As the financial year closes, the growth in mergers and acquisitions (M&A) first promised by a spurt of activity at the beginning of the year looks set to materialise. The gap between buyer and seller positions on asset pricing is expected to narrow as financials are published and the true value of companies becomes clear. Local M&A practitioners believe this will unblock the regional deal pipeline and with more than 50 international law firms chasing M&A advisory mandates in Dubai alone, lawyers welcome the pick-up in pace.

Historically, firms looking for Gulf M&A mandates have vied for business from sovereign wealth fund clients, advising on outbound cross border deals. Most recently, Abu Dhabi and Qatar have generated considerable interest and some deals.

In February, Abu Dhabi’s International Petroleum Investment Company (IPIC) was forced to sell its 70 per cent stake in South Korean-owned Hyundai Oil Bank amidst a legal dispute. And Aabar Investments recently completed a joint venture deal with Dead Sea Touristic and Real Estate Investment Company in Jordan. However, its anticipated purchase of a 70 per cent stake in construction company, Arabtec, did not materialise.

Following the purchase of Harrods (see page 6) plus a stake in Volkswagen and Porsche, the Qatar Investment Authority (QIA) is now seeking new investments in Germany. There has also been speculation that the QIA is looking at selling its 26 per cent stake in UK supermarket chain, J Sainsbury.

Looking forward, the energy sector could also see large local players seeking to grab value in the international market through acquisition. Saudi Arabia is the obvious source of those transactions, lawyers say. Overall, the volume of transactions in the kingdom is on the rise, as are the number of international law firms.

There are few inbound deals, with Yahoo!’s acquisition of Maktoob, on which Latham and Watkins and Greenberg Tauriq advised Yahoo!, an exception. Simmons and Simmons advised Tiger Global Management, one of the private equity firms selling Maktoob.

Restructuring, consolidations and new acquisitions are flagged as the source of future deals. State-owned entities and investment funds are seeking to reorganise their assets. Government-related entities are seeking to restructure their debts and divest. The UK’s Clifford Chance has a key role advising Dubai World on its debt restructuring.

The number of combinations to gain maximum synergies and reach economies of scale is rising. Badri & Salim El Meouchi and White & Case advised present Qatar Real Estate Investment Company on the merger with Barwa Real Estate. Linklaters and Hassan Al Khater advised Barwa. Latham & Watkins advised on the merger of Qatar Shipping Company with Qatar Navigation Company.

“Mergers in the shipping sector are slightly off the beaten path but consolidation deals in the real estate and financial services sectors are typical of a maturing market where there is potential for a shake-out,” says Latham & Watkins partner Nicholas O’Keefe.

Historically, the busiest sector for regional M&A has been telecoms. “For law firms in the region, telecoms deals provide the most consistent deal flow,” says Dubai-based Linklaters partner Scott Campbell.

The acquisition by Kuwait’s Mobile Telecommunications Company (MTC-now Zain) of Jordan’s Fastlink for US$424m in 2003 kicked off the trend. Now renamed Zain Jordan, the company is rumoured to be back on the merger track and in negotiations with the Palestine Telecommunications Company.

Deal activity in the telecoms sector is high globally but this is particularly the case in the Middle East due to the outward expansion of Gulf operators and the liberalisation of regional markets.

The M&A deals are also accompanied by financing, to fund expansion and rollout, which increases activity for lawyers. Partner at Allen & Overy, Tom Levine said:  “I think the deal activity will continue for at least 18 months, with further consolidation driven by regulatory liberalisation, and an enthusiasm for new types of deal such as infrastructure sharing.”

UK firms dominate M&A advisory market
UK firms dominate the cross border M&A advisory market. On Mergermarket’s league table of advisers on regional M&A deals, half of the top-10 firms by deal volume hail from the City of London. The prevalence of English law in commercial transactions fits their expertise. Most of the top-20 UK law firms bar Slaughter & May have a regional presence, notes one Dubai-based lawyer.

