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Issue

The first case involving the method of calculating late payment penalties on voluntary disclosures has been adjudicated by the Federal Supreme Court.

The Federal Supreme Court has taken a position divergent from that of the tax dispute resolution committees, and the Federal Primary and Federal Appeals Courts on this matter.

The judgment is significant because late payment penalties are calculated at a maximum of 300% of the tax debt.

A voluntary disclosure is when a taxpayer notifies the Federal Tax Authority (“FTA”) of an error or omission in a previous tax return, tax assessment or tax refund application.

A voluntary disclosure is obligatory when the taxpayer discovers a mistake – and submission of the voluntary disclosure must be made within twenty weekdays of discovering the mistake.

Once the taxpayer makes a voluntary disclosure – the resulting late payment penalties can reach a maximum of 300% of the disclosed amount calculated retrospectively as of the original tax return, tax assessment, or tax refund application.

Voluntary disclosure penalty calculation

The voluntary disclosure results in the FTA applying fixed penalties that comprise of AED 3,000 for the first time, and AED 5,000 for each subsequent voluntary disclosure.

A voluntary disclosure also results in the FTA applying a percentage-based penalty of 5% calculated based on the tax amount variance between the value in the voluntary disclosure and the original tax return, tax assessment, or tax refund application. This is referred to as a ‘tax benefit’ penalty.

Thirdly, the FTA generally applies a late payment penalty to voluntary disclosures at 2% immediately, 4% after the first week, and 1% daily up to a maximum of 300% calculated retrospectively as of the date of the tax return, tax assessment, or tax refund application that is being remedied – not as of the date of the voluntary disclosure.

Federal Supreme Court judgment

The case involved the application of late payment penalties on voluntary disclosures.

Since early 2019; the tax dispute resolution committees, the Federal Primary Court and the Federal Appeals Court, have taken the position that late payment penalties do not apply to the tax amount variance between the voluntary disclosure and the original tax return.

In other words – that the late payment penalties should be calculated as of the date of the voluntary disclosure, but not retrospectively as of the date of the original tax return.

However, the Federal Supreme Court has taken a position divergent from that of the tax dispute resolution committees, and the Federal Primary and Federal Appeals Courts.

The Federal Supreme Court reasoned that voluntary disclosures are to be considered a branch of the original tax return.

Based on this reasoning, the Federal Supreme Court ordered that late payment penalties should apply retrospective to the voluntary disclosure, calculated as of the date of the original tax return.

For example, if a person discovers a mistake in a tax return from April 2018, and makes a voluntary disclosure in April 2020, the late payment penalties up to 300% would be calculated as of April 2018 – not April 2020.

Article 101 of the UAE Constitution states that the judgements of the Federal Supreme Court shall be final and binding upon all. Thus, it is expected that the tax dispute resolution committees, and the Federal Primary and Federal Appeals Courts shall echo the position taken by the Federal Supreme Court on this issue.

VAT on Liquidated Damages

Construction litigation is generally segmented into two claims. The first is a claim for sums that are due but unpaid, whether contractually or on quantum meruit basis, generally for a transaction which has concluded. The second type of claim is compensation for a transaction that has not taken place, i.e. no underlying service or good has been provided.

In respect of the second type of claim, the UAE Civil Transactions Law permits the parties to set a compensatory amount for liquidated damages. Notwithstanding, the law also permits a court “…at the request of one of the parties, amend such an agreement, in order to make the amount assessed equal to the prejudice.”

Often before a competent court or an arbitration tribunal, litigants trigger the right to reassess compensation for liquidated damages which entails various applications, hearings, pleadings, and expert work that litigants should manage efficiently for any subsequent VAT liability concerns or tax trials.

The UAE Federal Tax Authority’s public clarification on the matter titled ‘VAT treatment of compensation-type payments’ explains that liquidated damages for loss of earnings – not for the provision of any goods or services – are outside the scope of VAT.

