In brief:
Commencing or facing litigation can be a very stressful, time consuming, resource draining and expensive process for all involved.
In some circumstances, litigation could be avoided by the taking of certain careful, pre-emptive steps. Where litigation is unavoidable, there are still some actions that can be taken to ensure a party is effectively prepared.
In this article, we discuss some key ways to prepare for the worst, and maybe even avoid litigation altogether.
1. Prepare - do your due diligence
We appreciate that a comprehensive due diligence exercise can be costly and time consuming and may not always be a feasible option for many individuals or businesses at the outset of your commercial relationships. However, it is extremely important to understand the party you are dealing with, if later on you might need to sue. You must ‘know your counterparty’ to effectively bring your claim against, as well as to defend yourself against them.
In modern business practice, it is commonly accepted that you can make certain requests for minimum key information from your counterparty at the start of your dealings, such as: (i) a copy of the company’s trade licence or passport details; (ii) founding company documents (such as the company’s Memorandum and Articles of Association); (iii) details of shareholders or ultimate beneficial owners; (iv) evidence that the company or individual is of good financial standing (as may be indicated in the company’s financial statements or accounts); and (v) perhaps, information on assets held by the company.
Requesting this information upfront is not only commercially prudent, but from a litigation standpoint, is invaluable. Once a relationship sours, such information is almost always very difficult to obtain.
A key consideration when deciding to initiate legal proceedings, is whether your counterparty has assets against which to enforce any successful judgment. If there are no accessible assets, then it is doubtful that litigation is worthwhile as it could be just throwing “good money after bad” and litigation just may not be feasible.
2. Have a well drafted contract and a good understanding of its provisions
It is of the upmost importance to have a well drafted contract, which includes a clearly worded and appropriate dispute resolution clause to enable you to pursue the remedy you want, in the way you want, if a dispute arises. Having a well drafted contract which covers all foreseeable eventualities can also assist in avoiding dispute or preventing litigation. If litigation is however already imminent, it can help to secure a party’s success.
a. One size does not fit all
In practice, unfortunately it is not uncommon to come across poorly drafted contracts that are not fit for their purpose. For example, some parties will use template contracts with untailored dispute resolution clauses, which can ultimately prejudice that party if a dispute arises. Or the parties may have no written agreement at all which can lead to problems over the most fundamental of issues, such as whether a contract exists at all. See our article on “Verbal contracts in the UAE – is lip service enough?” here for further details. In our experience, the lack of a written agreement is most common in relation to distribution agreements, where parties have simply relied on verbal agreements and perhaps previous dealings, and/or based their trading with each other on documents such as purchase orders and invoices.
a. Dispute resolution clauses are key
It is extremely important to have a carefully considered and well drafted dispute resolution clause within all contracts. If a dispute arises, there are multiple ways in which it can be resolved. Therefore, a dispute resolution clause should include provision for who can resolve the dispute, when, where and how. Such provisions avoid prolonging the dispute due to disagreement between the parties as to how that dispute should be settled. A number of factors will influence what type of dispute resolution clause would be most appropriate for a party and for a given contract and obtaining legal advice on the available options is strongly recommended.
a. Understand your contract
As well as having a clear and comprehensively drafted contract, it is important to understand what the implications are of its provisions. For example, it is critical to understand how you can terminate or exit the contract. In practice, we have seen many companies (even large multinational corporations) terminate agreements with their counterparties, without fully understanding the termination clause and its implications. We strongly recommend that parties seek legal advice prior to terminating any agreement in the UAE, to mitigate the risks involved in any potential litigation which may ensue as a result of a wrongful termination.
We often see that companies, when they are acquired or merged with other companies, often do not have proper assignment or novation agreements in place to take effect from completion of the acquisition/merger. If a dispute arises, this can make litigation more challenging and/or put the litigant in a more difficult position. Again, we recommend that parties seek legal advice before any such transaction which also deals with the aftermath of the transaction, in order to protect the party’s interests and ensure smooth post-completion interaction/operation.
