OUR EMPLOYMENT TEAM, ALONGSIDE LEADING COUNSEL TOM MONTAGU-SMITH QC, HAS REPRESENTED THE APPELLANT IN THE INDUSTRIAL GROUP LTD V ABDELAZIM EL SHIKH EL FADIL HAMID IN THE DIFC COURT OF APPEAL


The team was initially instructed on the case shortly before trial in the DIFC Court of First Instance ("CFI") in August 2021 before the appeal was heard by the DIFC Court of Appeal ("CA") in June 2022.

The CA handed down its decision last week, confirming a number of significant points on DIFC law. In this article our UAE employment and commercial disputes teams look at the key aspects of this significant decision, which has potentially far reaching implications for all cases governed by DIFC law.

Introduction

The case involved three issues of significant importance for those operating in the DIFC: (i) the impact of DIFC Law No. 2 of 2019, as amended (the "2019 Employment Law") on statutory penalty claims commenced before the introduction of the 2019 Employment Law but related to a period both before and after the legislation was introduced; (ii) the importation of other doctrines and laws into DIFC law; and (iii) clarification on the interpretation and application of Article 8(2) of DIFC Law No. 3 of 2004 (the "DIFC Application Law"), which determines the correct governing law in DIFC Court proceedings and is often referred to as the 'Waterfall Provisions'.

Notably, the CA has confirmed in its decision that DIFC Law No.5 of 2005 (the "Law of Obligations") is a complete code and the DIFC Courts cannot import a substantive tort into DIFC law if it is not already expressly set out in the Law of Obligations. Whilst the CA was focused on the Law of Obligations in this case, the decision has broader implications and it is clear that the CA has taken the view that all DIFC laws are intended to be codes.  Whether or not DIFC laws are intended to constitute complete codes or may be supplemented by substantive doctrines of English law was an open question of DIFC law for many years, which the CA has now put to rest.

The Court confirmed that Article 8 of the DIFC Application Law is a conflict of laws provision and only produces one right answer on the governing law of a DIFC Court claim. If the correct governing law – applying Article 8 – is DIFC law, then this cannot be supplemented by substantive English law doctrines on matters in relation to which DIFC law is otherwise silent (as was the case in this matter).  

It follows that it is vitally important for parties to be aware of the substantive differences between DIFC and English law (of which, there are many) when selecting the governing law of their contracts and in framing any disputes that are governed by DIFC law. 

Background

The Industrial Group Ltd (the "Employer"), a company located in the DIFC, terminated the employment of Abdelazim El Fadil (the "Employee") for cause in May 2018.

The Employer commenced proceedings against the Employee in the DIFC courts and filed a criminal complaint against him with the Dubai police in relation to allegations of wrongdoing during his employment. Both the DIFC court proceedings and the criminal complaint were subsequently dismissed.

The Employee counterclaimed against the Employer for:

  • various contractual and statutory entitlements which the Employee claimed were outstanding following the termination of his employment for cause;
  • a statutory penalty, triggered by the failure of the Employer to pay the Employee his contractual and statutory entitlements in accordance with Article 18 of DIFC Law No. 4 of 2005, as amended (the "2005 Employment Law"); and
  • damages arising from (i) alleged malicious prosecution by the Employer in the form of the criminal complaint; and (ii) alleged abuse of process by the Employer in the form of its proceedings against the Employee in the DIFC Courts (together, the "Torts").
DIFC Court of First Instance

Penalty

At trial, the CFI Judge found that (i) the Employer had not been entitled to terminate the Employee's employment for cause under the 2005 Employment Law; (ii) the Employee was entitled to receive his outstanding notice pay, end of service gratuity and holiday pay; and (iii) the Employee was entitled to receive a statutory penalty of AED 7,550,400 as a result of the Employer's failure to pay the Employee's statutory and contractual entitlements in accordance with Article 18 of the 2005 Employment Law.

The CFI Judge calculated that the Employee's penalty accrued from 22 May 2018, 14 days after the termination of the Employee's employment, to the date of the CFI's Judgment on 6 April 2022.

Tort claim

The CFI accepted the Employer's submission that the Law of Obligations was a complete code for DIFC torts and therefore any tortious causes of action not set out in the Law of Obligations could not be brought as a cause of action under DIFC law. It followed that as the torts relied upon by the Employee were not provided for in the Law of Obligations, the Employee had failed to establish that he had a cause of action in respect of them. His tort claims therefore failed and were dismissed.