In its public clarification, the Federal Tax Authority describes ‘liquidated damages’ as “predetermined amounts that contractual parties designate during the formation of the agreement for the injured party to collect as compensation upon a specific breach – for example, in case of early termination of a contract or performance delay. The purpose of such payments is not to provide consideration for a provision of any goods or services but to compensate a party for loss of earnings. As such, the payments are outside the scope of VAT.”

Litigation Considerations

The litigation commences with the dispute notice which sets out the allegations that create the basis for the claim. In this sense, the notice describes the allegations and heads of damages, it is a considerable piece of evidence to determine the taxation treatment of the construction dispute proceeds received, and any expenses that may be incurred.

The complaint then materializes into a construction dispute before an arbitration tribunal or competent court and may have consequential effects in a subsequent tax trial before any of the Abu Dhabi, Dubai, or Sharjah tax dispute resolution committees, or before the tax disputes circuits at the federal courts.

With VAT liabilities in mind, litigants should maintain a holistic approach during submission of documentation in a construction dispute to ensure that the segmentation of the claims allows for determination of the tax treatment of the moneys that will ultimately be awarded.

Ultimately, the judgement or award issued in the construction dispute may or may not specifically allocate the award moneys clearly and consequentially hinder a litigant from identification of the tax treatment that should apply. Litigants should be vigilant in their analysis of how the judgement or award is detailed and follow any necessary applications before the courts or arbitration tribunal to obtain evidentiary documentation of how the awarded moneys are allocated.

Set-Off / Nomenclature

The respective public clarification by the Federal Tax Authority explicitly considers and elaborates on nomenclature in determining whether a payment is consideration for a supply or not. The public clarification states verbatim that “…it is important to ignore the labels or titles the parties give to a payment.”

For employers, this should be accounted for where the employer is the recipient of liquidated damages and applies rights of set-off. Although the treatment of liquidated damages would be outside the scope of VAT, employers must account for potential VAT liability in cases where payment of liquidated damages by a contractor are set-off against contractor invoices.

Evidence

Upon receipt of the judgement or award, the taxpayer (e.g. the contractor) will determine the tax treatment that shall be applicable to the moneys awarded. The treatment should be in line with the Federal Tax Authority’s public clarifications and general tax legislation. Article 48 of the Tax Procedures Law places the burden of proof on the taxpayer to evidence the justification of the tax treatment.

Litigants would be prudent in considering the tax treatment of the ultimate judgement (or award) at the outset of the litigation and plan accordingly, with tax litigation expertise involved in the case management process, in case of a potential subsequent tax trial.

The outcome of the construction dispute will also provide evidence on whether the compensation can be attached to an underlying service or good – even if they are considered liquidated damages by the parties – at which point a VAT liability may be incurred (such as the case of set-off rights noted above).

The taxpayer will have to evidence that the moneys received are indeed compensatory in nature for liquidated damages before the Federal Tax Authority, or a tax dispute resolution committee, or the federal courts, in a potential tax trial.

When drafting an arbitration clause, it is vital to make sure that the clauses are simple and clear in order to avoid uncertainty and disputes over their semantics and effect. This is the first step to ensuring the time and cost-effectiveness of a potential dispute as it will minimize the risk of possible disagreements regarding the jurisdiction of the tribunal or the process of appointing the arbitrators. At the very outset of drafting the arbitration clause, it must be explicit that the parties wish to have their disputes resolved via arbitration and to waive the original jurisdiction of the courts. If this intention cannot be inferred, it means that the ‘medium’ used has missed its target.

The repercussions of the failure to express clarity and intention of the parties to refer to arbitration in case of a dispute manifested in a case leading to a Federal Supreme Court judgment issued recently.

The Case in Question

The case in question revolves around an agreement that was executed in March of 2013, relating to the non-payment of medical supplies.

The language used in the arbitration clause was in English and the issue arose out of whether or not the clause was explicit in commanding the parties to refer to arbitration as the dispute resolution mechanism.

The arbitration clause stated in case the parties could not reach an amicable settlement in relation to any dispute within 30 days, either party may trigger arbitration dispute proceedings to be seated in Abu Dhabi, conducted in English and subject to the rules of the Abu Dhabi Commercial Conciliation & Arbitration Centre.

