Tim Elliot: Welcome to Lawgical, the U.A.E.’s first and still the only legal podcast too. I’m Tim Elliot. I’m here with the Managing Partner of the Dubai-based law firm, HPL Yamalova & Plewka, Ludmila Yamalova. Good to back again. Nice to see you.
Ludmila Yamalova: Good to see you as well, Tim.
Tim Elliot: Today on Lawgical, and this is a good one. This is going to be popular, getting paid, something that’s always welcome, but this is very specifically about businesses, traders, service providers and how to increase the chances of getting invoices paid. Ludmila, just to be sitting here discussing a topic like this, you’re essentially telling me that not everyone pays on time and in full.
Ludmila Yamalova: Indeed. Without having said anything, that is ultimately why I would be telling you. This is not unexpected or unusual. Defaults in payments exist and happen everywhere throughout the world I guess as long as businesses are dealt by humans this perhaps will always happen. This is not an issue that is unusual or unique to U.A.E. businesses. That being said, perhaps the rate by which businesses here often either delay their payment obligations or try to renegotiate or outright disregard, perhaps the rate of those incidents here is somewhat higher than in other perhaps more developed economies or businesses. This could be due to a whole variety of reasons, but this is a very dynamic, rapid, but yet recent business environment, or a rapidly evolving environment, so there are a lot of businesses that set up, hoping to succeed, and without really having the necessary experience. Therefore, they commit and make investments that they ultimately cannot uphold, and so on and so forth. When that happens, obviously, they cannot continue with their obligations and the chain effect follows. But because of that, there are so many more businesses here that seem to either fail or that throughout the process want to renegotiate their terms or altogether just disregard, forget, or ignore.
Tim Elliot: What does the law say? If you’re a business or a trader or a service provider, you raise an invoice. How are you protected from a legislative standpoint?
Ludmila Yamalova: From a legislative standpoint it’s the same as in most other countries and, that is, it’s a matter of contract and a matter of law, depending on the nature of the transaction. But ultimately when you sell something to someone, you raise an invoice, an invoice is also a contract, so whenever you try to provide goods to someone or services, that’s a contractual relationship. Now, that relationship can be supported by one of two ways, either by contract, so I say, okay, Ludmila will provide services to Tim, and here is the service agreement that outlines our terms and conditions, or for example, we don’t have an agreement at all but I give you a my car. Even without the agreement, there is a law there to protect my interests, and that is, unless you’re my family member, why would I ever give you a car? I guess I gave you a car so that you can give me money for it. If you didn’t give me money, the ultimately that’s a form of theft. I use that example because it’s a very real example. It’s an actual example. Because in any kind of business deal, there has to be consideration. That is, if I give you a car, that’s something of value, so I have to get some sort of consideration back. The consideration in this case is a legal term of arm. In other words, you have to give me something back for it.
In the same way, let’s say Tim has a business. I don’t really have any legally registered interest in that business, but I gave you $10,000 and I have a receipt from you that you received $10,000. There is nothing else between us. There is no contract that sets out the terms for my investment in your business or for your repayment of it. In legal terms, and this is not so much on contract, but other commercial law, and that is, I gave something of value. If he didn’t give me back anything, then you owe me that value back either by virtue of giving the car back or giving me the money back, unless you have proof that somehow you compensated me for the value I gave you.
Tim Elliot: Right.
Ludmila Yamalova: So, it could be the contract or it could be the law. But generally speaking, if you do business you want to have a clear contract that sets out the terms and obligations of all the parties concerned. If I give you the good, then my agreement specifies clearly what the price of that good is, the form of payment, and the terms of payment. In other words, do you pay me for that good in one go and do you pay it to me when I give you delivery of the good or do you pay me in installments? When does the first installment happen and what happens if one of the installments is late? Or do you pay me in one payment, but after X number of days, weeks, or months, so a grace period? In very simple terms, that’s what the contract would say.
What happens a lot in business, in particular traders, is they don’t necessarily consider that particular relationship that I just described as a contractual relationship. I just have an invoice. An invoice is a contract. But also because in their businesses, for whatever reason, they just use that invoice perhaps as almost the only agreement between the parties. They will say, this is all I have. This is just an invoice. The invoice, let’s say, provides you goods, say potatoes or bread, for let’s say 5,000 dirhams. I give you that invoice and that’s the only document that exists. You’ve signed onto that invoice and that’s the only document that exists. That document is a contract. Unfortunately, what happens a lot in businesses here is that the particular contract does not include some of the necessary language that would help both parties in terms of managing their expectations and then ultimately outlining their rights and obligations and recourse for them to challenge or to demand performance.
