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Jurisdiction of the DIFC Courts - recent developments

Written by Richard Bell

When a dispute arises in Dubai, which Court has jurisdiction? Is it the Dubai Courts? Or can the case be heard by the Courts of the Dubai International Financial Centre?

In this article, we look at statutory basis for the jurisdiction of the DIFC Courts and discuss some recent DIFC Court cases that have considered the extent of that jurisdiction.

Introduction

The Dubai International Financial Centre (DIFC) is a financial free zone located near Dubai's central business district. It was established in 2004 to encourage growth in the banking, investment and the financial services sector in Dubai by offering a zero tax rate on income and profits, 100 percent foreign ownership, no restrictions on foreign exchange or capital/profit repatriation, operational support and first class business facilities.

An interesting feature of the DIFC is that it has its own laws which govern commerce within the DIFC. It also has an independent court system to hear civil cases (although the Dubai Courts retain jurisdiction to hear criminal cases).

Since the DIFC Courts were established, there has been ongoing debate within the legal community as to the extent of the DIFC Courts' jurisdiction. This issue has arisen in three recent cases in the DIFC Courts, which we discuss below.

Jurisdiction of DIFC Courts

The jurisdiction of the DIFC Courts is set out in Article 5 of DIFC Law No. 12 which provides that the DIFC Court of First Instance shall have the exclusive jurisdiction over:

  1. civil or commercial cases and disputes involving the Centre or any of the Centre's bodies or any of the Centre's establishments;
  2. civil or commercial cases and disputes arising from or related to a contract that has been executed or a transaction that has been concluded, in whole or in part in the Centre or an incident that has occurred in the Centre;
  3. objections filed against decisions made by the Centre's bodies, which are subject to objection in accordance with the Centre's laws and regulations;
  4. any applications over which the Courts have jurisdiction in accordance with the Centre's laws and regulations;

Article 5 also provides that the parties may elect to contract out of DIFC Law No. 12 and agree to submit disputes arising under the contract to the Courts of another jurisdiction.

On 7 December 2009, the DIFC Courts and the Dubai Courts signed a Protocol clarifying the extent of each court's jurisdiction.

According to the Protocol, the Dubai Courts and DIFC Courts agree that the DIFC Courts should have exclusive jurisdiction over civil or commercial cases in disputes involving the DIFC or any company licensed to operate from the DIFC. The DIFC Courts also have jurisdiction over any civil or commercial case or dispute arising from, or related to, a contract or financial transaction that has been performed in whole or in part within the DIFC.

The purpose of the Protocol was to clarify the position of the so-called "coffee shop" contract where the parties signed the contract in the DIFC but where neither party was based in the DIFC and no part of the contract was performed there. Pursuant to the terms of the Protocol, such contracts will not attract the jurisdiction of the DIFC Courts and must be referred to the Dubai Courts. In order for the DIFC Courts to have jurisdiction, one of the parties must be based in the DIFC or the dispute must arise out of a contract which is performed in whole or in part in the DIFC.

Hardt & Another v Damac (DIFC) Company Ltd et al

In March 2010, the DIFC Courts considered a claim by two claimants against the Damac Group of Companies. The claimants had entered into transactions with various different companies in the Damac Group for the purchase of residential apartments and retail units in four separate property developments – Park Towers, Waters Edge, Wildflower and Ocean Heights. Of these developments, only Park Towers was inside the DIFC. The claimants paid a total of AED 35,669,038.41 to various Damac companies toward the purchase price of the properties.

The claimants filed a claim with the DIFC Courts against various companies in the Damac Group alleging that they had failed to deliver the properties on time. The claimants alleged breach of contract, breach of various provisions of the UAE Civil Code, the UAE Penal Code and DIFC law. The claimants sought an order for termination of all contracts relating to the properties and repayment of all monies that they allege have been paid to the defendants together with damages for loss of profits, interest and costs.

The first defendant, Damac (DIFC) Company Ltd filed an application to strike out the claimants' claim on the grounds that the DIFC Courts have no jurisdiction.

In a judgment dated 31 March 2010, Justice Chadwick dismissed the claimants' claim against Damac (DIFC). In his judgment, Justice Chadwick noted that, while Damac (DIFC) was incorporated in the DIFC, it was not a party to any of the contracts that were the subject of the proceeding. In particular, Damac was not a party to the contracts relating to Park Towers, the only property within the DIFC.

Justice Chadwick notes that while Damac (DIFC) was named as a party on the face of the claim form, there were no specific allegations of breach of contract or breach of duty specifically against that company.

Justice Chadwick also held that even if there were facts indicating that the DIFC Courts could have jurisdiction over the proceeding, the parties had agreed to contract out of that jurisdiction as they were entitled to do under Article 5(A)(2) of Law No. 12 of 2004.

In light of these facts, Justice Chadwick had no difficulty in striking out the claimants' claim against Damac (DIFC) for want of jurisdiction.

While this case garnered a reasonable amount of attention in the media, Justice Chadwick's decision was a straightforward application of DIFC Law No. 10 of 2004. Given that Damac (DIFC) was not a party to any of the relevant contracts and in the absence of any specific allegation of breach of duty against Damac (DIFC), there is no basis on which the DIFC Courts could have assumed jurisdiction over the case. In this respect, the decision of the court was largely uncontroversial.

