The Liberty of Shareholders to Agree on an Exclusive Jurisdiction to Consider their Disputes
Adnan Al ErqsousiSenior Associate,Dispute Resolution
The new UAE’s Civil Procedure Law Federal Law of 2022 (the “CPL”), which was issued by virtue of Law by Decree No 42 of 2022 and came into effect on 2 January 2023, presented key changes and amendments to the repealed Federal Civil Procedures Law No 11 of 1992 (the “Repealed CPL”). One of those key changes is to give the liberty to the shareholders of a company to agree on an exclusive court jurisdiction to consider any disputes arising between them in relation to their rights and obligations as shareholders in the company, unlike to the Repealed CPL which gave jurisdiction to the court where the headquarter of the company is located, beside the agreed court of jurisdiction.
In July 2022, a shareholder (the “Shareholder”) brought an action before Ras Al Khaimah First Instance Court against an offshore company, registered in Ras Al Khaimah International Corporate Centre (“RAK ICC”), in which it holds shares (the “Company”), and against the registration agent of the Company (the “Agent”), seeking the appointment of an accounting expert to attend the offices of the Company and the Agent to review their statements, accounting records, commercial books, and annual balance sheets to determine its annual profits / dividends. The Shareholder purported that neither the Company nor the Agent grant it the access to the Company’s financials and books, thus preventing the Shareholder from ascertaining its dividends / annual profits.
The Company mainly argued with the lack of RAK Court’s jurisdiction to consider the action as it was agreed in the agreement entered by its shareholders (the “Shareholders Agreement”), including the Shareholder to the claim, that such jurisdiction belongs to the DIFC Courts to settle any disputes relating to their rights in the Company.
The Company also argued that, under the RAK ICC’s regulations, its address is the same address of its Agent which is domiciled in Dubai and, therefore, RAK Court does not have the jurisdiction to consider the matter.
The Court of First Instance ruled that it has no domestic jurisdiction to consider the action, according to Article 33 (5) of the CPL which provides that, for matters relating to companies, the parties may agree on a specific court jurisdiction to hear the dispute, in such case, the court chosen shall have the exclusive jurisdiction.
The Shareholder challenged the ruling before RAK Court of Appeal. On 17 March 2023, the Court of Appeal set aside the judgment of RAK First Instance Court as it found that RAK Court has the jurisdiction to consider the action given that the Shareholders Agreement was executed in RAK and, according to the CPL, the jurisdiction, for disputes of commercial nature, falls within the court jurisdiction where the agreement or contract was executed. The Court of Appeal established that RAK Court enjoys an inherent jurisdiction to consider the matter, and any otherwise agreement on another jurisdiction shall be deemed invalid given that the CPL gave the RAK Court the jurisdiction to consider the matter on the basis that the Shareholders Agreement was executed in RAK.
The Company challenged the ruling of the Court of Appeal before the Court of Cassation on the basis that the Court of Appeal erred in law and its findings by characterising the dispute as a commercial dispute which, from the standpoint of determination of domestic jurisdiction, was subject to Article 33(3) of the Civil Procedure Law No. 42 of 2022, which stipulate a specific jurisdiction for disputes related to companies. As such, the Shareholder filed an action pertaining to its rights as a shareholding partner in the Company under the Shareholders Agreement, and, therefore, the dispute should be subject to Article 35 of the CPL which gives the jurisdiction to the court of the district in which the head office of the company is situated, unless the shareholders of the company agree to a specific jurisdiction. As such, the shareholders of the Company, including the Shareholder to the dispute, agreed to the exclusive jurisdiction of the DIFC Courts to consider their disputes, and, in any event, RAK Courts do not have the jurisdiction to consider the action as Company’s office is located in Dubai as being the same office of its Agent under the RAKICC’s regulations.
On 28 July 2023, the Court of Cassation issued its judgment whereby it overruled the Court of Appeal’s judgement and dismissed the claim for lack of RAK Court’s jurisdiction to consider the matter. The Court of Cassation found that the dispute relates to the Company activities in the UAE and its reported profits & losses and the determination of the Shareholder’s share therein. These are matters connected with Company’s activities overall and it is clear that the Company is a foreign company carrying on business in the UAE and holding a license issued by the RAKICC and its office is located in Dubai given that the address of its Agent is located in Dubai. As such, the Court of Cassation established that the Company’s points of challenge are valid and affirmed that under, Article 35 of the CPL, any cases involving companies should be brought before the court of the district where the company’s head office is located, but as an exception and facilitation for the parties in bringing of proceedings, Article 33(5) of the CPL gave the shareholders the liberty to choose the exclusive court jurisdiction to consider their disputes arising from their relation in the respective company. Since the shareholders of the Company agreed under the Shareholders Agreement that the DIFC Courts shall have jurisdiction to consider any disputes arising out of its performance, it follows that the RAK Courts do not have jurisdiction to consider the action.
For further information,please contact Adnan Al Erqsousi.
Published in September 2023
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