Foreign companies are liable for their subsidiaries in the UAE under special requirements

published on 3 March 2021 | reading time approx. 2 minutes

The Supreme Court of the United Arab Emirates has ruled for the first time, that a foreign parent company can also be held liable for the liabilities of its subsidiary in the UAE under certain conditions.

   
  
On the one hand, the judgement expands the possibilities of claims by creditors and therefore also minimises the risks of effective legal action. On the other hand it entails increasing risks for foreign companies not resident in the UAE, which may now be held liable under certain requirements. So as of now it is necessary for foreign companies to conduct a comprehensive examination of the liability risks even before concluding a contract.
  
That specific case concerned a dispute arising from a gas supply contract concluded in 2006 between a manufacturer, which was to develop manufacturing capacities, and a UAE-based subsidiary of a foreign company, which was to act as a supplier of gas. In 2012, the manufacturer sued the UAE subsidiary and also the foreign company and its six other foreign subsidiaries for compensations. The claim based on the allegation that the UAE subsidiary had not fulfilled its obligation to deliver gas on time. The foreign company and its six foreign subsidiaries were not registered as companies in the UAE and therefore did not have a licence.
  
In the course of the proceedings, the UAE-based subsidiary counterclaimed for compensation, claiming that the contract was invalid. The judgement at the first instance and also the judgement at the second instance - after an appeal by the manufacturer - assumed a claim for compensations by the manufacturer against the subsidiary in the UAE, but rejected joint and several liability of the foreign company and its six other foreign subsidiaries. Accordingly, these were not parties to the concluded contract and could therefore not be held jointly and severally liable. In addition, the subsidiary's counterclaim was dismissed in each case.

 
However, the Supreme Court overturned the previous judgements and assumed joint and several liability of the UAE subsidiary, the foreign company and the other foreign subsidiaries, considering the Commercial Companies Law of 1984 as the relevant legal basis at the time of the conclusion of the contract. Accordingly, Art. 313-316 of this law are to be interpreted in such a way, that liability of the foreign parent company or further foreign subsidiaries is quite possible under certain requirements. Therefor liability is only excluded if the foreign company is legally independent. However, in order to operate in the UAE, a company must obtain a permit and licence from the competent authorities. If these requirements are not fulfilled, the foreign company or even its further foreign subsidiaries cannot be considered legally independent in comparison to the subsidiary based in the UAE. In that case the subsidiary is just acting on behalf of the foreign company. As a result, in that specific case, due to the absence of legal independence, there is joint and several liability, which allows recourse to the foreign company, even if it is not a direct party to the contract.
   
Moreover, the application of the relevant provisions of Art. 313-316 is not excluded due to Art. 3 of the Commercial Companies Law of 1984. This although declares the CCL inapplicable to oil companies. The previous judgements of the first and the second instance are among others based on the inapplicability of the CCL in force at the time of the conclusion of the contract, especially Art. 313-136. However, the Supreme Court has now expressly clarified that this is only the case for oil companies in the UAE with a registration and the appropriate licensing. If a foreign company - as in this case - is not registered in the UAE, the law is nevertheless applicable, so that the foreign company can be held liable.