How adopting the common law regime in free zones will benefit investors

Dubai's decision to explore implementing common law within its free zones is expected to be a win-win scenario for new investors and businesses already in the emirate, according to experts.

Unifying the applicable law across free zones by adopting new legislation is an investor-friendly decision that will offer a boost to free zones in the city, they said.

The Dubai government is studying the introduction of a common law in free zones to enhance the city’s business environment and boost its economic appeal and efficiency, the Dubai Media Office said on Tuesday.

“The initiative supports the economic objectives outlined in the Dubai Economic Agenda D33, which aims to position Dubai among the top three global economic hubs,” it said.

Abu Dhabi Global Market, the UAE capital city’s financial hub, is the first and only jurisdiction in the Middle East to adopt the direct application of English common law, and specifically by the Application of English Law Regulations 2015, according to a representative.

Those regulations make English common law directly applicable in ADGM, and serve as the foundation of the civil and commercial law in the financial centre.

ADGM said the approach made it the preferred jurisdiction for international companies looking to establish their presence in the region.

“English common law is widely regarded as one of the most sophisticated regimes governing commercial arrangements in the world and is the governing law of choice for commerce,” ADGM said on Wednesday.

“Its inherent flexibility is especially well suited to business dealings, particularly in a financial context. The global business and legal community will be familiar with the mechanics and predictability of English common law as reflected in ADGM as it evolves from time to time.”

ADGM’s common law approach also reduces the upfront legal costs and chances of litigation. English common law already covers a wide range of scenarios, aiding commercial dealings where parties want as much detailed case law as possible.

“Under the application regulations, all of this case law will have automatic precedential value in the ADGM,” the representative said.

“ADGM, through direct application of common law, offers a wide range of legal structures that can be used to hold, invest, secure and manage assets and operations.”

The Dubai International Financial Centre, which is governed by English common law, declined to comment.

Established in 2004, the DIFC Courts is Dubai’s international English-language common law judicial system and forms a key part of the legal system of the UAE.

The onshore financial centre is home to some of the world’s biggest financial institutions, banks, investment firms, wealth managers and insurers.

Common law is a definition of the laws that are usually used in the Anglo Saxon countries like the UK, the US and Australia. It is based on using precedent and evaluation of judges, and using similar matters that happened in the past to apply in the future, according to Hani Naja, corporate and commercial partner at law firm Baker McKenzie.

The use of common law is a little different than the current legislations in the UAE that are based on civil law, which are codes that are followed to the letter, and where the precedents and interpretation of judges are not always relevant or taken into consideration, he said.

“The Dubai Media Office announcement is important for two reasons. It not only uses the common law principles, but it’s also trying to unify the applicable law across different free zones,” Mr Naja said.

“The UAE has multiple free zones, including [in] Dubai, which has the biggest number of free zones in one city in the world. And those have been set up at different stages to cater for different needs.

“The DIFC already follows common law principles and they have proven that they are very successful and very attractive to foreign investors.”

At the moment, the level of legislation in each free zone is different.

For example, the DIFC has a detailed elaborate legislation versus other free zones that have few regulations and fall back on the Dubai laws and federal laws, Mr Naja said.

Not all free zones in the UAE have their own legislation. Some have a very basic company regulation, but do not have the full breadth of laws that are needed. For example, one will not find a civil transaction law, penal code, data law or a particular arbitration rule, he said.

The move is relevant for investors.

When the commercial company ownership law recently allowed foreign ownership in the UAE, a lot of people started questioning the need for free zones.

“But with this update, which is adopting a new set of legislation that is investor-friendly, I think free zones will get another boost,” Mr Naja said.

“This is a welcome change. Dubai is doing the right thing to both attract foreign investment and make sure that companies already in the country get an equal chance.”

Meanwhile, David Daly, a partner at the Gulf Tax Accounting Group in the UAE, said that common law’s “great commercial gift is precedence”.

A ruling on a matter can be drawn upon in deciding future cases, creating some certainty as to the legal position being contended, he said.

“Certainty is good for businesses. This is an exploratory process that will be widely welcomed,” Mr Daly said.

The UAE has different tiers of law such as free zone law, Emirate law and federal law, which trumps all, according to an industry source.

“Bringing in the common law gives you the law of precedence, where at least you know that for a given situation, the decision will be this for a tier of court,” the source said.

“It’s good to have an environment where you deal with smaller squabbles between parties. If you get precedence, you get certainty, which is important for businesses. It’s why the likes of London and New York have done well, because you can depend on the courts and you have consistency.”