DIFC Court of Appeal

Penalty

Under Article 18 of the 2005 Employment Law, an employee was entitled to a statutory penalty from their employer for late payment of wages in the following terms:

“18. Payment where the employment is terminated:
(1) An employer shall pay all wages and any other amount owing to an employee within fourteen (14) days after the employer or employee terminates the employment.
(2) If an employer fails to pay wages or any other amount owing to an employee in accordance with Article 18(1), the employer shall pay the employee a penalty equivalent to the last daily wage for each day the employer is in arrears.”

Article 18 of the 2005 Employment Law led to the accrual of unreasonable and disproportionate financial penalties, often as a consequence of minor miscalculations on the part of employers. In many cases, enormous penalties continued to accrue during the course of lengthy legal proceedings between ex-employees and their former employers.

The 2019 Employment Law sought to rectify the unintended consequences of Article 18 of the 2005 Employment Law by imposing a mandatory waiver of the statutory penalty for any period during which a dispute is pending before the Courts.

"19. Payments following termination
(4) A penalty pursuant to Article 19(2) will be waived by a Court in respect of any period during which: (a) a dispute is pending in the Court regarding any amount due to the Employee under Article 19(1)…”

On appeal, the Employer argued that the CFI erred in its construction of the provisions of the 2019 Employment Law by failing to waive the penalty accrued after the new legislation came into force on 28 August 2019.

The CA accepted that, on a natural reading of the language, Article 19(4)(a) of the 2019 Employment Law applied, with the effect that the penalty ceased to accumulate after 28 August 2019 because of the dispute pending before the Court. The CA nevertheless considered whether there was any escape from this provisional conclusion by way of any of the following routes:

i.    Did the Employee have an untrammelled right to a penalty until payment? The CA concluded that he did not. Article 18 of the 2005 Employment Law did not future proof the right to a penalty against the prospect of subsequent prospective legislative change. Article 19 of the 2019 Employment Law was an "equivalent provision" within the meaning of Article 1(4), with the effect that Article 18 of the 2005 Employment Law did not survive the introduction of the 2019 Employment Law. Accordingly, after 28 August 2019 (when the 2019 Employment Law came into force), the Employee's penalty was governed by the provisions of the 2019 Employment Law, including Article 19(4)(a), rather than by Article 18 of the 2005 Employment Law.

ii.    Was there a relevant dispute for the purposes of Article 19(4)(a) of the 2019 Employment Law? The CA concluded that there was.

iii.    Should Article 1(5) of the 2019 Employment Law have any impact? The CA favoured a narrow construction of Article 1(5), which saved that part of the penalty accruing prior to 28 August 2019 but did not require any revision to the CA's analysis of the effect of the 2019 Employment Law on the accrual of the penalty after 28 August 2019.

The CA therefore held that the statutory scheme preserved the Employee's accrued right to a penalty accrued up to 28 August 2019, when the 2019 Employment Law came into force. Thereafter, the Article 19(4)(a) waiver precluded the further accrual of any penalty in favour of the Employee.

Tort claim

As noted above, the Employee claimed that by commencing proceedings in the DIFC Courts and lodging and pursuing its criminal complaint  with the Dubai Police, the Employer was liable in damages in a tort equivalent to the English torts of malicious prosecution (which under English law extends to civil proceedings)[1]  and abuse of process. However, the torts of malicious prosecution and abuse of process are not referred to in the Law of Obligations. As noted above, the CFI found that the Law of Obligations is a complete code and therefore it was not permissible for the Employee to rely on these torts as the claim was governed by DIFC law.

The Employee appealed the CFI's decision on the grounds that the torts it sought to rely upon could be found in DIFC law through one of three routes: (i) as part of the inherent jurisdiction of a common law court, giving effect to the maxim ubi jus ibi remedium[2] , to support the argument that the Law of Obligations was not a complete code; (ii) by operation of Articles 8(1) and 8(2) of the Law of Obligations; and/or (iii) by operation of the "Waterfall Provisions" in the DIFC Application Law.

DIFC law and common law

This decision serves to clarify the source of DIFC law and correct the widely-held misconception that DIFC law is based on and/or incorporates English common law, which is not correct.