When the dispute arose for non-payment over the sale of the medical supplies, one of the parties filed the dispute before the Primary Court. The Primary Court found it had no jurisdiction to hear the case due to the arbitration clause.

The Primary Court judgement was appealed with the argument that the original language used in the arbitration clause did not obligate the parties to refer to arbitration, but rather, was an optional method for dispute resolution. The Appeals Court accepted the appeal argument and remanded the case to the Primary Court to apply its jurisdiction and rule on the merits of the dispute.

The party arguing that the arbitration clause was obligatory challenged the ruling of the Appeals Court before the Federal Supreme Court on the basis that it had submitted a translation of the arbitration clause from English to Arabic, provided by a judicially certified legal translator, to the court which evidenced that the arbitration clause was obligatory.

The Federal Supreme Court ruled that the judgement of the Appeals Court was unfounded as it did not debunk the translation presented by the party advocating for the obligatory language of the arbitration clause.

The Federal Supreme Court found that the Appeals Court could have ordered the appointment of a language expert from the respective expert registry, or the party advocating for the courts’ jurisdiction could have submitted a counter-translation evidencing that the arbitration clause was indeed optional. Neither of these potential procedures had occurred.

The Federal Supreme Court overturned the Appeals Court judgement.

But what if the Appeals Court of its own accord or by litigant’s request ruled for the requirement of a court-appointed language expert to opine on the English text of the arbitration clause?

Or what if the party advocating for litigation had submitted a translation by a judicially certified translator that arbitration clause was optional?

In both hypotheticals; the result would have been an even further prolongation of the dispute and an increase in costs.

The moral of the case is the importance of clear and effective arbitration clauses (or agreements); that include the seat of arbitration, number and selection of arbitrators, institutional or ad hoc, governing law of the subject matter in dispute and possibly governing law of the arbitration agreement (if different), capacity to agree to arbitration, the authority to sign arbitration agreements, multiple party arbitration, enforcement, opt-in and opt-out provisions (although they may be problematic), sovereign immunity if a party to the transaction is a State, scopes of disputes covered, and other matters.

In the late nineties, a contractor sued a government tender committee for AED 65,467,250 in compensation for losses and lost earnings as a result of not being awarded five tenders related to construction and maintenance works that the contractor had bid for.

The contractor argued that its five bids contained the lowest prices and fulfilled all the conditions of the tenders. Both the primary court and the appeals court rejected the claim.

The Federal Supreme Court, however, overturned the lower court judgments and found the tender committee to be administratively liable towards the contractor for the five rejected bids.

The case was brought forth on grounds of contravening Abu Dhabi Law No. 4/1977 On Tenders, Auctions and Warehouses in the Emirate of Abu Dhabi – particularly on the basis that Article 21 of the said law states that:

“The preference between the tenderers shall be according to the selection of the tenderer presenting the lowest total price, should the bid thereof be consistent with the tender conditions. However, the tenderer presenting a higher price may be chosen should the lower prices be unreasonably low and not assuring proper work progress.”

The Federal Supreme Court ruled that it was evident from the statutes regulating contracting by way of tender, that the legislator has subjected public tenders to basic principles of openness, equality, freedom of competition and the mechanism for awarding the tender, and obligates the administrative authority (i.e. the tender committee) to disclose the reasons for rejection of a bid.

The Court’s rationale was that this is to ensure that the administrative authority follows a decreed path in order to reach the appointment of the best bidders in accordance with the law. The contracting procedures are organized by way of tender, so that it takes place in two stages, the first of which includes preliminary work and the second in which the contract is concluded.

Continuing, the Court stated that the preliminary tender processes consist of setting the conditions for the tender, announcing it, receiving bids, fulfilling the conditions of the tender, and then separating between the bids. These were considered by the Court to be internal organizational rules that are the prerogative of the tender committee. Nonetheless, the Court opined that the provisions that are set by the legislator are for the benefit of the administrative authority (i.e. the tender committee) and private persons alike, with the aim of ensuring the impartiality of the bidding processes and respecting the principle of equality among all bidders.

