Introduction

The Dubai Court of Cassation recently issued a significant ruling (Appeal No. 14 of 2025, dated March 24, 2025) that addresses several critical legal issues pertaining to company ownership, contractual validity, and procedural aspects of commercial litigation. This judgment provides important clarification on the interplay between changing commercial company laws and existing corporate structures, the effects of contract nullity, and the proper handling of primary and contingent claims in litigation.

Case Background

The case involved a dispute over the ownership structure of a limited liability company (LLC) established in Dubai. The appellant claimed full ownership of the company’s shares and alleged that the respondent was merely a nominal partner acting as a local service agent (sponsor) rather than a genuine equity holder. The appellant sought court recognition of their full ownership rights and transfer of the registered shares from the respondent to themselves.

The case also involved secondary claims related to the company’s leased premises and financial compensation for company assets.

Key Legal Principles Established

1. Application of Commercial Companies Law and Ownership Requirements

The Court addressed the critical issue of how changes in UAE commercial company laws affect existing business structures. The judgment references Article 22 of Federal Law No. 8 of 1984 (the previous Commercial Companies Law), which mandated that every company established in the UAE must have a local partner holding at least 51% of the company’s capital.

The Court affirmed that an agreement to circumvent this mandatory local ownership requirement by establishing a UAE national as a nominal partner with no genuine equity interest renders the company’s formation contract absolutely null and void. This nullity relates to public order and can be determined by the court even without being specifically pleaded by the parties.

Importantly, the Court clarified that the issuance of Federal Decree-Law No. 32 of 2021, which removed the 51% local ownership requirement, does not retroactively validate previously invalid arrangements. The Court emphasized that laws generally do not apply retroactively unless explicitly stated, citing the fundamental legal principle articulated in Articles 205, 209, 210, and 274 of Federal Law No. 5 of 1985 on Civil Transactions.

2. Contract Validity and Effects of Nullity

The Court provided a comprehensive analysis of contract validity principles, distinguishing between:

• Valid contracts: Those that are legitimate in origin and description, with lawful subject matter and purpose

• Void contracts: Those that lack essential elements, violate mandatory legal forms, or contravene public order or morals

The judgment emphasized that absolute nullity operates by operation of law (ipso jure) without requiring a court judgment to establish it. However, a judicial declaration may be necessary for practical purposes, especially when a party has performed obligations under the contract before becoming aware of its nullity.

The Court noted that a judgment declaring a contract null does not invalidate the contract but merely reveals its inherent nullity from inception.

3. Relative Effect of Contracts

The Court reaffirmed the principle of privity of contract, citing Articles 151, 250, and 252 of Federal Law No. 5 of 1985 on Civil Transactions. These provisions establish that:

• Contracts bind only their parties and their universal and particular successors
• Contracts cannot create obligations for third parties
• The effects of contracts do not extend beyond their parties, except where provided by law

This principle was applied to determine that a lease agreement between the respondent and the property owner could not be enforced by or against parties who were not signatories to that agreement.

4. Judicial Handling of Primary and Contingent Claims

A particularly instructive aspect of the judgment concerns the proper judicial treatment of primary and contingent claims in litigation. The Court emphasized that:

• When a case includes both primary and contingent claims, the court must first examine and rule on the primary claim
• If the primary claim is accepted, there is no need to address the contingent claim
• If the primary claim is rejected, the court must proceed to examine and rule on the contingent claim
• When an appellate court overturns a ruling on a primary claim that was originally accepted, it must either address the contingent claim or remand the case to the lower court to rule on it

The Court cited Article 163(2) of Federal Decree-Law No. 42 of 2022 on Civil Procedures to support this procedural framework, noting that failing to follow this approach constitutes a violation of the fundamental principle of two-tier litigation, which parties cannot waive.

5. Court Authority to Recharacterize Legal Relationships

The judgment reaffirmed the court’s authority and obligation to determine the true nature of legal relationships based on their substance rather than labels applied by the parties. This principle empowers courts to:

• Identify the true legal characterization of contracts and relationships
• Look beyond formal designations to the actual intent and conduct of parties
• Apply the correct legal provisions based on this substantive analysis

Practical Implications

This ruling has several important implications for businesses and legal practice in the UAE:

1- Corporate Structures and Ownership:

• Historical “nominee” arrangements involving UAE nationals as nominal partners with no genuine equity interest remain void despite the 2021 legal changes

• Companies established under such arrangements may need to restructure and regularize their status under current laws

• The 100% foreign ownership permitted under current law does not retroactively validate previously non-compliant structures

2- Contract Drafting and Validity:

• Contracts that violate mandatory legal provisions, particularly those related to public order, cannot be remedied by subsequent legal changes

• Parties should ensure contracts comply with the laws in force at the time of formation

3- Litigation Strategy:

• The structure of primary and contingent claims requires careful consideration

• Appellate courts must properly address contingent claims when overturning rulings on primary claims

• Failure to address contingent claims can constitute grounds for cassation

4- Lease Agreements and Business Premises:

• Rights and obligations under lease agreements generally cannot be enforced by or against non-parties
  
• Business restructuring should carefully address lease agreements and real property interests

Conclusion

The Dubai Court of Cassation’s judgment in Appeal No. 14 of 2025 provides valuable guidance on fundamental aspects of UAE commercial and civil law. It underscores the courts’ commitment to upholding mandatory legal provisions while providing procedural safeguards for litigants.

For businesses operating in the UAE, particularly those established before the 2021 changes to the Commercial Companies Law, this ruling highlights the importance of ensuring that corporate structures fully comply with the legal requirements in effect at the time of their formation. While the law now permits 100% foreign ownership in many sectors, historical non-compliance cannot be automatically cured by these changes.

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