In its heyday before the financial crisis, Dubai was known as the land of plenty. Real estate was king, ambitions were high, and the global financial community eagerly doled out cash on the back of promises that seemed rock solid. For the legal community also, it was a time for deal making, when transactional corporate and capital markets work was in vogue. International firms rushed to establish offices and expand their footprint in the City of Gold, while local players sought to bolster their corporate practices in the hopes of attracting a wide swath of clientele.
But times have changed. With the onset of the global financial crisis and subsequent downfall of the real estate market, the seemingly endless supply of deals in the pipeline dried up and a new emphasis on contentious legal work and dispute resolution suddenly emerged. The passage of Dubai’s Decree 16 late last year broadened the jurisdiction of the common law-based Dubai International Financial Centre (DIFC) Courts, and is expected to put greater focus on dispute resolution in the days to come. Legal experts are expecting a slow but steady increase in the number of litigation cases that will be heard in the DIFC Courts. This will, in turn, create opportunities for a new wave of commercial litigators to make their mark in the UAE.
“Litigation has a tendency to increase in tough markets,” says Anil Shah, partner at legal recruitment firm Hewetson Shah. “In the past, within the MENA market, litigators were underutilised as lawyers during the boom times. We’re seeing more firms trying to compensate now, and shift focus in the contentious practice.”
Shah said the emergence of Decree 16 will increase the importance of the DIFC Courts as a regional hub for both litigation and arbitration. Cases will also become more diverse, ranging from insolvency and property disputes to more complex commercial issues involving shareholder disputes, injunctions, and cross border litigation.
DECREE GAINS TRACTION
There is no doubt that the ramp up in litigation will take time because legal contracts will first have to introduce clauses requesting the DIFC Courts’ jurisdiction in cases of dispute. There will then be a lag time as disagreements arrive. However, early indicators suggest that the law is already gaining traction. Since the introduction of Decree 16 in October, lawyers have maintained that there has been an aggressive push among their clients — particularly those involved in construction transactions — to include a clause in their contracts favouring DIFC jurisdiction.
“I think the development of Law 16 will mean an inevitable increase in litigation in the DIFC,” says Kaashif Basit, partner at Dubai-based KBH Kaanuun. “While I don’t see an overnight explosion, it is fair to say that there will be a gradual increase in cases over the next 12 to 18 months. But there is a serious shortage of advocates on the ground here. There will definitely be more demand for those services down the road.” Basit, who is a staple at the DIFC Courts having tried a number of high-profile commercial disputes within its chambers, says his firm is actively hiring on the contentious side, given its current high level of litigation work.
Other firms with less established contentious practices will also have to bulk up in the months to come as the demand for litigators rises. But there is currently a wait-and-see approach in play before firms begin to aggressively recruit, legal experts says.
Two recent lawsuits decided before DIFC Court justices, however, may also open the doors wide for more legal cases to be filed.
Prior to the October passage of Decree 16, DIFC Courts only had jurisdiction over entities registered within the free zone. All other cases had to be resolved within the Dubai courts — a system that many foreigners criticised as being too arbitrary in its rulings, and subject to numerous delays in judgment.
In Khorafi v Sarasin, a judgment issued in January by the DIFC Court of Appeals, it was ruled that the DIFC Courts would retain jurisdiction of a legal claim under an article in Decree 16, even though the law suit was filed well before the decree had been signed into law by Dubai’s ruler.
Basit, who represented the Al-Khorafi family in the case alleging negligence by a Dubai unit of Switzerland-based Bank Sarasin & Co, says the ruling was significant because it invoked the forum non conveniens clause to overrule a clause in the contract allowing for Swiss jurisdiction. That opens the door for the common law court to use its discretion in hearing cases even if one of the parties inserted a clause explicitly stating the choice of a foreign jurisdiction.
In another lawsuit filed last year, Greek steel pipes manufacturing firm Corinth Pipeworks sued British bank Barclays claiming that an employee in the bank’s Dubai operations defrauded the firm of $24 million. Lawyers for Corinth argued that all of Barclays’ branches in Dubai – including the one accused of committing the alleged fraud — fell under the DIFC Courts’ jurisdiction because Barclays Bank was registered within the DIFC. Financial institutions in Dubai are generally regulated by the UAE Central Bank, and thus fall under the jurisdiction of the Dubai civil courts.