However, other internationals are accruing market share, such as Weil Gotshal & Manges, of the US, which along with the UK’s Linklaters, advised on Showtime’s merger with Orbit.

Most of the work won by international firms in the region is executed on the ground, with local firms, more familiar with the subtleties of the local market, acting as subcontractors. Although this is changing.

Local firms tend to stick to single, country-based M&A deals. However, head of corporate commercial department at Al-Tamimi & Company Gary Watts points out that his firm is different. Its expanding network of offices from Amman to Kuwait means it is positioned to undertake cross-border transactions within the region. The bulk of Al-Tamimi’s M&A work comes from private equity clients. PE players are back with the return of debt financing.

“We’re not confined to local counsel. But we are well connected locally and have a role in sorting through challenging regulatory issues. We are aiming to replicate that across the region,” Watts says.

Relationships matter, not only with the regional client base and regulators but also with M&A investment bankers that refer work.

But in a market so packed with legal experts, the importance of established relationships can be overstated. Larger clients, such as government-related corporates are leveraging the competition between firms and running competitive tender processes for legal advisers. As most large transactions include some level of government involvement in terms of ownership or strategy, legal firms across the board, no matter how entrenched in the local market, have to participate in bidding rounds. Lawyers say that fee structure rather than expertise is often the deciding factor.

Contributors: Victoria Robson and Lucia Dore at Mergermarket Middle East. Mergermarket is an M&A newswire service and is part of the Financial Times Group.

The cogs of change are turning as Gulf countries look to relax existing foreign ownership laws, with manufacturing and industry top of the agenda.

Although the requirements for owning a business are vastly different in each Gulf country, one commonality exists, which is that historically it’s been a thorny issue wherever you go.

In modern times, GCC states have begun to underline their commitment to more relaxed and open laws and a few have taken the tentative steps towards full foreign ownership more broadly.

UAE
In April, the UAE became the most recent GCC country to speak out, hinting that it may open up its industrial sector to greater international ownership.

The UAE Minister of Economy Sultan bin Saeed Al Mansouri gave a heavily qualified thumbs up to overseas investors, saying that there was nothing to be feared from foreign investment, but he would work to protect nationals.

His argument was, as long as the investment is useful to the UAE, why should foreigners not own projects, especially if these businesses involve a huge amount of capital. Al Mansouri said: “We have a lot of raw materials, especially in the petrochemical sector, which we export to China and Japan. Then we buy them back after manufacturing at a huge cost. If we set up industries for these materials in Abu Dhabi, we would make huge profits.”

He identified three areas that would potentially benefit from foreign ownership – petrochemicals, aluminum and iron. All three industries, he said, require a large amount of capital and expertise to run effectively.

Still, 100 per cent foreign ownership is still a very sticky subject for the UAE economy.

Currently full foreign ownership of companies is only allowed in designated areas, known as free zones. Outside these areas all companies must be at least 51 per cent owned by a UAE national or locally-owned company.

A fundamental change in ownership structures would strip the large UAE merchant families of power, as their services as “agents” for joint ventures are rendered defunct.

Rumours have circulated that not just large families are standing in the way of change though. Some say the UAE’s free zone authorities are fiercely opposing the relaxation of foreign ownership laws because they would lose their competitive edge and would face a huge loss of business.

The relaxation of ownership restrictions is seen as key to accelerating the country’s drive to diversify its economy away from a dependence on energy exports.

Plus, ownership restrictions have been blamed for curtailing foreign investment in the UAE and business figures have called for the limits to be lifted as the country exits its worst economic downturn in more than a decade.

But lawyers say the foreign investment argument is overblown and insist there’s a lot of wriggle room inside the current regulations.