Let’s say I provided you my bread and I gave you an invoice for 1,000 dirhams. You received that bread and I gave you the bread without having gotten paid and then you haven’t paid me my 1,000 dirhams. Now I demand that you pay me that for my bread, and you say, “Well, I will pay it to you in installments.” If I don’t have anything in that invoice, if that is the only document that exists between us, that outlines you have to pay me in one go, that is the argument that you have. You have an argument, I will pay you in installments, and I have nothing contrary that expressly provides otherwise. Or, for example, if you say, “Fine, I’ll pay it to you, but I’ll pay it to you in one month.” Once again, I don’t have anything in the agreement that clearly allows me to argue something of a different type.
This is what we see often is the problem with traders. The example I use, it’s important because for a number of reasons: (1) These kinds of invoices are quite prevalent, invoices without a sufficient level of details. (2) The amount that I use is actually also is where a lot of the problems happen. Because it’s 1,000 dirhams, so if you don’t pay me the 1,000 dirhams, what happens? Am I going to go to court after you? Well, no. But if I’m a trader and I have hundreds of you and so each one of you owes me 1,000 dirhams, that’s a lot of money. What am I going to do with each one of you? I cannot file one case against all of you together, so I have to file 100 different cases. Obviously, that’s commercial and not feasible. Therefore, a lot of traders find themselves in that position where the amount of the invoice is just not significant enough for them to justify going to court or committing resources, and yet, this is how a lot of the industry is structured, and that is, in a way almost like a line of credit or credit facility. In other words, when you go to the store and you buy bread in the store, you don’t walk away with bread and bring money later. You pay money.
But when I give you bread in that scenario, when I give you bread, I let you keep the bread without getting paid. In a way what I’m doing is I’m extending you a line of credit or some sort of a credit facility. Why this particular example is quite pervasive in the industry here is because we don’t have many credit-facility type service providers here. Banks don’t offer that kind of credit facility and so therefore, I, as a trader, that’s my only option. If I want to do business with you, I have to provide you with this credit.
You are a restaurant so I know that you will sell that bread and you will pay me later. But this is why when I sell you my bread, I bake my fresh bread or fresh baguettes or croissants, and then when you sell them you pay me. I know that you are in business so therefore I allow you for you to do it and because I know that you, in a way, have your own limited finances and you are not in a position to pay me for my bread outright until you sell it. This way I don’t demand from you the payment right way. That’s the very common scheme that exists in the U.A.E.
As part of this, what complicates things even more is that in that invoice I didn’t tell you what’s my expectation of when I want you to pay me my 1,000 dirhams for that bread. That’s on example. The other one is I tell you to pay me in 30 days. Okay. First of all, now I’ve given you my goods without getting paid and for 30 days I don’t get paid. Let’s say it’s my risk. But what if you don’t pay me after those 30 days because you still either cannot, or you do not? What happens then? What if you paid me in 45 days, not 30 days? Often a lot of the invoices don’t include that level of detail in terms of what is the term of payment. Then what is the grace period before perhaps a penalty is accumulated and what is that penalty? Is there a penalty? Then at the end, what is the deadline for us to basically settle our dispute or the contract is terminated, and I no longer have the obligation to supply you with my goods?
That’s also another serious problem here because traders in business always sell. If you’re trading, you need to be selling all the time. What happens often is that the same trader will continue to sell, i.e., our example will be me, I’ll continue to sell you my bread even though you didn’t pay me. You didn’t pay perhaps one month, maybe you paid me for three months and then you don’t pay me for two months. Or maybe you pay me back for one month, but you owe me four months. But I want to continue the relationship with you, so I continue to give you my bread and not getting paid. That’s another issue. In a lot of cases businesses do not have this deadline. Say, okay, listen, if you owe me money for more than one month, I’m not going to sell you my bread anymore. That’s the other problem. This is why the debt accumulates to the point of maybe it’s not 1,000 dirhams anymore, it’s 10,000 dirhams.
The way these issues can be mitigated – it’s really about mitigation of damages and the risks, and not so much guarantees because there are few guarantees in this life – so the different avenues or mechanisms that exist or available to traders or businesses.