In interpreting the law, the Federal Supreme Court noted that the bidder with the lowest price is originally the owner of the right to the award whenever the bid is consistent with the terms of the tender, and with the exception of this principle, the administrative authority may award the tender that was submitted at a higher price if the lower price was unreasonably reduced, as there may be concerns regarding good performance, and this exception was a violation of the basic principle that governs public tendering procedures, which is the mechanism for awarding the tender.

In its judgment, the Federal Supreme Court found the tender committee to be administratively liable.

The significance of this case is not only that a contractor had succeeded in an action against an administrative decision issued by an administrative authority (i.e. the tender committee), but that the Federal Supreme Court found the committee to be liable for its decision.

In other words, the Court did not only invalidate the decision, but also found that liability arose against the contractor’s claim of AED 65,467,250.

One of the rarely commented upon competencies under Emirati law is administrative law and administrative decisions; the law that governs the relations between government agencies, and government agencies and the private sector, and the decision taken by government agencies.

There is no single administrative legislative text in the UAE, rather, the corpus of administrative law is comprised of scattered provisions in various pieces of legislation – but mainly the Constitution and Article 84 (bis) of the Civil Procedures Law – and also scholarly works and jurisprudence.

As a matter of fact, Article 84 (bis) was only added to the Civil Procedures Law in 2014.

In 2019, there were almost 1,130 administrative cases filed before the various stages of the Federal Courts. Not to mention the myriad other administrative cases that are domestic respective of domestic administrative authorities in Emirates that have independent judicial authorities (i.e. Abu Dhabi, Dubai, RAKI, DIFC, and ADGM).

Most administrative disputes revolve around invalidating an administrative decision – in other words – cancelling the administrative decision and its consequence. The discussion surrounding forms and procedures of administrative disputes is quite broad and has its own respective nuances such as the effects of administrative decision in rem and those in personam, and whether effects can be retrospective, or whether there can be a monetary value attached to an administrative decision and its invalidation.

However, with all that said, it is extremely rare for a Court to find an administrative authority liable for an administrative decision – particularly where the plaintiff is claiming compensation for losses and lost earnings.

Generally, the Courts either uphold the administrative decision, or invalidate it, or invalidate it and replace it with a quasi-judicial/administrative decision – but rarely does a Court find the administrative authority liable.

This particular case in this article is what one may refer to as an ‘orphan’ case. It occurred in an exceptional instance, and it is unclear if there are other similar judgments, or whether the Federal Supreme Court may repeat such a judgment.

In January 2019, the Federal Supreme Court (FSC) ruled on whether a double-exequatur requirement was necessary for the enforcement of an arbitral award issued under the Rules of the London Court of International Arbitration (LCIA), seated in London.

The declaration sought from the FSC was whether an arbitral award issued under LCIA rules and seated in London could (or not) be recognized and enforced as it had not been granted exequatur by the English Courts before a petition to confirm and enforce the award had been lodged in the United Arab Emirates.

The appeal to the FSC was in challenge to a rejection by the Khor Fakkan Federal Appeal Court (KFFAC) to submit a petition to confirm and subsequently enforce the award. The KFFAC rejected the petition on the basis that it has not been granted exequatur by the English Court prior to enforcement in the UAE. Essentially, the KFFAC’s judgement was that the party looking to confirm the award for enforcement must obtain a double-exequatur; a requirement under the Geneva Convention of 1927 where the award must be “final” in the country of origin as.

The necessity for a double-exequatur was abolished by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the Convention), which was adopted by the UAE pursuant to Federal Decree No. 43 of 2006. The Convention replaced the word “final” with “binding” so that no leave for enforcement (or exequatur) would be required from the country of origin.

Overturning the ruling of the KFFAC, the FSC found that the court’s refusal to recognize and enforce the award was due to misinterpretation of the term “authenticated” under in Article IV(1)(a) of the New York Convention which requires that a duly authenticated original award (or a duly certified copy) must be presented by a party looking to confirm and enforce an arbitral award.