Patrick Watson-Thorp, a partner in the Abu Dhabi office of Norton Rose, says: “For the time being, limited liability companies established in the UAE must have 51 per cent local ownership. Subject to any sector-specific restrictions, foreign shareholders can hold a maximum of 49 per cent of the shares of such companies. However, the profits can be distributed differently, up to 80 per cent of the profits can be distributed to the foreign shareholder and this can be entrenched in the company’s memorandum and articles of association.

“For the remaining 20 per cent of the profits there are various structures that have been used which allow you to put in place fee arrangements where part of the remaining 20 per cent is payable to the foreign shareholder,” he adds.

The UAE has been working on a revision to its Companies Law for several years and a string of officials have given deadlines for when the law will be approved, but as yet nothing has come into force.

Government officials are beginning to get to grips with the issue but stop at commenting definitively on the extent to which 100 per cent foreign ownership would be allowed.

Qatar
Qatar has been a little more explicit lately, with its minister of business and trade saying he is considering an amendment to the investment law that allows up to 100 per cent foreign ownership in certain commercial enterprises.

Ownership limits might exceed 49 per cent in the sectors such as business consulting, technical services, information technology, distribution services and cultural, sports and leisure services.

Investors in office buildings as a short-term venture have shifted their focus to concentrate on deriving the maximum long-term income from their investments, regardless of whether their intention is to hold for the long-term or not. In addition, investors in property have had to adapt to the changing demands of tenants who are clearer as to their occupational needs. The interests of landlords and tenants have had to become more balanced in order to achieve a deal, taking into account the evolving legal landscape. Through this we are seeing the emergence of the institutional lease.

Long-term plan
An institutional lease is a lease of property that would be acceptable to an institutional investor who is concerned with a protected long-term income stream, such as a bank or pension fund. Institutional leases typically provide that the landlord is entitled to recover all costs relating to the property from the tenant, such as the costs of repair and insurance. Such leases are commonly referred to as “fully repairing and insuring leases” (FRI) (ie the tenant is responsible for all repair and insurance) or “triple net leases” (ie the tenant is responsible for all taxes as well as repair and insurance).

The lease can either provide that the landlord will pay for such costs and thereafter claim them back from the tenant through a service charge mechanism (this works well in a multi-let building), or that the tenant is obliged to pay such costs, leaving the landlord with no outgoings (this works well with a single-let building although landlords will typically wish to retain the obligation to insure and claim the cost of insurance in order to ensure that the building remains properly covered).

The regional market was initially resistant to long-term leases, with tenants’ expansion plans evolving daily and landlords keen to ensure the best possible rent from a tenant. The introduction of rent caps and minimum tenures has forced landlords to take a longer- term view, and landlords are keen to ensure that they have a secure income stream.

The obvious benefit to landlords of institutional leases is that the tenant is liable to pay the costs of running the property. This means that the rental payments which the landlord receives are fixed and can be used to pay off the cost of acquiring the property, service the financing over it or, ultimately, as profit.

Institutional leases minimise the risk to a landlord of investing in property, as the associated costs are met by the tenant. The covenant strength of the tenant (sometimes coupled with a bank or parent company guarantee) is of critical importance in providing the landlord with comfort that the tenant will meet its obligations under the lease.

Established funds are focused on yields and risk. Traditionally conservative investors such as banks and pension funds are unlikely, particularly in the present economic climate, to invest in uncertain portfolios. Moreover, the greater the perceived or actual risk, the higher the yield (ie the lower price/higher rents) an investor will expect. However, if it can be demonstrated to an investor that the income to be derived from a property is subject to few uncertainties, then the property may well command a premium.

It is easy to assume that an institutional lease will only benefit landlords. However, tenants can also benefit from lease property which is subject to an institutionally acceptable lease.

A full-length institutional lease provides a tenant with certainty as to its rights and obligations throughout the term of the lease, although the tenant takes the risk of fluctuating maintenance and insurance costs.