DIFC law is statutory and draws influence from a variety of sources (including, but by no means limited to, English law). For example, DIFC arbitration law is based on the UNCITRAL Model Law and the DIFC Law No.6 of 2004 (the "Contract Law") is derived from the UNIDROIT Principles of International Commercial Contracts (the "UNIDROIT Principles"). Whilst statutes are capable of interpretation by reference to case law from other jurisdictions, there is no room for judge-made law to import, wholesale, legal doctrines not already implemented into DIFC law by legislation (and the CA confirmed this on appeal).

The CA confirmed that DIFC Courts are common law courts and that DIFC law is to be interpreted and developed incrementally, in accordance with the methodology of the common law, however the basis of the DIFC Courts’ jurisdiction is statutory. This decision is significant because it confirms the DIFC Courts should refrain from what the CA described as "straying into impermissible judicial legislation" in its decision-making. Where DIFC statutes identify principles which come from other jurisdictions, it is legitimate to look to those jurisdictions to determine the content of the principles in question and their appropriate, incremental, development[3].  It is not, however, permissible for the DIFC Courts to incorporate into DIFC law any common law development from any common law jurisdiction.  That would result in the DIFC Courts acting as legislators which, as noted above, is impermissible, especially given that the DIFC Courts are a court of limited statutory jurisdiction.  

Having confirmed the basis of DIFC law and the Courts' role in developing DIFC law, the CA ultimately found that incorporating the torts of malicious prosecution and abuse of process into the Law of Obligations by way of judicial decision would amount to the Courts impermissibly acting as legislators[4].

In reaching this decision, the CA made the following comments on DIFC law:

1)    Civil and commercial laws of the UAE (the 'onshore laws') have been expressly disapplied in designated freezones, including the DIFC[5]. 

2)    Articles 23-25 of the DIFC Law of Damages and Remedies No. 7 of 2005 (the "Law of Damages") confer a right to damages in the event of "… a breach of an obligation under the Law of Obligations". Otherwise put, the right to a remedy under the Law of Damages is tied to losses arising from a breach of an obligation under DIFC law only.  Importantly DIFC law does not give a remedy for breaches of obligations under any other laws (e.g. English law), because if DIFC law applies then there is no basis to apply any other governing law.

3)    The Law of Obligations expressly deals with the torts of negligence, occupiers' liability, deceit, economic torts, nuisance, insurance and bailment (amongst other torts). It does not, however, contain any provisions dealing with defamation, malicious prosecution or abuse of process. The CA acknowledged the exclusion of defamation and malicious prosecution from DIFC law could well have been intentional, leaving these causes of action to be dealt with by the onshore criminal courts.

4)    The Employee had argued that the absence of malicious prosecution and abuse of process from the Law of Obligations was a "gap" in the DIFC legal system. However, the CA was clear in its view that to the extent such a gap existed, it should be remedied through statutory reform and it was not for the DIFC Courts to fill this gap, citing this would "cross the line into impermissible judicial legislation."

5)    It cannot be assumed that, merely because there has been a common law development in English law, that any such development will be transplanted into DIFC law. The sources of DIFC law are not confined to English law, as demonstrated by the fact that DIFC arbitration law is based on the UNCITRAL Model Law and the DIFC Contract Law is derived from the UNIDROIT Principles.

6)    The CA confirmed that the Law of Obligations is a complete code. It follows that the Court cannot import a substantive tort into DIFC law, if it is not already expressly set out in the Law of Obligations. However, the CA did note that the case may be different if considering procedural or evidential matters[7].  This is significant and potentially creates a limited work-around for importing other doctrines of law into DIFC law. We consider this in more detail below.

The Law of Obligations

The Employee sought to rely on Article 8 of the Law of Obligations to say that the law contemplated causes of action not provided for in the law. Article 8 states:

“Rights cumulative
(1) The existence of a right of action under this Law is without prejudice to any other right of action under this Law or any other law.
(2) A claimant may sue a defendant in respect of any right of action under this Law.”

The CA rejected the Employee's argument in short order. Contrary to the Employee's position, Article 8(1) of the Law of Obligations did not introduce anything into DIFC law; it simply preserved rights already in existence under other DIFC laws (i.e. other than the Law of Obligations).

The Waterfall Provisions

As noted above, the Employee sought to rely on the Waterfall Provisions in Article 8(2) of the DIFC Application Law to argue that English law doctrines could be incorporated into a dispute governed by DIFC law if DIFC law is silent on the question in issue.