Tim Elliot: Let’s put aside the business relationships for a second because those are additional ways of mitigating a situation like this. What can you include on an invoice aside from the details there to make it overabundantly clear that this invoice is due at a certain point with a certain penalty if you don’t pay at that point? What do you need to do to really get the point across?
Ludmila Yamalova: There are several ways of doing it, but again in terms of how much flexibility or leeway you as a business have to insist on those terms really depends on your market share and your position in the business. This is what we hear from business as well, “I’d love to do it this way, but they won’t agree. Nobody will sign this agreement.” That being said, what would be the ideal terms that you want to include? (1) You want to make clear what the price is. You want the price to be very specific. Is the price per item or per batch or per shipment? You want the price to be very, very specific. (2) Then the payment amount. Do you expect a full 100% payment paid or you accept installments? That has to be very clearly spelled out. (3) Now, whether it’s a one-time lump payment or installments, then the next one is be very clear in terms of when you expect those payments to start coming in, in other words, when they are due. Are they due 30 days after receipt or delivery? Or are they due upon receipt but you have X number of days to pay before a penalty accumulates, for example?
I will tell you that in professional services, what often happens these days with the more standard, particularly the more established businesses, let’s say when you issue an invoice, the payment is due upon receipt. Why? Because the service has already been provided, so the payment is due as per the agreement, for example, upon receipt. But that doesn’t mean that you have to pay me the following day, but if you don’t pay me for let’s say X number of days, then the penalty or the interest can start accumulating. But the payment is due immediately.
But a lot of businesses feel that these are not common terms for them to do business on here, and that’s why they not only do they not specify that, but they usually give something like 30 to 90 days to pay. But whatever it may be, it’s very important to highlight or clarify how that particular arrangement, the timing, is to be structured. Let’s say if you’re giving somebody 30 days, within those 30 days you expect to get paid. What if it’s 35 days? What happens then? Is there a penalty? A lot of businesses say that they try to include a penalty, but the customer will not accept the penalty.
Then at some point in time, let’s say if it’s 60 days and you still haven’t paid me. There should also be a deadline that gives you as a business the right, the legal right and also moral right, to say I don’t want to do business with you anymore. These things are usually not outlined. For example, I gave you a grace period of another 30 days. After that, this is it. If Tim doesn’t pay me, then I consider this contract terminated and I no longer want to do business with Tim. That’s not to say that you don’t owe me that money. But at least I have no more obligation to supply you with goods. That level of detail often is not included in the invoices.
Finally, and this is probably even more important, is that, let’s say even if you have all of those details, or you don’t necessarily have the details but let’s say we’re going back to the same example and I have hundreds of customers to whom I’ve provided 1 to 5,000 dirhams worth of invoices. One to 5,000, it’s not so huge to justify going to court, but if I have a hundred of them, that could go to up to half a million dirhams. But I cannot bring one case, so what do I do?
The local courts in the U.A.E. do not really have what perhaps in other jurisdictions is called a small claims court that would allow you to go as a business and say, “Listen, here is 1,000 dirhams. I want to get paid.” There isn’t really a system like that. It’s the same system as for all other cases.
However, there are some jurisdictions within the U.A.E., such as in Dubai, for example, it’s the DIFC courts. The DIFC courts, which is the Dubai International Financial Centre courts, it’s a specialized court system based on common law jurisdiction. It’s within the civil law jurisdiction of the U.A.E. But it’s an independent court. It’s also an English-based court. What wee recommend to a lot of businesses and traders is to include the laws and the jurisdiction of the DIFC courts for the purposes of their contracts or their businesses. In other words, in our contract I would say: In the event of a dispute between Ludmila and Tim, this contract is subject to the DIFC laws and jurisdiction, the DIFC courts and the DIFC laws.
Now, you and I have nothing to do with the DIFC, so you may be thinking, well, why DIFC? We are not based in the DIFC. We are not a financial institution. We don’t even do business in the DIFC, and we don’t even really meet there.
Tim Elliot: That’s exactly what I’m thinking.
Ludmila Yamalova: I can see. There is a law that was issued a few years ago now that in commercial settings allows parties ultimately to contract into the DIFC, even if they have no relationship with the DIFC otherwise, which means that even though you and I have nothing to do with the DIFC jurisdiction and we don’t even go there for coffees, we can agree in our contract that in the event of a dispute we agree to deal with our dispute before the DIFC courts.