Institutional leases all cover very similar rights and obligations of the parties, and the landlord and tenant can negotiate those which are most important to them. While properly audited service charges are rare and the absence of an audit can cause tenants a degree of uncertainty, this can be mitigated by preparing careful budgets and ensuring that the mechanism is transparent and represents the genuine cost of providing services, rather than an additional profit for the landlord.

In the current financial climate investments are being ever more closely scrutinised by investors’ central management. If located in markets such as the UK, the US and Australia, management committees and boards will be much more familiar with the concept of an institutional lease and potentially more comfortable in approving their terms.

Welcome to the UAE
Traditionally in the UAE, leases have not been institutional leases. Awareness of, and demand for, institutional leases is increasing, for the following reasons:

● Increasing high quality of supply. Previously, high quality office space was in short supply. In Dubai, in particular, office space in free zones has been in high demand. This enabled landlords to impose whatever form of lease they chose, which often fell into one of two extremes: either a one-page short-form lease; or a full-length form of lease which was highly favourable to the landlord. Neither provided any certainty to the tenant, nor would they be acceptable to an investor as they did not provide clarity in relation to matters such as service charges and insurance.

With high-quality commercial office space being constructed in the UAE, landlords are looking at ways to set their developments apart. Those adopting institutional terms are appealing to both institutional investors and high-caliber corporate tenants alike.

● Increasing commitment to the region. Previously, corporate tenants may have shown less long-term commitment to the region. This meant that they were less interested in entering into longer-term leases of office premises. Now, tenants such as banks and professional services firms are keen to commit to the UAE for the foreseeable future and are demanding longer-term leases of larger office space.

● Push for institutional leases. There is a noticeable push by both landlords and tenants for institutionally acceptable leases in the UAE. The DIFC has taken some strides to incorporate institutional terms but has resisted the development of a full service charge regime, instead opting for inclusive service charges – providing for greater tenant certainty, but less clarity on yield as far as the landlord is concerned.

Others are embracing the concept. Drew Nieman, executive director of leasing at John Buck International, explained that Sowwah Square, which is being developed on Sowwah Island, Abu Dhabi, by Mubadala is being pre-let on the basis of institutional leases. “Mubadala and John Buck International are committed to introducing a new standard of institutional leases into the UAE,” Nieman said.

“We believe this will attract a high standard of investors and blue chip companies to commit to a long-term presence in Abu Dhabi. We hope that where Sowwah Island leads with institutional leases, others in the Middle East will follow.”

Bermuda is becoming an increasingly popular choice for MENA-based companies entering into joint ventures and it is easy to see why, says Kerri Lefebvre.

While Bermuda may be known for the mysterious triangle that bears its name, there is nothing mysterious about its sophisticated corporate and regulatory regime. A majority of the Fortune 100 companies maintain a presence in Bermuda, reflecting its long and successful history of accommodating international business.

Its reputation and business profile offer a high level of comfort to investors, and its key corporate legislation, the Companies Act 1981 (the “Act”), keeps pace with international commercial developments. Bermuda is committed to international standards of cooperation and transparency. With 19 tax information exchange agreements to its credit, it is on the OECD’s “white list” and has been chosen to host the 2011 OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.

Joining forces
A balance between corporate flexibility and regulatory oversight has made Bermuda entities an increasingly popular choice for industry leaders entering into MENA joint ventures.

A “joint venture” describes an arrangement between two or more participants who pool resources to develop a business opportunity. The participants generally enter into an agreement (a “JVA”) that sets out their commercial arrangement, providing for matters such as voting rights, corporate management, capitalisation, distributions and transfer rights and restrictions. While joint ventures may be structured through a partnership (which may elect to be treated as a separate legal entity under Bermuda law), a company (“JVCo”) is more usual.

The JVCo is usually set up in a neutral jurisdiction to avoid any “home court advantage” and reduce legal risk. In addition to the obvious advantage of tax neutrality, key factors in the choice of jurisdiction include reputation, confidentiality and the familiarity and flexibility of the legal system. It is important to ensure that the deal set out in the JVA can be effected under the applicable corporate law (particularly if the JVA is governed by the laws of a different jurisdiction, as is often the case). Bermuda’s regulatory and legal systems meet these criteria.