The CA ultimately rejected this argument and accepted that the Waterfall Provisions are concerned with choice of law rules to determine the applicable system of law rather than the content of that system of law. The CA was clear in its decision that the "content of the law in the jurisdiction chosen in accordance with Art. 8(2) is neither here nor there; it is whatever laws are for the time being in force in the jurisdiction chosen. The jurisdiction chosen in accordance with Art. 8(2) is unaffected, regardless of whether a particular remedy is available or not."[8]

Further, the fact that there is a "gap" in the law in the jurisdiction chosen in accordance with Article 8(2) does not give parties a right to select the next jurisdiction in the waterfall. The CA, in this case, accepted that English law does not become more closely associated with the facts and the parties simply because DIFC law does not expressly contain the cause of action relied upon (in this case, the torts of malicious prosecution and abuse of process).

Key takeaways

Given the confirmation from the CA that DIFC legislation should be treated as a complete code, practitioners should also be alive to the implications this will have on claims brought under other statutes, such as the DIFC Contract Law. As noted above, the Contract Law is based on the UNIDROIT Principles.  There are material deviations between the UNIDROIT Principles and the position under English common law, particularly around interpretation and termination. For example, there is no doctrine of estoppel in the Contract Law.  Arguably this now means that estoppel does not form any part of DIFC law. However, and as discussed below, following the CA's decision there may be an argument that certain English law concepts are still applicable in DIFC law governed disputes (albeit in limited circumstances).

By way of further example, the contractual termination regime under the Contract Law is different to the English common law regime.  Under DIFC law, the right to terminate based on a fundamental breach will be lost if notice of termination is not given within a "reasonable time after [the innocent party] has or ought to have become aware of the non-conforming performance" (see Article 87(2) of the Contract Law).  Thus, the DIFC Contract Law adopts a bright line approach to loss of the right to terminate. This is materially different to the position under English law where the right to terminate will only be lost by affirmation, which must be clear and unequivocal; the mere passage of time will usually not be sufficient (particularly in the face of a continuing reservation of rights and a no waiver provision in the contract).

The CA, did however, leave open one avenue for other laws or doctrines to be imported into DIFC law. Namely, if the relevant doctrines are procedural or evidentiary in nature[9].  Therefore, we anticipate the DIFC Courts will now see an increase in litigation on whether a particular doctrine (which is not expressly included in DIFC law) is a 'procedural' or 'evidential' doctrine, such that the Court may apply the English law concept if it is missing from DIFC law. The CA made it clear in the Protiviti case[10] that the DIFC Courts may apply whatever law it considers appropriate in respect of procedural matters[11].   

We anticipate this becoming an abundant area of dispute and a potential 'backdoor' way to run some arguments based on English law, where DIFC law is silent.  Whilst it is unlikely an entire cause of action could be imported into DIFC law based on this approach, there might be certain doctrines that could potentially be imported into DIFC law on the basis that they are procedural or evidentiary in nature.

Further, this decision reinforces the need for careful monitoring of legislative developments by the DIFC Authority so as to ensure that any perceived 'gaps' in the DIFC legislative regime are remedied by statutory modification.  This decision makes it clear the DIFC Courts cannot (and will not) fill this role.

In respect of the decision on the 2019 Employment Law, the key takeaway is that despite the changes to the penalty provisions introduced in 2019, DIFC employers must still be very careful to ensure that employees are paid all their contractual and statutory entitlements within 14 days of their last day of employment, failing which significant financial penalties may still accrue.

Footnotes

[1] Crawford Adjusters (Cayman) Ltd v Sagicor General Insurance (Cayman) Ltd [2013] UKPC 17; [2014] AC 366; Willers v Joyce [2016] UKSC 43; [2018] AC 779

[2]The translation of this maxim is "for every wrong, the law provides a remedy".

[3] Para 105.

[4] Para 105.

[5] Article 3(2), UAE Federal Law 8 of 2004.

[6] Para 110.

[7] Para 112.

[8] Para 120.

[9] Para 112.

[10] Protiviti Member Firm (Middle East) Limited v (1) Mohammad Bin Hamad Abdul-Karim Al-Mojil (2) Adel Bill   Mohammad Bin Hamad Al-Mojil [2016] DIFC CA 003

[11] In this case, the Court decided to follow the English law approach on the question of forum non conveniens.

Key contact

David True

David True

Associate, Employment
Dubai

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Shane Jury

Shane Jury

Partner, Commercial Disputes
UAE

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Emma Tormey

Emma Tormey

Managing Associate, Commercial Disputes
UAE

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