In Brief:
- ‘The Commission for the Unification of Federal and Local Judicial Principles’ was established to review and determine conflicting judicial principles issued by two or more supreme courts in different jurisdictions within the UAE.
- A judgment nullifying a gift contract between family members (known as ‘Hiba’ in Sharia Law) was used as the basis for claiming nullification of subsequent property sale and purchase contracts in separate emirates.
- The supreme courts of two different emirates came to differing conclusions on the validity of these subsequent property purchases and the Commission ultimately considered that bona fide purchasers were entitled to confidence in the validity of such transactions.
Background
The United Arab Emirates is a federation, comprising seven emirates. Upon the creation of the UAE legal system, the federal courts were established as one of the federal authorities. In addition, the UAE constitution allowed each emirate to establish its own judiciary. As a result, there are four separate supreme courts at the top of the hierarchy of the federal and local judiciaries, namely the Federal Supreme Court, the Dubai Court of Cassation, the Abu Dhabi Court of Cassation and the Ras Al Khaimah Court of Cassation.
Establishment of the Commission for the Unification Judicial Principles
Pursuant to Federal Law No. (10) of 2019 on ‘Regulating Judicial Relations between the Federal and Local Judicial Authorities’, a judicial body called ‘The Commission for the Unification of Federal and Local Judicial Principles’ (the “Commission”) was established. The Commission has jurisdiction to unify conflicting judicial principles issued by two or more supreme courts in the country.
The facts and the judgments issued in the disputes
During 2006, a UAE citizen (the “Father”) and one of his sons (the “Son”) established a limited liability company for the purpose of real estate investment and management of the father’s real estate (the “Company”). The Father owned 99% of share capital of the Company and the remainder (1%) was owned by the Son.
During the period from 2006 to 2011, the Father transferred all his real estate to the Company and to the Son by way of a gift contract (known as ‘Hiba’ in Sharia Law) so that it became part of the Company’s assets. The Father also granted two powers of attorney to his Son. By virtue of these two powers of attorney, the Son changed the ownership structure of the company so that he owned 76% of the Company’s shares, leaving the Father with the remaining 24%. The Son also sold some shares in the Company and some of the Company’s properties to unrelated third party buyers.
The Father passed away during 2012, and his heirs (the “Heirs”) filed a lawsuit before the Abu Dhabi Courts, claiming for nullification of the ‘Hiba’ contract made by their Father in favour of the Son.
The Abu Dhabi Court issued a final judgment nullifying the Father’s ‘Hiba’ of 22 properties, and these properties were therefore distributed among the Father’s Heirs according to Sharia rules.
As a result of this judgment, the Father’s Heirs began to seek return of the properties that had been sold by the Son to third parties in Abu Dhabi and Sharjah.
The Heirs filed a lawsuit before the Sharjah Federal Court claiming for nullification of the Son’s sale of one property to a third party in Sharjah. The Federal Supreme Court issued its judgment nullifying the sale of the property, based on the grounds that the nullification of the ‘Hiba’ by the Abu Dhabi Courts required the return of the property to the Heirs. The property sale contract had been based on the invalid ‘Hiba’ and was therefore nullified, even where the property had been officially registered in the name of the buyer.
The Heirs also filed another lawsuit before the Abu Dhabi Courts claiming nullification of the sale of one property in Abu Dhabi to a third party, and the re-registration of the property in the name of the Heirs. The Abu Dhabi Court of First Instance rejected the case. The Heirs appealed this judgment, and upon final appeal, the Abu Dhabi Court of Cassation upheld the ruling of the lower courts. The Abu Dhabi Court of Cassation based its judgment on the grounds that the third party had bought the property in good faith. The Court added that the property had been officially registered in the name of the Son at the time of concluding the sale contract, and that the property was registered in the name of the buyer before the issuance of the original judgment nullifying the ‘Hiba’ contract.
Referring the conflicting principles to the Commission
It is clear that two supreme courts in different jurisdictions had arrived at two conflicting judicial principles on the issue of onward sale of property to third parties based on a nullified ‘Hiba’ contract.
On one hand, the judgment issued by the Federal Supreme Court found that the judgment nullifying the ‘Hiba’ contract was considered a ‘revealing judgment’ and not an ‘established judgment’.
A ‘revealing judgment’ is a judgment that reveals a legal position that previously existed. It does not add anything new, but rather affirms the legal position that existed previously. In this case, the judgment reveals and affirms the pre-existing fact that the nullified ‘Hiba’ did not transfer ownership of the property from the Father, which means that the property remained owned by the Father, and was incapable of being transferred by the Company or the Son to a third party.
An ‘established judgment’ is a judgment that establishes or creates a new legal position that did not exist previously. In this case, the Heirs’ ownership of the property did not arise by virtue of the judgment, and subsequently the effect of the invalidity of the ‘Hiba’ extends to the sale of the property concluded by the Company and/or the Son with third parties, even where the property was registered in the name of the buyer, because registration does not correct the nullified contract.
On the other hand the judgment of the Abu Dhabi Court of Cassation did not rely on the retrospective effect of the nullification of ‘Hiba’ against third parties who bought the property in good faith.
As a result of this conflict, the UAE Federal Attorney General requested that the Commission consider the conflict between the two aforementioned judicial principles.
Ultimately, the Commission adopted the principle decided by the Abu Dhabi Court of Cassation. In reaching its determination, the Commission discussed the following two issues:
- Adopting the principle of absolute nullity of contracts and extending its effect to other unrelated third parties leads to destabilising transactions – The Commission considered that the nullity of a contract does not prevent its existence in reality as the contract creates, despite its nullity, an ‘apparent’ situation in which parties deal in good faith, and that parties can form a legally valid contract so long as no mistake or negligence is attributable to them.
- Bona fide purchasers – The Commission found that this ‘apparent’ factual situation (involving facts that appear to third parties to be true, but were in fact in violation of the law) should provide to bona fide third parties, the same binding effect that would have been generated had the contract in fact had a correct legal basis. Further, the Commission held that given the ‘apparent situation’, the transaction concluded between the apparent owner and a third party in good faith will be considered effective against the real owner of a property, where the real owner has contributed in some way by his mistake (either negatively or positively) that results in the third party purchasing the property.
In addition, the Commission noted that should contracts that were concluded on the basis of ‘apparent situations’ at the time of their negation be classed as subsequently nullified, it would inevitably lead to disorder and instability in transactions.
The Commission concluded that the above grounds justified the protection of good faith third party purchasers where they have ownership subject to a false disposition by contracting with the owner of an ‘apparent situation’ that contradicts the seller’s actual legal ownership. However, if the third party purchaser committed a mistake or neglected to investigate the truth of the situation (was wilfully negligent), the presumption of good faith would cease to exist and the purchaser would lose the protection prescribed by virtue of the ‘apparent situation’.
Following the Commission’s decision, Federal Law No. (10) of 2019 on ‘Regulating Judicial Relations between the Federal and Local Judicial Authorities’ provides that the principles determined by the Commission are binding on the federal and local courts and any judgment issued by any court that contradicts such determination is subject to appeal.
For more information, please contact Mutasim Khalil Ismail, Senior Legal Consultant, m.ismail@hadefpartners.com or any other member of our Litigation team.