The FSC found that the KFFAC had misinterpreted the meaning of the term “authenticated” with the meaning of enforceability or exequatur. The interpretation by KFFAC was due to the Ground e of Article V(1) of the Geneva Protocol on Arbitration Clauses (1923) and the Geneva Convention on the Execution of Foreign Arbitral Awards (1927). Ground e of Article V(1) provided that the enforcement of an award may be refused if the party against whom the award is to be enforced evidences that the award is not “binding”. Succeeding the 1923 Geneva Protocol, the 1927 Geneva Convention amended the requirement from “binding” to “final” which was ultimately interpreted by courts as a requirement to obtain grant of an exequatur from the court of the country of origin; hence the coming into practice of the double-exequatur system until the 1958 New York Convention.

Client Alert

Recently, the Federal Appeals Court (UAE) reversed late payment penalties applied by the Federal Tax Authority on voluntary disclosures in two separate tax disputes for two separate taxpayers assisted by Wasel & Wasel.

The Federal Appeals Court has ruled on nearly six tax disputes between 2019 and June 2020, almost three of which have been successful in reversing penalties imposed on taxpayers by the Federal Tax Authority.

Wasel & Wasel has been counsel on two of the three successful judgements before the Federal Appeals Court reversing multi-million Dirham tax penalties.

The penalties reversed were late payment penalties imposed on voluntary disclosure submissions.

These latest judgements by the Federal Appeals Court continue the success record of Wasel & Wasel on tax disputes before the tax disputes resolution committees and the Federal courts.

Moreover, Wasel & Wasel was able to obtain these successful judgements without the Federal Courts ordering the appointment of a court expert, which lead to an increased speed of the court proceedings.

The two companies had filed objections before the Dubai Tax Dispute Resolution Committee in 2019 against the late penalties on voluntary disclosures.

In mid-2019, the Dubai TDRC ruled in favour of the taxpayers and reversed late penalties imposed on voluntary disclosures.

The TDRC rulings were subsequently challenged before the Federal Primary Court in late 2019.

The Federal Primary Court upheld the TDRC rulings in early 2020, maintaining the reversal of late penalties on the voluntary disclosures.

The Federal Appeals Court judgements follow a significant number of TDRC and Federal Court rulings and judgements since 2019 that Wasel & Wasel has assisted taxpayers with, in addition to various other issues taxpayers face; such as private clarification tax disputes, out-of-State taxpayer disputes; tax disputes arising out of audits by the Federal Tax Authority; tax disputes arising out of supply to Government entities; and more.

To access the Getting The Deal Through publication on tax disputes in the UAE; click here.

New court

On 10 November 2020, His Highness Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, and Chairman of the Abu Dhabi Judicial Department issued Resolution No. 35 of 2020 (the “Resolution”).

Article 1 of the Resolution states that:

“A Court is to be established in the city of Abu Dhabi and shall be dedicated to hearing Money Laundering and Tax Evasion Crimes. The Court shall be under the Abu Dhabi Criminal Court.”

So far, there have not been reported tax evasion crimes in the UAE.

In December 2019, however, news was issued that the Federal Tax Authority and the Federal Public Prosecution had begun coordination and cooperation on regulatory measures to address cases of tax evasion, to develop training courses in the field of tax evasion and means of confronting it, and to form a joint team to work on identifying the legal documents and requirements to be dealt with for tax evasion issues and to manage the witness and victim protection program.

Tax evasion was addressed by a court for the first time during civil proceedings on 14 October 2020 when the Federal Supreme Court addressed tax evasion in a judgment related to voluntary disclosures.

The Federal Supreme Court took the position that where a person discovers an error, they must disclose and correct the error (within twenty weekdays) — or be found to have committed tax evasion.

Tax evasion

Tax evasion is defined in the law as:

“The use of illegal means resulting in the reduction of the amount of the due tax, nonpayment thereof, or a refund of a tax that a person does not have the right to have refunded under any tax law.”

The criminal penalty for tax evasion is a prison sentence and/or a monetary penalty up to five times the amount of evaded tax.