Taaleem PJSC v National Bonds Corporation PJSC & Deyaar Development PJSC

This case arose out of the Sky Gardens development, one of the first residential buildings to be constructed in the DIFC. Taaleem, a private school company, was one of three part-owners in Sky Gardens.

In May 2010 Taaleem filed proceedings in the DIFC Courts against National Bonds and Deyaar Developments. In its statement of claim, Taaleem alleged that National Bonds offered to procure and finance a 33% interest in Sky Gardens under what amounted to a "Muhabara" agreement. Taaleem also alleged that its liabilities were assumed, with the consent of national Bonds, by Deyaar who then became responsible for the total cost of the building.

Taaleem sought a declaration from the DIFC Courts that its liabilities had been assumed by Deyaar. National Bonds subsequently filed an application seeking to have the case dismissed for want of jurisdiction. In a decision issued on 26 September 2010, the DIFC Court rejected that application and accepted jurisdiction to hear the dispute under Article 5(1)(a) of DIFC Law No. 12 of 2004.

As the subject matter of the contract was the sale and purchase of a building in the DIFC, there appeared to be little doubt that the DIFC Courts did have jurisdiction to hear the dispute. However, in an interesting twist, National Bonds filed its own claim against Taaleem in the Dubai Court of First Instance. While it is not clear precisely on what basis National Bonds is suing Taaleem, it appears that the Dubai Court proceeding arises out of the same facts under consideration in the DIFC proceeding. The DIFC Court has accordingly adjourned Taaleem's case until the Dubai Court has ruled on whether it has jurisdiction to hear National Bonds case.

The Dubai Courts are currently considering whether they have jurisdiction to hear National Bonds' claim against Taaleem or whether the matter should be referred to the DIFC Courts. If the Dubai Courts find that they do have jurisdiction to hear the case, then an unusual situation will be created in that both the DIFC Courts and the Dubai Courts will have found that they have jurisdiction to hear disputes arising out of the same set of facts. If the Dubai Courts follow the Protocol, then they should find that the DIFC Courts have jurisdiction to hear National Bonds' claim against Taaleem. Until that decision is to hand, however, it remains to be seen whether this will actually be the case. The legal community is accordingly awaiting the decision of the Dubai Courts with great interest.

Corinth Pipeworks SA v Barclays Bank PLC

This case arose out of a tortious claim by a Greek company against the DIFC branch of Barclays Bank PLC.

Corinth Pipeworks was a pipe works manufacturer carrying on business in Athens. In April 2009 it sold and delivered steel pipes having a value of US$ 34,668,868.26 to Afres Ltd, a company registered in the Jebel Ali Free Zone in Dubai. Afres paid the claimant the sum of US$ 9,642,278 for the pipes but failed to pay the balance.

Between April 2010 and June 2010 an employee of Barclays Bank Jebel Ali branch sent a number of emails to Afres which Corinth Pipeworks alleged represented on behalf of Barclays Bank that Afres had requested Barclays Bank to transfer funds to pay for the pipes. Corinth Pipeworks alleged that these emails indicated that the payment would be made within a short period of time and that the emails were sent by Barclays Bank to Afres so that Afres could in turn pass them on to Corinth Pipeworks. It was alleged that the representations made in the emails were untrue and had been made so that Corinth Pipeworks did not take any steps to recover the debt or to freeze or otherwise secure Afres' assets.

In an effort to recover its losses, Corinth Pipeworks issued proceedings in the DIFC Courts against the DIFC branch of Barclays Bank. Barclays Bank promptly filed an application for a declaration that the Court had no jurisdiction to hear the claim.

Barclays argued that the DIFC Court had no jurisdiction to hear the dispute because Corinth Pipeworks' claim related to the conduct of Barclay's employees at its Jebel Ali branch and not at its DIFC branch. Accordingly, the requirement that the dispute involve "the Centre or any of the Centre's bodies or any of the Centre's establishments" was not satisfied.

In response to the application, Corinth Pipeworks argued that, the DIFC Court had jurisdiction because Barclay's Bank as a whole and not just the DIFC branch had been designated a licensed Centre establishment and therefore was a "Centre establishment" within the meaning of Article 5 of Law No. 12.

Justice Coleman had no difficulty in dismissing Corinth Pipeworks' arguments. Justice Coleman found that the fact that all branches of a corporation may be part of a single legal person with a single corporate name does not result in all of the branches of the corporation being part of a Centre's establishment. The international corporation is a Centre's establishment only to the extent to which its branch is authorised to conduct business in the DIFC. As such a claim or dispute only "involves a Centre's establishment" when that claim or dispute is connected with or arises out of the activities of the corporation conducted by its DIFC branch or division. Justice Coleman found that the Court had no jurisdiction over claims arising out of the conduct of the Bank's Jebel Ali branch any more than it would have over claims arising out of the conduct of the Bank's head office in London.

Conclusion

Given that the DIFC Courts are still a relatively new judicial body in the UAE, there will undoubtedly be issues arising in relation to the jurisdiction of the DIFC Courts that will need to be resolved.

The decisions of the DIFC Court in the Hardt v Damac (DIFC) case and Barclay's Bank cases are a reasonably clear indication that the DIFC Court will apply the provisions of DIFC Law No. 10 of 2004 and the Protocol with the Dubai Courts strictly. With regard to the Dubai Courts, the decision in the National Bonds v Taaleem case will be a major test as to whether they will interpret the DIFC Law and the Protocol in the same manner.