The consent of the Bermuda Monetary Authority (the “BMA”) is required to establish an exempted company. While this requirement may have been seen as a hurdle in the past, it is now largely perceived as a reputational advantage. The company may then be incorporated and organised to reflect the JVA.

The JVCo’s constitutional documents (memorandum of association and bye-laws) govern the relationship between the company and its shareholders. The memorandum (a public document) contains minimal information (eg, the authorised capital and objects of the company, which generally are unrestricted), while the bye-laws (a private document) set out the framework for the company’s operations. The bye-laws need not be filed with any authority, and may be amended by resolutions of the directors and shareholders.

The terms of the JVA should be reflected in (or at least must not conflict with) the constitutional documents. Voting rights, quorum and notice requirements generally should be incorporated into the bye-laws to ensure enforceability, and it may be prudent to include other provisions of the JVA (such as rights and restrictions on the transfer of shares, pre-emptive rights, rights of first refusal, tag-along rights and drag-along rights) in the bye-laws as well. Should a dispute arise, a Bermuda court would be bound to apply the provisions of the JVCo’s constitution.

While the JVA (at least to the extent that it is governed by Bermuda law) may be enforceable in its own right as a matter of contract law, it is generally possible for a court to award damages in the event of a breach rather than specific performance. Specific performance is an equitable remedy available at the court’s discretion and will be ordered only when damages are not adequate to compensate the injured party for the breach of the JVA. A breach of the constitutional documents, on the other hand, may go to the validity of the unauthorised action.

As the bye-laws are private, constitutional documents generally may be crafted to accord with the JVA without risking commercial confidentiality.

Directing affairs
Bermuda law allows considerable flexibility with respect to corporate governance and there is broad discretion to fix rights attaching to shares. The bye-laws of a JVCo often provide that each shareholder is entitled unilaterally to appoint and remove a specified number of directors. Directors owe fiduciary and other duties to the company under the Act and at common law, and they must act in the best interests of the company.

The directors are generally empowered to manage the JVCo’s business, subject to the bye-laws and the Act (which reserves certain limited matters to the shareholders). Where shareholder action is required, resolutions are passed by a simple majority unless the bye-laws provide otherwise (save in very limited circumstances set out in the Act), and generally may be passed in writing. The bye-laws of a JVCo frequently include supermajority voting requirements (at the shareholder and/or the board level) that accord with the JVA in order to protect shareholder rights with respect to fundamental business issues. The bye-laws may also contain an array of additional shareholder protections relating to, for example, variation of share rights, meetings and dissemination of financial and other information, and it is quite usual to include tag-along, drag-along and pre-emption rights.

Bermuda companies must appoint an auditor and lay audited financial statements before the shareholders at an annual general meeting (which generally may be effected by written resolution) unless all of the directors and all of the shareholders waive these requirements. Multi-national joint ventures typically require the appointment of an auditor, and participants take comfort from these statutory requirements.

A Bermuda JVCo may be capitalised with share capital, share premium and/or contributed surplus. Share premium is an amount paid to the company for shares over their par value and generally is treated like share capital, while “contributed surplus” is contributed to the company, but not in consideration for shares (save on certain share exchanges) and includes donations of cash and other assets. Funding a JVCo with contributed surplus can facilitate distributions and limit the annual government fee payable.

A dividend or a distribution out of contributed surplus may be authorised by the directors if the “dividend test” in the Act is met. The test is a two-limbed solvency test; no calculation of profits is required and there is no differentiation between interim and final dividends. Capital may be returned to shareholders by share redemption or repurchase, or through a statutory reduction. A repurchase generally may be authorised by the directors of a solvent company on terms agreed with the relevant shareholder. A formal reduction of share capital requires shareholder consent and must be effected in accordance with the relevant statutory provisions (although there is no requirement for court affirmation).