Now the DIFC courts within it has, in addition to other things, what is called a small claims tribunal. The small claims tribunal in the DIFC is helpful for these kinds of businesses for a number of reasons and importantly because it is an English-based court. The reality is such that most businesses in the U.A.E. are run by in the English language, and that is even if the people that work for them or own them maybe are Arabic speakers. Most of the contracts, most of the invoices, and all of the documentation are in English. Therefore, if you were to take this dispute to the local courts, you would have to legally translate everything into Arabic, which is time consuming and expensive, especially when you’re talking about a 1,000 to 5,000 invoice that you’re trying to get paid.
(1) In the DIFC small claims, you don’t need to translate. It’s all English. (2) The fees are a lot more proportional to the amount at stake. They are quite affordable because they’re based on the amount of the claim. (3) In fact, in most cases, parties are not allowed to bring lawyers in, which is great. Let’s say I, Ludmila, only have 1,000 dirhams to provide, but you, Tim, have a big restaurant group behind you. Now you hire lawyers and you go and you argue with me in court and I only have myself because I cannot afford to bring lawyers, nor would I want to bring lawyers for a 1,000-dirham dispute. The purpose of the small claims tribunal is to make it very casual, less formal, and more expeditious for businesses to settle their disputes. That’s exactly what the small claims tribunal is set up for, that is to allow business to business to mitigate their differences and ultimately settle their differences.
This means that now, all of a sudden, I don’t need to translate my documents into Arabic. I can do it all in English. I can appear there myself with you on the other side. The small claims tribunal’s objective is to settle disputes within two weeks on average, within weeks to just maybe two months.
Moreover, they continue to introduce services that allow businesses even more flexibility to address their disputes, for example, appearing by video-conference. Now you can attend the hearing by video-conference. Let’s say if I’m a business and I am on a business trip or elsewhere or maybe based somewhere else, I can now attend hearings by video-conference. Everything is done online so it’s a lot more expeditious, a lot more efficient, and a lot less expensive because I can do everything myself. Because I’m not arguing with a lawyer on the side, I don’t need to be as formal. Because the court’s objective is to resolve disputes ultimately by two weeks, here we are. It’s a perfect solution for businesses. For businesses who have small claims, small invoices, that don’t have the time, resources, or interest in litigating and getting stuck in prolonged court disputes, here we can appear in a quick and convenient and commercially-minded forum to help us resolve our differences.
Now, that’s one option, but the other option with regards to the same forum, what if you don’t show up? Now, you don’t show up, then ultimately the court will issue a decision in abstentia. Since you’re not there to present your case, and in most cases, it shows that I gave you goods and you didn’t pay so there isn’t really much to argue, then there will be a court judgment. Even though it’s a DIFC court judgment, there is an memorandum of understanding between the DIFC courts and the local courts, in particular in Dubai, whereby the DIFC judgment, with a few administrative steps, is converted into a Dubai court judgment and on the basis of that I can then file for enforcement. That means now, with an enforcement filed, I go after your bank account, your company, and whatever else. That’s a bit of a run down on how this process of litigating in the DIFC would work for small businesses.
Because of that, it’s a very convenient and very efficient, and therefore highly advisable scheme for businesses to consider including in their underlying contracts, be it a service agreement that spans several pages or just an invoice that only has a few items or a few lines at the bottom of let’s say the table, but I would definitely highly recommend that businesses include that language in their invoices because it will help them ensure that their payments will come in a lot more promptly. I will tell you this, often when you do have the DIFC court language in the invoices or in the agreements, parties are a lot more willing to settle their disputes without going to court. That’s because they know that there is an inexpensive option and an efficient option to litigate their disputes and that you don’t have to do it in Arabic, you don’t have to hire a local advocate, you don’t have to be stuck in the court system for a year plus. Because they know that, then the leverage is much stronger through the DIFC courts and therefore in most cases parties ultimately decide to just pay without even the necessity of going to court. For the time being, to recap, what we recommend for small businesses to do is to include more specific terms in terms of when they expect payment, what the penalties should be, when they have the right to terminate the agreement and stop dealing, and then also, more importantly, including the language for jurisdiction and the courts in the event of a dispute.