3. Requesting Security
If you are entering into a contract (particularly one of high value), we recommend that you obtain some form of security for certain types of transactions or business relationships, in order to protect your business should a dispute occur.
A party can request security in a number of ways including signed and post-dated cheques, personal guarantees (particularly important for loan agreements), bank guarantees, parent company guarantees, land or vehicle mortgages and assignments of earnings and so forth.
Arguably, one of the most effective forms of security in the UAE is a cheque, because if a cheque given as security is dishonored, this constitutes a criminal offence under UAE law. The drawer of the cheque effectively stands as a guarantor for the amount of the cheque pursuant to Article 606 of UAE Federal Law 18 of 1993 (the Commercial Transactions Code), and can also be sued in civil proceedings for the amount of the cheque. If a cheque is provided as security, we suggest that you try to obtain the personal indemnification details of the signatory, should you need to bring a claim against them personally in future.
4. Keep relevant documentation
It is sensible to keep all documentation relating to your dealings, which may become relevant if a dispute arises. Keeping copies of all relevant contracts, related emails, text messages, purchase orders, cheque receipts means that, if a dispute arises, this may help to facilitate and expedite the litigation process, strengthen your position and may even help to prevent litigation occurring in the first place, by strengthening your pre-action negotiating position against your counterparty.
In our experience, there has been an increase in the number of contractual defaults of late. Prior to threatening or filing litigation proceedings, it is wise to keep lines of communication open with your adverse party and, if possible, obtain a written acknowledgement of the debt perhaps by requesting an acknowledgement for accounting purposes. Once such an acknowledgement is obtained it becomes very difficult for the party to resist any litigation claim that may subsequently have to be brought.
Conclusion
To try to limit the costly and time consuming effects of litigation, steps can be taken to firstly reduce the chances of a dispute arising, and then assist in effectively preparing for unavoidable litigation. “By failing to prepare, you are preparing to fail” – Benjamin Franklin.
For more information, please contact us on sectors@hadefpartners.com.
This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.
In brief:
On 18 November 2018, the VAT refund scheme for tourists was introduced in the UAE.
This is arguably one of the most significant schemes relating to VAT exemptions and recovery that has been introduced by the Federal Government so far.
In this article we summarise the main provisions of the scheme and discuss its significance in the UAE.
At the start of the year Value Added Tax (VAT) was introduced in the UAE by the Federal Tax Authority (FTA) (under Federal Decree Law No. 8 of 2017, supplemented by the Executive Regulations under Cabinet Resolution No. 52 of 2017). There have been a number of schemes subsequently introduced by the FTA for the purpose of VAT refunds and recovery, such as in respect of the reimbursement of VAT paid on services provided in exhibitions and conferences, VAT refunds for certain charities, and zero rate VAT on medications and medical equipment. However, Federal Cabinet Decision No. 41 of 2018 On Introducing the Tax Refunds for Tourist Scheme (the Scheme) is arguably one of the most significant schemes relating to VAT exemptions and recovery that has been introduced by the UAE Federal Government so far.
Parties involved in the Scheme
The FTA has confirmed that it has partnered with Planet who will be the service provider operating the VAT refund mechanism for tourists in the UAE. Retailers wanting to participate in the Scheme will need to be registered with the FTA, hold a valid Tax Registration Number, sell goods that are not excluded from the Scheme by the FTA, submit a participation application form to Planet, and have a completed mandatory credit check. The Scheme also specifies that the retailer must have a good track record of regularly submitting VAT returns and settling payments to the FTA. In mid-November, the FTA’s Director General revealed that the number of retailers linked to the electronic system had already exceeded 4,500 stores and this number is expected to rise during December.
A UAE tourist to whom the Scheme will apply (the Tourist) is any natural person who is not a resident in the UAE (or of any GCC countries implementing VAT) and we believe that it is intended that crew members of GCC airlines are excluded from benefitting from the definition of a Tourist. Under the rules of the Scheme, UAE nationals and residents are not eligible for VAT refunds but non-resident GCC Nationals (and any other non-resident nationalities) exiting the UAE currently are.