Operating mechanism
The Act contains a number of provisions that facilitate the operation of a JVCo. Comprehensive provisions for amalgamations and continuations provide a convenient mechanism for consolidations and acquisitions and a regime for the registration of charges granted by a Bermuda company over its assets (or by a foreign company over property in Bermuda, including shares of a Bermuda company) facilitates debt finance and security arrangements. Registration is not mandatory and does not ensure enforceability, but to the extent that Bermuda law governs priority, a registered charge will generally have priority over any unregistered, or subsequently registered, charges in respect of the same assets.

A provision allowing companies to agree to refrain from exercising certain powers reserved to the shareholders under the Act may assist enforceability of negative covenants relating to matters such as alterations to the constitutional documents and share capital in finance documents.

The Act also contains a cogent regime for both voluntary and involuntary winding up. Bermuda practitioners have wide experience with multi-jurisdictional liquidations and restructurings, and joint venture participants value the certainty that flows from a well-established regime in this regard.

Bermuda exercises stricter oversight than many offshore financial centres. However, an exempted company (other than an investment fund) generally will not be subject to ongoing regulation (except for the requirement to obtain BMA consent to issues and transfers of shares) unless it proposes to carry on investment and/or insurance business in or from Bermuda. Most JVCos set up to invest in the MENA region are holding companies with interests in local operating entities and would not be subject to such ongoing regulation, although advice in this regard should be sought.

Suggested expansion of the DIFC Courts’ jurisdiction has not been met with an altogether positive response as the region’s legal community continues to grapple with questions over the bounds of its existing remit.

Can I get my case heard before the DIFC Courts? This is a common question asked by foreign investors keen to take advantage of the international legal standards in the DIFC. The past 12 months have been a moving feast as far as the answer to this question is concerned, with the jurisdiction of the DIFC Courts appearing to both contract and expand at the same time.

Uncertain conclusions
As with any “young” untested jurisdiction there were areas of uncertainty in the laws governing the jurisdiction of the DIFC Courts. For example whether DIFC Law No 10 of 2004 (the DIFC Court Law), or Dubai Law No 12 of 2004 (the Judicial Authority Law) was the effective source of the DIFC Court’s jurisdiction.

The laws referred to contracts and “transactions” being “executed” or “concluded” in whole or in part in the DIFC, and “incidents” occurring in the DIFC. These terms were all undefined.

It was not surprising that lawyers quickly thought of ways in which disputes arising out of their clients’ contracts might be decided by the DIFC Courts, even if any link with the DIFC was tenuous. This led to the emergence of “coffee shop” contracts.

In July 2009 in the Waterfront case (CFI 011/2009 Amarjeet Singh v Waterfront Property Investment Limited and Linarus Fze) the DIFC Courts held that the Judicial Authority Law is the operative provision that confers jurisdiction on the DIFC Courts, and that the reference to cases and disputes “involving” the centre or any of the centre’s bodies or any of the centre’s establishments in the law meant that such bodies must be a party to the dispute. On the facts, the DIFC Courts had no power to grant a freezing order where the disputes were to be resolved by arbitration in accordance with the DIFC-LCIA rules where the arbitration was to take “place” in Dubai, not the DIFC.

This was not sufficient for the DIFC Courts to take jurisdiction as the DIFC-LCIA Arbitration Centre was not a party to the dispute.

On December 7, 2009, the DIFC Court in the Shuaa Capital case held that the DIFC Courts may have jurisdiction over matters related to or arising from incidents occurring in the DIFC if the consequences of an incident affect the DIFC or a DIFC entity, even where that DIFC entity was not a party to the proceedings.

The DIFC Court also provided guidance on the meaning of the word “transaction”, stating that this is wide enough to include a range of deals not just confined to contracts, and held that for a contract to be “executed” in the DIFC it had to be wholly or partly
performed in the DIFC.

