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27 Nov 2023

Dubai's ambitious move: expanding DIFC law across all Dubai free zones

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The Government of Dubai is poised to enact a transformative change that could redefine the legal landscape in its free zone jurisdictions.

At present, Dubai operates under two distinct legal systems: the Federal Laws of the UAE, applicable throughout the Emirate, and the laws of the Dubai International Financial Centre (DIFC), founded on the common law principles of English law. Dubai's government is contemplating extending the jurisdiction of DIFC courts and/or laws to encompass all free zones within the Emirate. This ground-breaking proposal, open for public input through a government survey, could bring about a pivotal shift, aligning the legal systems within Dubai's free zones with a common law framework. Such a move sits with Dubai's broader vision, as outlined in the Dubai Economic Agenda D33, which envisions Dubai as one of the world's top three global economic hubs and demonstrates Dubai's commitment to enhancing its economic appeal and environment.

Current legal framework in free zones in Dubai

The DIFC is the only free zone in Dubai which has its own civil and commercial laws and courts, which allows the DIFC to operate with its own distinct civil and commercial legal system operating independently of UAE federal law. In contrast, the other free zones in Dubai fall under the umbrella of UAE federal law, albeit supplemented by the relevant free zone regulations. Whilst companies may in some cases opt for contracts to be governed by alternative laws, where no alternative law is specified, or where alternative laws are not permitted, such as for contracts of employment, UAE federal law takes precedence.

Government survey

In line with their progressive vision, the Government of Dubai has shared a public survey to explore the application of DIFC laws beyond the DIFC itself. The survey offers two potential options:

Option 1: A hybrid system

In this model, UAE federal laws would continue to apply in the other Dubai free zones (except on contractual issues where parties have opted for an alternative governing law) but all civil and commercial disputes in those free zones would be heard by the DIFC Courts. The procedural and evidentiary rules of the DIFC would accordingly apply to these disputes, including the Rules of the DIFC Courts (akin to the Civil Procedure Rules in the English Courts). In short, the remit of the DIFC Courts would be expanded to handle disputes concerning other Dubai free zone entities, on UAE Federal law issues.

Option 2: A standalone system

In the standalone system, the DIFC's civil and commercial laws (excluding DIFC licensing regulations) would be applied across all free zones in Dubai. Consequently, companies in the other Dubai free zones would be subject to DIFC laws and regulations, covering areas such as company law, insolvency law, and employment law. The DIFC Courts would also handle all disputes by default where the parties have not opted for an alternative jurisdiction or dispute resolution forum.

Practical implications

Whilst the hybrid system offers the convenience of the English language being used in litigation, it may not bring about significant changes given that UAE federal laws would still apply. Well-advised companies should already be giving consideration to their dispute resolution clauses and carefully selecting the applicable jurisdiction, such that the introduction of the hybrid system may have a limited effect. The slightly higher costs associated with conducting litigation in the DIFC Courts as compared to the Dubai Courts could also be seen as a financial barrier to litigation by some claimants.

The standalone system, in contrast, represents a substantial departure from the status quo by introducing a unified and comprehensive set of laws and regulations for all free zones. This approach is likely to find favour among foreign investors, offering them some comfort of a legal system rooted in common law principles and allowing companies to streamline their internal procedures and requirements where they have companies established in various free zones in Dubai.

The practicalities of the standalone system are not yet clear. For example, will all free zones create portals to mirror that of the DIFC? Will they all need to harmonise their internal corporate documents, including all employment agreements? Will all the benefits of capital structures and differing share classes be able to be utilised? Whilst the licensing regulations of free zones are intended to remain untouched, will any of those licensing activities fall under the regulatory authority of the Dubai Financial Services Authority?

Whilst aspects remain uncertain, we would be interested to understand whether a full roll out of DIFC laws would include the application of the legal concepts of equitable remedies and the law of precedent, both concepts not generally recognised under UAE federal law. Giving free zone companies access to equitable remedies, such as injunctions and specific performance, would have a significant impact on the legal landscape in Dubai. Other aspects of the standalone system would impact the day-to-day business of companies, such as the application of the Employment Law (DIFC Law No. 2 of 2019), given the significant disparities between that legislation and the UAE federal Labour Law.

The extent to which these changes, alongside other procedural modifications, will be embraced by businesses in the free zones will likely hinge on their administrative capacity and the cost-effectiveness of adapting to such alterations. Nonetheless, the objective of simplifying the business environment in free zones would potentially have long-term positive effects, not only for the businesses but also for the free zones themselves.

Conclusion

Further details will be needed on how the hybrid system would work in practice for an accurate assessment of its likely impact. The standalone system however promises a degree of familiarity and comfort for foreign investors and business owners. The stability of DIFC laws and regulations, tried and tested over time, is likely to be a welcome change for businesses looking to establish themselves in free zones outside the DIFC.

In an environment where most companies can now be 100% foreign-owned onshore, and with the complexity of corporation tax applicability to various free zones and their businesses, the introduction and publication of more unique privileges available to free zones should enable them to differentiate their offering more clearly.

The survey remains open, and the outcome of this consultation may take some time to materialise. Nevertheless, Dubai's proactive approach to adapt and lead in embracing change is evident, reflecting its commitment to achieving its vision of becoming one of the world's top three global economic hubs.

For those currently operating within a free zone in Dubai outside of the DIFC, your input is valuable. Be sure to have your say through the "Common Law Beyond DIFC: Evaluating Proposed Legal Frameworks for Free Zone Jurisdictions" survey on dsc.gov.ae.

Contact us

Should you have any queries or require any specific advice in relation to this topic, please do reach out to members of our Middle East team on the details listed, who will be happy to assist you.

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