From Flags to Finance

As a Civil law jurisdiction, UAE maritime law is derived from the UAE’s Maritime Code (or specifically Federal Law No. 26/1981) but all maritime financial transactions are governed by the Commercial and Civil Codes. The Federal Transport Authority (FTA), is the Government body which is responsible for regulating and implementing daily shipping procedures, and for operating the national ship registry.

Through bold Government initiatives such as the recently announced Dubai Industrial Strategy (DIS) and the Dubai Maritime Vision 2030, the UAE has clearly set its sights on becoming an international leader in the Maritime Sector. The DIS, in particular, has identified the Maritime Sectors as one of the six essential pillars for the UAE’s future industrial growth. However, an important element in achieving this goal will be the ability to attract top level ship financing transactions into the market. Although the UAE is already generally acknowledged as a world leader in Islamic Finance, foreign lenders may find the traditional security package for ship finance transactions difficult to implement in the jurisdiction. This is because there are currently various questions being addressed including the interpretation of the UAE’s verifications, which once obtained allow the FTA to then issue a Navigation License. A Navigation License then allows the vessel to freely operate within UAE national waters. There are clear Commercial and Civil Codes, the technicalities of registering a ship in the country, and mortgaging that ship, which could have an impact.

DUE DILIGENCE

Traditionally the first step for a lender in any ship finance transaction is to determine the borrower’s background. This can be more difficult in the UAE as there isn’t a public registry of companies, and technically there is no concept of a good standing certificate. As a result, a lender has to focus significant resources on their due diligence before proceeding with any transaction, and will also need to receive active support from the prospective borrower.

UAE: A CLOSED AND ADMINISTRATIVE FLAG

The process for registering a vessel with the UAE national registry is outlined in the UAE Maritime Code, Federal Law No. 26/1981 and requires the guidelines on which vessels can and cannot be registered under the UAE flag. However, the most important limitation is that the registry is, currently, strictly a national one. This means that a UAE national has to own 51 % (or more) of the shares in the vessel in order for that vessel to be eligible for UAE registration. However, a vessel owned by a UAE national is not automatically eligible for a Navigation Licence, unless the owning company’s Trade Licence also specifies the type of Marine Activity the company intends to be involved in.

Despite this, vessels under construction, floating docks, offshore rigs, and hovercrafts (amongst other types of vessels) have all been deemed eligible for registration under the UAE flag. However, tankers over 10 years old can only be registered under specific circumstances

MORTGAGES

The primary vehicle for securing a lender’s position is typically the vessel mortgage. However, Federal Law No. 26/1981 has little detail on how a mortgage agreement should be structured. As a result, there is much discretion on drafting a mortgage instrument and it is the drafter’s responsibility to ensure the rights of each party are well documented in order to be enforceable. Federal Law No. 26/1981 does specify that a mortgage agreement must be in writing and signed before a notary public, which also means the mortgage has to be in Arabic or in a dual Arabic/English format. However, once a mortgage is finalised and executed, the FTA procedure for registering it is relatively straightforward.

VESSELS UNDER CONSTRUCTION

One positive point, in which the UAE is far advanced, is that it is one of the few jurisdictions which permits the mortgage of a vessel under construction, with the caveat that the mortgage instrument is accompanied by a declaration from the relevant Maritime Office in the port in which jurisdiction the vessel is being constructed, stating its length and other dimensions, its approximate tonnage, and the address of the yard or place in which it is being built.

OTHER SECURITIES

In terms of other securities, including assignments, guarantees, security over bank accounts and share pledges, even leaving aside difficulties with due diligence, mortgage and registration, the real problems when it comes to UAE ship finance at present are the difficulties in establishing the usual security package.

The legal treatment of an assignment is still not entirely clear, and similarly in the UAE the creation of a security over an (earning) account is a totally grey area. However, the UAE is addressing these issues. Recent developments in commercial law have helped clarify the status of share pledges, so we hope issues over assignments and security over accounts will also soon be addressed.

FOREIGN JUDGEMENTS AND ARBITRATION AWARDS

It used to be considered unwise for a lender to commence action in a foreign jurisdiction with the aim of enforcing that foreign judgement or award in the UAE. There is presently some debate over which foreign judgements and awards are enforceable in the UAE. Although since the Emirates ratified the New York Convention, foreign arbitration awards have been easier to enforce in the UAE, the position with regard to Court judgements is not as clear. The customary way of determining whether the enforcement of a foreign judgement would be possible, was to evaluate the treaty (if any) between the UAE and the foreign jurisdiction. However, it was unlikely a UAE Court will accept a foreign judgement where matters involved a UAE national, UAE company, or a business transaction which took place within the UAE due to the national courts’ original jurisdiction.

However, a recent alternative has been provided by the DIFC Courts. These Courts have entered into a series of Memoranda of Understanding with foreign courts on how, even in the absence of a specific treaty between the countries, foreign judgements can be recognised and enforced in the UAE through the DIFC Courts. Although this is not yet a well-tested option at the enforcement stage, in a recent judgement it was held that the DIFC Courts could even be used as a conduit jurisdiction for the recognition of foreign judgements, which could then be enforced through certain UAE Courts.

NEW MARITIME CODE

Work is currently being undertaken on a new Maritime Code which will help clarify areas of uncertainty, and provide a framework which will help contribute towards the UAE’s development into the global maritime hub. It is expected this new Code will help address many of the above grey areas, including the structure of mortgages, and could open up the registry to foreign nationals.

The UAE has already been successful in elevating its status as a major maritime hub, and it seems these changes will allow the sector here to reach the next level internationally.

If you need further assistance with a Ship Finance matter, contact Alessandro Tricoli on +971 44 357 577.

This article first appeared in Emirates Law Business & Practice October 2016