While the claim was initially dismissed, DIFC Court Chief Justice Michael Hwang overturned the earlier ruling on subsequent appeal, saying that a branch office and its parent company are a single legal entity. This made the designation of the “centre’s establishment” applicable to the whole company. Under Dubai Law No 12, DIFC Courts have exclusive jurisdiction over any “centre’s establishment.”
The ruling is significant because it potentially opens up the jurisdiction for any legal cases filed before the passage of Decree 16 by establishing that any foreign company with a licensed branch within the DIFC is considered to be the licensed centre establishment and is, therefore, liable in matters of dispute under the DIFC Court.
“I think, given that the government has extended the jurisdiction of the courts through Law 16 and given that the courts appear to have taken quite an open view of their own jurisdiction, you can legitimately say that the DIFC Courts are going to be used more than they have in the past,” says Christopher Mills, partner and head of dispute resolution for the Middle East at Clyde & Co.
MORE CLAIMS ON THE CARDS
Since the inception of the DIFC Courts in 2008, it has heard about 100 claims, averaging 30 million dirhams per claim. With the new law in place, that is set to change dramatically, says Mark Beer, registrar at the DIFC Courts. “We have had about three billion dirhams of claims in the last two to three years,” he said. “In the next 12 to 18 months alone, we expect that we will have another three billion dirhams in claims. We might not get more cases, but the complexity and size of the case is likely to now, I believe, go up.”
Beer also says the court is planning to double its registry staff to around 20 this year in order to meet the expected growth in court responsibilities going forward. He says the number of judges, however, will remain the same.
The recruitment of commercial litigators is definitely on the cards. But the big question is whether law firms will seek to draw from an internal pool of lawyers on the ground, or whether the industry will see an influx of foreign lawyers from common law jurisdictions,such as the UK and Singapore. “Firms will always look for people out of this region first. But if litigation claims do grow substantially, there won’t be that many people in this market that (law firms) can tap into,” says Shane Morton, partner at global legal recruitment consultancy Taylor Root. “They will have to start looking overseas,” he adds.
Morton says recruitment will be a balancing act to some extent, at least in the next couple of years. Law firms are weighing costs and current capacity in handling cases with the anticipation of more litigation to come. International firms that have largely been focused on arbitration and transactional law are eyeing the changes as an additional practice area to be developed. But every decision is being made with a cautious eye on the future.
LOCAL LAWYERS FEAR DISADVANTAGE
Shah of Hewetson Shah says the relatively small number of cases that have been heard by the DIFC Courts thus far puts lawyers practicing in the Middle East at a disadvantage compared to solicitors in markets such as London. International firms may feel the need to recruit lawyers in other common law jurisdictions. But attracting talent away from lucrative practices abroad may prove to be a challenge. “Unless the lawyer has a valid reason to live in the Middle East, there is a risk in giving up a busy practice to move out there,” says Shah.
“Secondments might be an attractive option for Western lawyers.” An influx of foreign lawyers, however, may cause some concerns among local practitioners who are already eyeing Decree 16 as a death knell for the Dubai civil courts. There is a fear that by widening the DIFC Courts’ jurisdiction beyond DIFC-registered companies, more local and international businesses will steer clear of the civil courts. This will then result in a drop in the demand for local attorneys. If law firms in the UAE start looking abroad to meet demand for commercial litigators versed in common law, the role of local lawyers will become even smaller. “Many local lawyers just do not have the training to appear in front of the DIFC Courts. If it is between us and a lawyer from the UK, we will be the ones to lose out,” says an attorney at a local law firm.
He says that the DIFC Courts have plans to train local lawyers in common law procedure to help facilitate the transition between practicing in Dubai’s civil courts and the DIFC Courts system. But he was worried that a newly trained lawyer will not be as attractive as one who has practiced in a common law jurisdiction for years.
“Firms may talk about hiring locally, but if you think about it, that really just means expat lawyers who are working at competitor firms. There will be a need for more commercial litigators with the new law in place. But the system will not work in favour of local Arab lawyers, at least in my view,” he says.
Published in the new ALB The Brief – March 2012