The tax legislation does not limit the prison sentence term, but Article 69 of the Penal Code states that:

“The minimum period of imprisonment may not be less than a month nor exceed three years, unless the law provides otherwise.”

Because the tax legislation does not state otherwise, one can draw from the Penal Code that prison sentences for tax evasion crimes can be a minimum of a month and a maximum of three years.

As opposed to the self-declaratory tax regime for tax returns and so on, where the burden of proving the accuracy of the tax return falls upon the taxable person, in tax evasion issues, the burden of proving tax evasion falls on the Federal Tax Authority. – As is the case between civil and criminal cases.

It is to be noted that the Penal Code explicitly states that ignorance of the law is not to be considered an excuse – hence knowledge and application of the tax legislation is expected of all taxpayers, failure of which may lead to finding a tax evasion offense.

Procedure

As for the court procedure, Article 2 of the Resolution states that:

“Appeals to the judgements rendered by the specialized Court…shall be heard by one of the specialized circuits of Appeal of the Abu Dhabi Criminal Court.”

The specialized court will thus – seemingly – comprise of three stages of trial; a primary level, an appeals level, and final the Abu Dhabi Court of Cassation (criminal).

Prior, it was expected that tax evasion crimes would come under the ambit and jurisdiction of the Federal Primary Court (criminal circuit), given that tax evasion is a federal crime.

However, with the Abu Dhabi Judicial Department establishing an Abu Dhabi dedicated criminal court for tax evasion crimes, it is expected that the Emirates with independent judicial systems will have jurisdiction over tax evasion crimes that occur within their Emirate (or fall within their jurisdiction for other reasons).

The Emirates with independent judicial systems are Abu Dhabi, Dubai, and Ras Al-Khaimah (RAK). The remaining Emirates utilize the Federal court systems.

This will ultimately lead to potential diversity in judgments and reasonings, as there will expectedly be separate judgments over similar issues by the Abu Dhabi Cassation Court, the Dubai Cassation Court, the RAK Cassation Court, and the Federal Supreme Court.

Liability

As a general matter, a tax evasion accusation would be levied against the taxpayer (as the original debtor) and against the legal representative of the taxpayer company (i.e. the listed authorized signatory on the commercial registration of the company, or the listed representative with the FTA).

However, both the tax legislation and the Penal Code address complicity – i.e. where others are involved in the potential tax evasion crime.

This is extremely important for employees of the taxpayer and external advisors to the taxpayer alike to take note of, as any could be deemed an accomplice to a tax evasion crime.

For example, if the finance director of a company discovers an error but does not take action on that error within the requisite time period to avoid tax penalties, the company (taxpayer) may be found to have committed tax evasion, and the finance director to be a direct accomplice to that action.

In another hypothetical, if a tax agent advises their client not to disclose a particular tax error to avoid facing tax penalties, the tax agent could be found to be an accomplice by causation.

Article 26 of the Tax Procedures Law addresses complicity as follows:

“The competent court shall impose tax evasion penalties against any person who is proven to have been directly involved or instrumental in tax evasion…[and] any person who is proven to have been directly involved or instrumental in tax evasion shall be jointly and severally liable with the person whom he has assisted, to pay the payable tax and administrative penalties pursuant to this law or any other tax law.”

There are two types of criminal complicity; direct and by causation.

Direct complicity is defined in the Penal Code as one of three categories:

1. A person who perpetrates the crime with another person.
2. A person who participates in its perpetration when it consists of several acts and deliberately commits one of its constituent acts.
3. If a person sub-serves another person by any means to execute the criminal act and the latter is not criminally responsible for this act for any reason whatsoever.

Complicity by causation is also defined in the Penal Code under three categories:

1. If the person instigates to commit a crime that was perpetrated as a result of this instigation.
2. If the person conspires with others to perpetrate a crime that occurred as a result of this conspiracy.
3. If the person gives the doer a weapon, tools or anything else used in the perpetration of the crime of which he had knowledge; or willfully assists the perpetrator, by any other means, in the preparatory acts or those facilitating or completing the perpetration of the crime.