Clarifying terms
On the same day, the protocol of jurisdiction between the DIFC Courts and the Dubai Courts was signed, and aimed to clarify the interpretation of the terms “executed” “transaction” and “incident” under the Judicial Authority Law. The protocol provides that the DIFC Courts have jurisdiction over disputes arising from or related to a contract that has been performed, in whole or in part in the DIFC. Combined with the Shuaa decision this may be the death knell for “coffee shop” contracts, and therefore a narrowing of the DIFC Courts jurisdiction.

At the same time the protocol stated that “transactions” in the context of the DIFC Courts’ jurisdiction related to financial banking, financial, ancillary activities or any activities licensed to be performed within the DIFC. While some of these terms are defined under Federal Law No 8 of 2004 concerning financial free zones, there is obviously scope for argument as to the extent of these provisions.

This month the press reported that discussions were under way to consider expanding the jurisdiction of the DIFC Courts to include specific types of commercial cases in Dubai itself involving banking, shipping and financial services that take place outside the DIFC. Judging by some of reactions that may be a step too far for some. However, one thing is certain – the evolving jurisdiction of the DIFC Courts is likely to keep practitioners and court users guessing for the foreseeable future.

Does the economic crisis qualify as force majeure? Many businesses are hoping that it does, as contracts become harder to fulfil because of the downturn.

With the turmoil in the financial markets still all too apparent, businesses in all industries are facing problems in terms of increased costs, poor cashflow and a fall in prices. This often leaves contracts costly or unprofitable to perform and, as a result, is causing businesses to review closely their contracts to see what options are available to them.

Businesses that wish to avoid contractual commitments are increasingly looking to argue that their circumstances amount to economic hardship brought on by the global financial crisis and that this is a force majeure event that excuses non-performance or excludes liability.

Unable to perform
Force majeure is used to describe a contractual term by which one or both of the parties is excused from performance of the contract, in whole or in part, or is entitled to suspend or delay the time for performance. If a contract does not contain such a clause then there is generally an absolute obligation to perform.

However, notions of what constitutes a force majeure differ under common law and civil law jurisdictions. Under English law, force majeure will only operate if inserted into the contract. English law does not provide a precise legal definition of force majeure, making it difficult to define its scope. Therefore how it applies to a particular contract is dependent upon the exact wording of the clause, especially as English courts construe force majeure clauses (as exception clauses) narrowly and against the party seeking to rely upon them.

The force majeure clause will define an event that is unforeseeable, rendering the fulfilment of the obligation wholly impossible, typically by listing a number of events followed by the words “or any other causes beyond the control”. For example, in construction, clause 37.1 of the ENAA forms (ENAA Model Form International Contract or Power Plant Construction 1996 and ENAA Model Form International Contract for Process Plant Construction 1992) defines force majeure as: “any event beyond the reasonable control of the owner or the contractor, as the case may be, which is unavoidable notwithstanding the reasonable care of the party affected, and shall include, without limitation, the following…” The clause then details a non-exhaustive list of typically cited events that would constitute force majeure, including acts of foreign enemy, civil war hostilities (whether or not war has been declared), war, invasion, rebellion, terrorist acts, strike sabotage, import restrictions, fire, flood, earthquake, inclement weather conditions and shortages of labour.

There are similar clauses in commodities sale contracts such as GAFTA and SCOTA. GAFTA 100 states: “Sellers shall not be responsible for delay in shipment of the goods or any part thereof occasioned by an act of God, strike, lockout, riot or civil commotion, combination of workmen, breakdown of machinery, fire or any cause comprehended by the term “force majeure”.

