative framework where possible since these fit with the common law. Adjustments were made to fit in with the ambitions of a free market centre. By way of example, as a primarily non-retail financial centre, the English common law's extensive consumer client and retail protections were considered unnecessarily burdensome and unsuitable for application in the ADGM.

This establishes the application of English common law in the ADGM, including the principles and rules of equity, on all civil and commercial matters such as contracts, tort, equitable remedies, unjust enrichment, damages, conflicts of laws, security and personal property.

A significant aspect and benefit of the ADGM's incorporation of English common law is that the common law is considered to be "ever-green" since the common law "as it stands from time to time" is to apply. As such, future developments in the English common law will also have an effect in the ADGM and the ADGM will continue to benefit from the incremental additions to English law developed through the common law system.

This approach contrasts with the approach taken in, for example, Singapore, where only a retrospective approach applies, meaning that any further developments in English common law have no effect in Singapore.7 The Singaporean approach was considered appropriate in a nation-state context, where legislative and legal autonomy are required by democracy and sovereign independence. However, in a FFZ based on the English common law, the ADGM took the view that reflecting best international practice, ensuring familiarity and predictability, and leveraging the international reputation of English law as it stands from time to time were key drivers.

There was then an extensive review of all of the English law statutes, modifying aspects of the common law from the Statute of Frauds 1677 onwards. These included essential pieces of legislation such as the Law of Property Act 1925, Contracts (Rights of Third Parties) Act 1999 and codifications of various aspects of the prior common law such as the Partnership Act 1890.8 Under s.2 of and the Schedule to the Application of English Law Regulations, these statutes were adopted into ADGM law with modifications stated, for instance, to remove references to Scotland and Northern Ireland, named UK institutions or ministries and other matters extraneous to the ADGM.

On top of this framework, specific legislation was produced in a highly tailored manner to cover matters of particular concern such as companies, insolvency and financial services law, as set out further below.

In the event of any conflict or inconsistency between English common law and these ADGM enactments, the ADGM regime will depart from English law. The Application of English Law Regulations uphold the precedence of the ADGM's own regulations and expressly clarify that:

  • any English common law applied within the ADGM is subject to modifications as required by the specific circumstances of the ADGM. ADGM courts are able to determine which variations in each case are appropriate for the circumstances in question; and
  • ADGM legislation overrides the English common law. This ensures that the ADGM is not fettered in its ability to manage its own affairs and can respond efficiently to the needs and wishes of banks, participants and other investors in the ADGM.

Where the UK legislature abolishes or modifies a rule of common law, such as through the Contract (Rights of Third Parties) Act 1999 or a mistake of law, such changes will be of no effect in the ADGM unless similar legislation is expressly adopted by the ADGM.

To view the full article click here

Footnotes

1 See, for example, Singapore's Application of English Law Act 1993 and Hong Kong's Application of English Law Ordinance 1966, Ch.88.

2 Federal Decree No.15 of 2013 and Cabinet Resolution No.4 of 2013.   3 In this article, all legislation referred to is ADGM legislation unless otherwise specified.

4 Contract Law, DIFC Law No.6 of 2004.

5 DIFC Courts, Enforcement Guide, 4th edn (2016), fn.17 available at: http://difccourts.ae/wp-content/uploads/2016/01/ENFORCEMENT-GUIDE-2016-AW.pdf [Accessed 28 March 2017].

6 Section 1(1) of the Application of English Law Regulations 2015.

7 Section 3(1) of the Application of English Law Act 1993 provides that "the common law of England (including the principles and rules of equity) ... shall continue to be part of the law of Singapore". Some in Singapore are hoping this will enable Singapore law to float away from English law and develop its own separate identity. That would, of course, require a large number of sophisticated judgments to flow from the court system there in order to provide suitable and credible alternative guidance.

8 One significant exclusion is that real property matters are not governed by English common law but have instead been codified in the Real Property Regulations 2015, as described further below.

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.