FTA powers

Article 50 of the Tax Procedures Law grants the Director-General, and tax auditors appointed by a decision of the Minister of Justice, the capacity of judicial officers for tax violations.

Under Article 30 of the Criminal Procedures Law, judicial officers have the power to inquire about crimes, search for their perpetrators and collect the necessary information and evidence for investigation and indictment.

Article 45 of the Criminal Procedures Law grants judicial officers the power order the arrest of the accused, present and against whom there is enough evidence that they committed a crime.

Nonetheless, criminal trial proceedings would be conducted by the respective public prosecution.

As such, the initiation of a criminal case may only be via an application of the FTA’s Director-General pursuant to Article 17 of the Tax Procedures Law.

Ultimately, the Director-General and certain FTA tax auditors can act as judicial officers with the powers to search, investigation, question, and indict a person for tax evasion.

Subsequently, the complaint is submitted to the public prosecution by the Director-General in order for the new Tax Evasion Court to adjudicate the case.

Background

The Executive Regulations to the UAE Civil Procedures Law that came into effect in early 2019 amended the right of persons to appeal to seizure orders limiting the right to only the distrainee (the debtor whom the order is issued against).

Prior to this amendment, the distrainee, the judgment creditor, and any concerned person had the right to appeal against a seizure order.

In May of 2019, a creditor applied to the Dubai Courts to seize a performance bond held by the debtor.

The application was rejected.

The creditor appealed the rejection and in July 2019 the Dubai Courts turned down the appeal on the basis that Article 114(3) of the Executive Regulations to the Civil Procedures Law limits appeals against seizure orders to the distrainee (the debtor) only.

The creditor argued that Article 114(3) is unconstitutional pursuant to Articles 14, 25 and 41 of the UAE Federal Constitution and requested the Dubai Court of Appeals to grant leave to file a constitutional case before the Constitutional Circuit of the Federal Supreme Court for review of the constitutionality of Article 114(3).

The Dubai Court of Appeals found merit in the request and granted the creditor leave to file a constitutional lawsuit before the Constitutional Circuit of the Federal Supreme Court, which the creditor proceeded to do so in September of 2019.

Defense arguing the constitutionality of Article 114(3) was submitted by the Cabinet of Ministers and the Minister of Justice, represented by the State Disputes Department of the Ministry of Justice, and the Dubai Legal Affairs Department on behalf of the President of the Dubai Primary Court.

Decision

The Constitutional Circuit of the Federal Supreme Court rejected the argument that Article 114(3) is unconstitutional but stated that creditors and any concerned persons may rely on Article 60(1) of the Executive Regulations to the Civil Procedures Law to appeal against seizure orders.

Article 60(1) states that a petitioner whose request has been rejected, the person against whom the order has been issued, and any concerned persons, have the right to file a grievance against said order unless the law or the Executive Regulations stipulate otherwise.

Prior to this ruling by the Constitutional Circuit, it was understood that Article 114(3) was a carve-out provision that applied the restriction provided for in Article 60(1); “…unless the law or the Executive Regulations stipulate otherwise…”.

The Constitutional Circuit, however, ruled that Article 114(3) is not a carve-out provision and creditors and concerned persons may rely on Article 60(1) to file appeals against seizure orders.

Constitutional Litigation (Brief)

In the UAE, filing a constitutional case directly before the Constitutional Circuit of the Federal Supreme Court is a right restricted to the federal and local government agencies only.

Private litigants may only file a constitutional case with the Constitutional Circuit if granted leave by a subject matter trial court in an on-going substantive case.

The basic principle is that a constitutional lawsuit is filed based on an existing substantive case before the trial court. In which a litigant argues the unconstitutionality of legislative text against the substantive dispute. If the trial court accepts the argument it authorizes the litigant to file a constitutional lawsuit. Alternatively, the trial court may of its own accord find that the text is unconstitutional and refer it to the Constitutional Circuit of the Federal Supreme Court for review.

However, this does not make the constitutional lawsuit a subordinate lawsuit, but rather a case that is separate from the subject matter dispute because it – the constitutional lawsuit – deals with a subject that differs from the merits of the substantive case.