COVID-19 fallout: Businesses will soon be testing UAE’s legal boundaries
Courts will have to give their take on contractual obligations and fix responsibility
As the medium-term realities of the pandemic become clearer, businesses and law firms are asking how litigation may change in the UAE and wider region.
Contract payment delays and debtor defaults will be significant and widespread across sectors, including hospitality, travel, tourism and retail. Litigation by creditors (and credit insurers) to enforce payment obligations will increase across the spectrum - from short-term trade debts to very large bank lending. Investors across more negatively impacted assets classes may seek to recover losses from advisers or institutions for alleged mis-selling or negligent advice.
“Force majeure” claims have been treated with scepticism by courts in the wider common law world. That is consistent with the approach taken in many “onshore” UAE Courts (outside the DIFC and ADGM financial free zones) in litigation arising out of the 2008-09 global financial crisis in which contractual obligations were strictly enforced.
Lay the blame elsewhere
It is reported, however, that an onshore Dubai court recently terminated a residential lease pursuant to provisions of the UAE Civil Code, finding that the pandemic had prevented the tenant from enjoying the property. This may prompt similar claims by tenants whose use of onshore office, retail or hospitality space is - or has been - compromised by lockdown and ongoing social distancing.
Debtors in the region have also sought refuge in inventive arguments as to the authority of the signatory of an instrument, or even the authenticity of their signature. Such arguments tend to fare less well in DIFC Courts, which take a broader view of authority and require cogent expert evidence for a finding of forgery.
The assets of debtors may not be the only target.
The first wave of litigation after the emergence of COVID-19 saw a rise in calls on performance bonds, particularly in the construction sector. Tom Montagu-Smith, QC, believes that the DIFC Courts is taking a robust approach to the enforcement of these bonds.
Calling in the cover
The credit insurance market has also been significantly exposed by the pandemic, as lockdown has seriously disrupted supply chains and impacted traders’ ability to pay for goods. Some coverage litigation is likely in respect of such policies.
Particular issues also arise in relation to business interruption insurance claims and related policy exclusions, as in the UK.
All economic shocks, with interruptions to cashflow and a contraction in credit supply, expose businesses that may be under-capitalised and over-leveraged. They may further reveal fraud in the historic presentation to banks and insurers of a business’ financial position.
As businesses fall into default, there is often a “dash for the cash”. Banks more readily accelerate loans and pursue legal enforcement options. There has been a corresponding rise in court applications for freezing injunctions to preserve assets to satisfy judgments.
The DIFC Courts have taken a flexible approach in granting such injunctions. They are willing to find the necessary risk that the debtor may dissipate assets where it has engaged in discreditable conduct.
Similarly, there is no longer a need to prove there are assets in the DIFC. In contrast, the onshore Dubai courts will only order a precautionary attachment in respect of identifiable property located onshore.
A DIFC worldwide freezing order also benefits from being enforceable in the onshore Dubai Courts. More generally, there are various arrangements and treaties with foreign jurisdictions, including England and India, which give DIFC court orders significant international currency.
Insolvencies and restructurings are sadly also likely be a significant feature. In onshore UAE, distressed companies can enter into either a preventive composition, restructuring or insolvent liquidation.
Perceived gap
However, there are presently no provisions in the Bankruptcy Law to deal with the increasing number of cross-border insolvencies.
By contrast, the DIFC’s 2019 Insolvency Law incorporates such cross-border provisions and benefits from a new “rehabilitation” procedure for DIFC companies that leaves directors in control while they seek to restructure debt with minimal court intervention.
The forthcoming economic contraction is likely to see the testing in the DIFC and onshore UAE Courts not only of a number of established legal principles and remedies, but also of the statutory provisions of their respective insolvency regimes.
- Rupert Reed QC, Gregor Hogan are with Serle Court, London. Keith Hutchison and Nick Braganza are with Clyde & Co.