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Pre-In Cooperation Contracts in the UAE

Guiding Principle

Contracts which were concluded by either the shareholders or other third persons on behalf of the company before its registration was completed, will remain legally effective for the company once it is registered. No further transfer of rights to the company is required if the contracts were necessary for the foundation of the company. Any kind of legal action closely connected to the intended activities of the company shall be deemed to be necessary in this sense. Rights and obligations arising from any such contracts, which are not necessary for the foundation of the company, must be transferred to the company. The transfer can be carried out by implied actions.

A. Scenario

A part of the procedure for the establishment of companies in the UAE requires the conclusion of contracts before it is duly registered. This is typically the case with leases for the premises and the opening of bank accounts. A company will be registered in the UAE only when a lease is submitted to the authority beforehand and a landlord will require safety checks upon conclusion of the contract. But many other contracts and legal acts can be considered as preparatory actions in this sense as well, if they are closely associated with the desired purpose of the commercial activities.

A company has a corporate personality only after the constitutive registration in the commercial register, see Art. 12 Para 1 sentence 1 Commercial Code UAE (law No. 8 of 1984). With regard to the preliminary agreements mentioned before as per Art 12 Para 1 sentence 4 Commercial Code UAE, the company shall have sufficient corporate personality required for its incorporation. Assuming the company will be duly registered, these contracts will be conducted directly with the company.

The transfer of the resulting rights is automatically. There is no need for any further assignment procedure.

In the case of pre-registration contracts which are not covered by Art. 12 Para 1 sentence 4 Commercial Code UAE or if the company will not be registered, the acting persons are entitled and obliged jointly and severally as debtors and/or creditors. The position as creditor does not result directly from Art. 12 Commercial Code UAE, but from the regulations on joint debtors in the Civil Code of the UAE (law No 5 of 1985), Art. 441 Civil Code of the UAE.

Art. 12 Commercial Code UAE is a general provision but applies to the limited liability company, since there is no explicit provision in the special section stipulating otherwise.

Regulations similar to Art 12 Commercial Code UAE can be found in the laws of the most Free Zones, for example, Art.18 (B) of the Implementing Rules and Regulations FZC Hamriyah Free Zone. If such provision is not included in the laws of a Free Zone Art. 12 Commercial Code UAE nevertheless applies, as the Federal Laws of the UAE shall apply also in the Free Zones if they did not implement their own regulations. The application of these regulations is also independent from the corporate form of the entity in the Free Zone. The common entities FZE and FZC differ only in terms of the number of potential shareholders and are otherwise equivalent to a limited liability company.

Overall, this can be referred to as a general corporate principle of law in the United Arab Emirates.

B. In Concreto

It must be evaluated on a case by case basis to which extent the registration and protection of rights is necessary for a foundation of the company. In case the use of trademarks and patents are closely connected to the planned activities of the company, such transactions will typically already be completed before registration. This occurs in particular if the commercial activity of the company are focused on the sales of products under a trademark or the use of a patent.

In fact, there is the possibility to carry out relevant applications for the registration of a trademark on behalf of a company in foundation. In these cases, the proof of the registration of the company has to be subsequently delivered within three months.

This is clear evidence that such a trademark application is seen as a preparatory action within the meaning of Article 12 Commercial Code UAE by the jurisdiction of the UAE. Consequently, in the event that a trademark has been registered in the name of a shareholder or any other person acting for the company, for example the designated manager of the company under registration, the trademark belongs automatically to the company when it was registered.

According Art. 29 Trademark Law UAE (law No. 37 of 1992) the transfer of the ownership of a trademark shall have no effect against third parties unless duly recorded in the register of trademarks. This rule applies to the automatic transfer of ownership from the acting person to the company in the moment it has been registered. The effective date of the transfer should be the day the company has been duly registered.

Even in cases where it is doubtful whether a contract or a legal act are deemed to be necessary for the incorporation, there may be arguments, stating an exclusive permission/obligation of the entity itself. For example in case where we find a repetitive behavior such as delivery of goods to the later established company on the company’s account, based on the conditions resulting from a contract concluded with as shareholder or designated manager. The principle of implied behavior is recognized in the UAE and can be found in the form of implied behavior and tacit declarations of intent in the UAE laws inter alia in the general rules of the Civil Code UAE, compare Art. 132 (implied behavior) and Art. 135 (acceptance through silence). Yet again these provisions are applicable in the Free Zones. Some of the Free Zones Laws contain regulations stating that implicit and explicit action are rated equally, as in Art 18 (A) of the Implementing Rules and Regulations FZC Hamriyah Free Zone, stating that conclusion of a contract by a representative of the FZC irrespectively whether his authority was expressed or implied.

January, 2015 Francesco Jorno
Meyer-Reumann & Partners, Dubai Office
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