Tax free shopping in the UAE and qualifying purchases
The conditions for a UAE Tourist to utilise the Scheme are that the goods must have been supplied to the Tourist in the UAE, and the region, and the Tourist must leave the region, with the goods, within 90 days of the date of purchase.
According to the FTA website, to make a qualifying purchase the Tourist must make a purchase at a participating retailer of a value of a minimum of AED 250. The Tourist will receive back 85% of the total VAT amount paid (minus an admin fee of AED 4.80). The refund can be provided by either cash or credit card (however cash refunds are subject to a maximum limit of AED 10,000 per Tourist and per 24 hours).
Notably there are some goods that are exempt from the Scheme:
a. goods that have been consumed, fully or partly, in the UAE or any VAT implementing country in the GCC;
b. motor vehicles, boats and aircraft; and
c. goods that are not in the Tourist’s personal possession at the time of leaving the UAE.
The VAT refund process
The VAT refund process in the UAE is completely digital, with the majority of the process taking place at the point of sale.
Point of sale
According to the FTA and Planet’s websites, the process starts when the Tourist makes an eligible purchase from a participating retailer. Once the Tourist has provided the retailer with documentation evidencing non-residence in the UAE, the retailer captures the Tourist’s information using an application provided by Planet which links the retailer to the digital systems of the FTA, as well as airports and land and sea ports. A QR code tag is then printed, which is attached to the back of the sales receipt. A digital VAT refund form is then created, ready for the Tourist to validate the transaction at the point of exit from the UAE.
Point of exit
At the point of exit, the Tourist takes the goods and the tagged receipt to Planet’s ‘validation point’ (in airports these are to be placed before check in). For the process to be completed, the Tourist must produce the sales receipt with the tax refund tag attached to the back, the purchased goods in question, a valid passport with entry stamp and a boarding pass. In some circumstances the purchased goods may undergo additional verification checks by customs officers.
Validation of the tax free tag needs to take place within 90 days of the purchase date otherwise the tax free tag expires, and the VAT cannot be claimed.
When and where will the Scheme be launched
Just recently, an FTA decision (No.2 of 2018) confirmed that from 18 November 2018, a Tourist could reclaim VAT at Abu Dhabi International Airport, Dubai International Airport, and Sharjah International Airport. From 16 December 2018, this will be extended to other UAE international air, land and sea ports.
The significance of VAT refunds for Tourists in the UAE
The UAE has already established itself as a luxury shopping and tourist destination. Dubai welcomed 10.44 million visitors to the Emirate in the first six months of 2018 and it is expected that there will be up to 20 million visitors per year by 2020 (according to Dubai’s Department of Tourism and Commerce Marketing). Abu Dhabi saw a 5% growth in guest numbers in the first six months of 2018 with hotel guest numbers reaching 2.4 million from January to June 2018 (according to Department of Culture and Tourism Abu Dhabi).
In 2017, the travel and tourism sector contributed 5.1 % of the UAE total gross domestic product (GDP), at AED 69.1 billion, and is expected to account for 4.9 % of the GDP by 2028, at an annual growth rate of 4.1 % (according to World Travel and Tourism Council Annual Economic Impact Research). The Scheme will align the UAE with countries throughout Europe, America and Asia, who already offer VAT refunds to tourists. It is anticipated that the Scheme will also play a significant role in increasing international traveler spend in the UAE, which is a fundamental element in asserting the UAE as a prime tourist destination.
For more information, please contact us on sectors@hadefpartners.com.
This article, together with any commentary, does not constitute legal advice. It is provided solely for information purposes on a complimentary basis, without consideration of any specific objectives, circumstances or facts. It reflects then current views of the writer which may modify in time and based on differing objectives, circumstances or facts. A writer's view may differ from views of colleagues and/or the firm. You should seek legal advice on each specific matter. Access to this article does not form an attorney-client relationship.