Forming a partnership or establishing a company to do business in the UAE is common practice. But it seems far less common for persons entering in to these arrangements to give due consideration to the potential liabilities they risk. These liabilities need to be carefully considered, especially the liabilities they risk, without directly committing any fault.
"Vicarious liability" is a legal doctrine that can fasten liability for an injury or loss to a person to someone who is not directly responsible for that injury or loss, but who has a particular legal relationship with the person who principally caused the injury or loss. Legal relationships that can lead to imputed negligence would include a relationship between a principal and an agent, employer and an employee, and a company and its directors.
Vicarious liability as a concept is, in legal terms, a variant of secondary liability that arises under the common law doctrine of agency – respondeat superior – the responsibility of a superior for the acts of his subordinate, or, in a much broader sense, the responsibility of a third party that had the 'right, ability or duty to control' the activities of the person who caused the injury or loss.
There are myriad of provisions in the UAE Federal Law No. 8 of 1984 concerning Commercial Companies (Companies Law) that may cause a person to be held "vicariously liable" for the actions of third parties. A brief analysis of the principle of vicarious liability from the perspective of a company officer or a senior functionary in a UAE company is summarized below. While some of the legal provisions referred to below may not squarely fall under the principle of vicarious liability, it is sufficient to note their potential application, if not, only to raise awareness of these issues in the business community.
Under the Companies Law, the first reference on vicarious liability is found associated with General Partnership, the first of the 7 forms of companies prescribed by the Companies Law. The Companies Law stipulates that the name of a General Partnership may consist of the names of all the partners, or it may be confined to the name of one or more of the partners. If the name of an individual, who is not a partner, is, with his knowledge, mentioned in the name of the company, that individual will be jointly liable for all of the liabilities of the company.
This principle might seem harsh, but it is consistent with international partnership laws and practice, and however you view it, it imposes liability upon a person even on account of "his presence" in a company's name. This issue assumes more significance if the person is not in any manner allied with the company's business. It is common knowledge that searches in the registry can readily disclose the true owners of a company, in the UAE. Be that as it may, the fact remains that the person, whose name appears in the name of the company, can be held vicariously liable as regards all the liabilities of the company.
Further, any person who joins a General Partnership as its partner is jointly liable for all the liabilities of the company incurred prior and subsequent to his joining the company, to the extent of all his assets, along with the other partners.
There are benefits to partnerships and burdens as well. One such "burden" is the fixing of accountability on certain definite individuals associated with the company for all the company's liabilities, which may, in turn, safeguard the genuine interests of the creditors of the company.
A liability incurred upon a person consequent to the inclusion of his name in the company's name is applicable in the cases of Simple Limited Partnership and Partnership Limited with Shares also. As per the Companies Law, the names of such companies shall be composed of the names of one or more general partners [who are jointly liable to the extent of all their assets for the company's liabilities]. The names of the limited/participating partners [who are liable only to the extent of their shares in the company] may not be mentioned in the company's name. However, if their names are mentioned in the company's name, with their knowledge, they shall be deemed as general partners towards bona fide third parties. Consequently, such persons can be liable to the extent of all their assets for the company's liabilities.
The limited/participating partners of a Simple Limited Partnership and Partnership Limited with Shares are prohibited from carrying out any management functions of the companies involving third parties. If the limited/participating partners act contrary to that prohibition, they can be liable for the liabilities arising from their performance of management functions to the extent of all their assets. Further, if these functions are performed in accordance with the authorization of the general partners, the partners who gave the authorization can also be jointly liable for liabilities arising from the performance of these actions.
The vicarious liability that may be fastened to the general partners in the above circumstances stems from the legal maxim "delegatus non potest delegare", meaning "a delegate cannot further delegate".
The Companies Law distinctively reserves the management functions to the general partners, whose names are required to be stipulated in the company memorandum.
The board of supervisors of a Partnership Limited with Shares (Board) is vested with authority to achieve this objective, which includes: requiring the managers to present a report on their management, examining the company books and documents, calling the general assembly to convene if it ascertains that a serious violation in the company management were committed etc. The Board is also bound to submit to the general assembly, at the end of each financial year, a report on the results of its supervision of the company's business.
The Companies Law endeavors to cast strict accountability on the Board by stipulating that the members of the board shall be liable for the actions of managers, or the results of their actions, if they were aware of the mistakes made in the management, and failed to notify the general assembly.
In addition, the Companies Law binds the company itself, vicariously liable for the actions of the board members in certain cases. The Companies Law stipulates that a public/private joint stock company shall be bound by the actions of the board of directors performed within its competence. The company must indemnify third parties for the damages caused by unlawful actions that might be performed by the members of the board, in the context of managing the company.
Overall, many of these issues are quite complex and requires legal analysis. The main purpose of this article is to make individuals who participate in business in the UAE – in companies or partnership style arrangements – aware of the pitfalls and to counsel caution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