Now there are a few other things that are important to highlight and that is for businesses not to extend themselves too much or too far. This is what happens often. Because I really want to stay in business, so I continue to sell to Tim my bread even though he is not paying me. This is more practical advice, not legal. Legally, if you had a perfect contract, but I continue not to rely or evoke those clauses in the contract and I keep extending my line of credit to you, then at the end as a business, I’ve become heavily burdened by debt and that leads to all sorts of risks and liabilities. My advice to businesses, in addition to fine tuning their contracts, is to not extend themselves too far.
Now there is one more option for businesses in particular, it depends on the type of businesses, and it’s to sign what’s called an acknowledgement of debt. An acknowledgement of debt is an instrument that is actually now available to sign or register through, in Dubai, it’s the Dubai notary. Let’s say Tim, I’m investing in your business, or I am lending you money to make your own bread, or even I am giving you some services or goods of particular value, but I’m not getting the payment yet. Let’s say I provide you with my services and we know the value of the service is 10,000 dirhams. But you don’t have the money to pay me yet. In addition to doing the contract, what we can do is for me to present my interest that we go to the Dubai notary and we sign what’s called an acknowledgement of debt. An acknowledgement of debt means we sign an undertaking before the Dubai notary and there is a standard form there that says Tim owes me 10,000 dirhams. Now I have this document. I have provided you my services and now you don’t pay me. I take this acknowledgement of debt and I go straight to the enforcement courts and the Dubai courts enforce it. Unlike a regular contract where we have to take it to the court and then litigate it in the court about who’s right, who’s wrong, how do you interpret the contract, what does it mean, and then be subject to court of first instance, the court of appeal, and the court of cassation, the three stages of the court system, instead of all that, we can skip all that and with this acknowledgement of debt I go straight basically to the enforcement courts to enforce this. This is a fairly new instrument that became available about maybe a year ago or so, maybe a little longer, that has not quite gotten as much awareness as perhaps it could, or it should. That instrument is available to businesses and that’s fairly inexpensive. The parties can go themselves to the Dubai notary. It is in Arabic, however. Then just have the acknowledgement of debt signed before the notary and use that ultimately kind of as a guarantee in their business. There are a few options and that’s basically another one that businesses can avail themselves of.
Finally, there is one more, and that is depending on the type of business you’re dealing with, there is the consumer protection system where for certain businesses if you are not getting paid or if you continue to give, let’s say goods that are defective and you don’t get a refund, you can file a complaint with the Consumer Protection Department. Depending again on the matter in question, sometimes just a phone call or a message from them solves the problem.
Tim Elliot: It’s very often the case though, isn’t it, that before these last-ditch measures are taken, that the most effective form of credit control is somebody with the people skill to talk to clients and by hook or by crook get that money. Those are the people you want to keep in a business.
Ludmila Yamalova: Yes, but you just reminded me of an interesting and important part of the discussion, and that is collection agents. Often, we have traders and a lot of the clients that come with these small invoices that are just so upset that they’re not getting paid. They are upset for a number of reasons, in many cases just that they know their clients or customers continue to do business and stay in business and yet they are not paying them. They say, we want to hire collection agents because in other countries, collection agencies are quite frequently used and quite common. They will either hire those collection agents for a fee or they will ultimately assign their debt to these collection agents and then leave it to them. Then collection agents who work in all sorts of ways, sometimes it’s just physical kind of bullying, other times it’s just becoming a nuisance and just harassing by phone or messages and such. Whatever their tactics are, collection agents are not legal in the U.A.E., so it’s not an option that you can legally avail yourself of.
Therefore, if there are entities out there that say they provide collection services, it’s important to manage your expectations that ultimately legally they have no power to do so. All they can do is just write letters that say, pay me, pay me, pay me, or pay the other party, but in the end legally they have no power to do it. If they start harassing you, then you can even file a criminal case against them for harassment.
Tim Elliot: It’s good to know. The Managing Partner of the Dubai-based legal firm, Yamalova & Plewka, Ludmila Yamalova. As always, thank you.
Ludmila Yamalova: As always, thank you to you, Tim.
Tim Elliot: That’s it for this edition of Lawgical, getting paid, sound legal advice from the U.A.E. every week. Remember LYLawyers.com is always open and it’s a legal information resource that’s always free to use. If you have a specific question you would like an answer to, or you need a consultation, get in touch by clicking Contact at the website LYLawyers.com, or you can WhatsApp as well, 00971 52 525 1611.