Date: November 11, 2024
Jurisdiction:
Dubai Courts – Civil First Instance and Appeal
Client:
An LLC company registered in a UAE Free Zone
(Defendant/Appellee)
Opposing Party:
A British individual alleging an unofficial partnership
(Plaintiff/Appellant)
Background
In this case, our client –a licensed LLC operating in a UAE Free Zone- was sued by an individual claiming to be a partner in the company. Although not listed on the trade license or in any official documentation as a shareholder, the claimant submitted emails, internal certificates, and financial records to support his claim that he had paid capital and held a 35% share in the company since its establishment in 2016.
The claimant sought to compel the authorities to reflect his name on the trade license and to award him millions of dirhams in profit dividends, arguing the existence of a de facto partnership based on contributions and email agreements.
The case was complex and high-risk, not only because of the financial exposure but also due to the established judicial trend in the UAE recognizing fact partnerships, where courts often accept informal evidence such as payment records, side agreements, and internal acknowledgments to prove a partnership in the absence of registration.
Plaintiff’s Argument
- Submitted evidence of capital contribution (AED 134,900).
- Presented internal company documents reflecting a 35% share.
- Relied on email exchanges and formal acknowledgment.
- Claimed a de facto partnership.
- Requested to be added to the trade license as an official shareholder.
- Demanded profit distribution from 2016–2024.
Legal Context: Courts’ General Recognition of Fact Partnerships
We were facing an uphill battle against prevailing UAE case law that supports claimants in similar situations. The Dubai Court of Cassation has consistently held that partnerships may be proven by conduct, even without written contracts or registration.
In Cassation No. 89/2024 (Dubai, 10 Oct 2024), the court ruled:
“The absence of a written or publicized partnership contract does not prevent the recognition of a de facto partnership. It may be established through all forms of evidence, including testimony. Once the company agreement is proven, it takes full effect between the parties, even if not written. The trial court may independently assess whether a fact partnership exists based on the circumstances and available evidence.” Translated version.
- Defense Strategy
Despite the legal headwind, we dismantled the plaintiff’s claim across multiple fronts, relying on solid legal reasoning, statutory interpretation, and key precedents.
- Investment, Not Partnership
We argued that the funds paid by the plaintiff were a private investment, not a partnership contribution. He was not granted any legal or formal rights, and the financial returns he received were part of a commercial arrangement, not equity entitlement.
- No Intention to Create Legal Relations
Under Article 8(1) of the Commercial Companies Law, a partnership requires that:
“Two or more persons agree to get involved in an economic profit-making venture by contributing capital or work, and to divide among themselves the profit or loss resulting from such venture.”
We emphasized the absence of any agreement on bearing losses, which is essential for a valid partnership. This concept is further supported by the Dubai Court of Cassation ruling dated 2 April 1994 (Cassation No. 257/1993):
“For a partnership to exist, the parties must intend to engage in an activity that involves risk, with each party contributing and sharing in both profit and loss. Determining this intent is a factual matter left to the trial court’s discretion, provided its decision is reasonably grounded.” Translated version.
The plaintiff only sought profit but explicitly avoided loss—invalidating any claim of partnership.
- Violation of Public Order – “Lion’s Share” Clause
This was a critical angle of attack. The alleged agreement failed due to “lion’s share condition”, when a party claims profits but refuses loss. This voids the contract as it violates public order, per Civil Transactions Law Article 654, and was confirmed in Cassation No. 247/2009 (10 Jan 2010):
“A partnership contract is void if it excludes a partner from loss or profit—known as the lion’s share condition. This makes the agreement invalid for lacking the essential feature of mutual risk and benefit” Translated version.
- No Formal Contract or Registration
As per Article 15 of the Commercial Companies Law, to be legally valid, the founding agreement must be:
- Notarized;
- Attested and approved by the competent authority;
- Registered with the licensing body;
None of these were fulfilled in the claimant’s case. The Dubai Cassation Court ruling of 30 June 2016 (Cassation No. 20/2016) reinforced this view:
“Where a legislative provision clearly reflects the lawmaker’s intent to regulate a specific arrangement, deviation is not allowed in favor of private interests. Such rules are mandatory and relate to public policy.” Translated version.
- Full Reimbursement of Funds
We submitted evidence that the plaintiff had already received back more than what he paid, including profit, eliminating any outstanding financial claim—even under an investment theory.
Court Proceedings and Judgment
- First Instance
Despite the appointed expert report supporting the plaintiff, the court accepted our legal arguments and dismissed the case in full. The court ruled:
“It is evident the claimant contributed AED 134,900 for a 35% share, but there is no written agreement specifying mutual obligations. No share registration occurred. No intention to jointly participate in the company’s operations, profits, or losses was demonstrated. The agreement is therefore void and contrary to public order. The claim is baseless and dismissed accordingly.” Translated Excerpt from Judgment.
- Appeal and Final Judgment
The plaintiff appealed, attaching a private accountant consultant’s report as further evidence. We reaffirmed our defenses. The Appeals Court upheld the dismissal, stating:
“A valid partnership requires intention, mutual contributions, and agreement to share profits and losses. The appellant failed to produce a notarized or registered agreement. The arrangement only addressed profits and not losses, violating public order. Additionally, the appellant received more than he invested. The trial court’s ruling was consistent with the law: no partnership exists.” Translated Excerpt from Appeal Judgment.
Conclusion
This case is a model example of using statutory interpretation and public policy principles to counter fact partnership claims in the UAE. While local jurisprudence often leans in favor of recognizing informal partnerships, this ruling highlights:
- The critical importance of loss-sharing in partnership legitimacy.
- The necessity of formal registration and documented intent.
- That public order overrides informal or profit-only arrangements.
Our legal strategy not only shielded the client from a multi-million dirham claim but reaffirmed the rule of law for corporate formation and ownership in the UAE.
AWS Legal Consultancy
Mohamed Qahwagy