SCOTA reads: “Force majeure means any event or circumstance: not reasonably foreseeable at the date of a transaction which wholly or partly prevents or delays a party from performing its obligations arising with respect to such transaction (apart from an obligation to make payment); and which cannot reasonably be overcome or avoided by such party exercising all reasonable skill, care and diligence…”

The party seeking to rely on the force majeure provision must prove that the force majeure event falls within the clause and it has been prevented, hindered or delayed (as the case may be) from performing the contract by reason of that event. Moreover, the non-performance, hindrance or delay must have been due to circumstances beyond its control, and the force majeure event such that it was not reasonably foreseeable at the time the contract was concluded. The party must also show that there were no reasonable steps that could have been taken to avoid or mitigate the event or its consequences.

Seeking relief
In recent times parties have looked to argue force majeure on account of economic hardship. However, an initial difficulty for a party seeking relief is that under most standard force majeure clauses economic hardship is not a listed force majeure event. The party must then argue that economic hardship falls within the general ambit of the clause as one of “any other causes beyond [its] control”. This is a difficult argument to advance as an English court is likely to regard the global financial crisis as a event fundamentally different to the usual force majeure events mentioned above.

Notwithstanding this, should a party successfully argue that the global financial crisis is a force majeure event within the scope of the parties’ contract, it must additionally establish that the global financial crisis in fact hindered or prevented it from performing the contract. If the event does not render performance impossible, but rather creates conditions in which its performance is more financially onerous, the event is unlikely to be held as the cause of the failure to perform.

The long-established attitude of the English courts is that a failure of performance due to the provision of insufficient financial resources, or a rise in cost or expense, will not amount to events of force majeure. This is based on the notions of sanctity of contract and commercial certainty. English courts adopt the view that parties should not be able to undermine these principles by exploiting force majeure clauses and should only be able to avoid their contractual obligations where they have expressly agreed that they may do so.

This has been affirmed by the recent decision in Tandrin Holdings v Aero Toy Store [2010]. In this case Aero Toy Store alleged that the “unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets” had triggered the force majeure clause in the sale agreement.

Justice Hamblen disagreed, ruling that it had long been a settled law that a change in economic and/or market circumstances that affects the profitability of a contract or the performance of parties’ obligations will not be regarded as being a force majeure event.

Therefore advancing an argument of force majeure to escape obligations under a contract which has become expensive to perform will not, even if it has become drastically more expensive, avail a party and alone constitute force majeure. Under English law an economic downturn is not generally recognised as a force majeure, absent contractual terms specifically including such economic circumstances. The approach of the English courts is that economic conditions under a contract are no more than a normal risk of a commercial bargain.

There are also issues on causation. A party seeking to prove force majeure will need to show that it is physically prevented from performance. If it is only on grounds of commercial impracticality in performance of a contract, it is unlikely (absent clear words dealing with the circumstances in the clause) that reliance on a force majeure provision will relieve a party of its obligations under the contract.

Civil code interpretation
In the UAE, release from contractual obligations is governed by the UAE Civil Code. Even if a UAE law governed contract contains a force majeure clause, the UAE Civil Code may still be relevant in determining whether performance of a contractual obligation has become impossible or oppressive under article 249, which requires that the circumstances must be unforeseen and of a public nature.

Article 249 grants a judge or an arbitrator the power to revise a contract with a view to restoring economic parity between the parties. Therefore, it provides some scope to argue that the economics of a given situation are oppressive and that the contract should be “reopened”. The deterioration of freight rates in shipping coupled against pre-existing high charter rates are an example of how this rule may have particular relevance.

Article 273 goes further containing elements of impossibility of performance, with the onus of proof on the party claiming force majeure. There is no definition of force majeure under UAE law, but these provisions suggest three required elements: the first is an intervening event over which the party had no control; the second is that the event’s occurrence left performance (partial or totally) impossible; third is the unforseeability of the event itself.

It is generally accepted that force majeure is limited to events that are in the circumstances unforeseeable, such as natural disasters.  More difficult is the credit crisis.

Although the strength of the financial markets is beyond most individuals and businesses, a recession is not unpredictable, while the increased financial burden of performance is unlikely to be held to render performance impossible. Moreover, the mitigation requirement related to the notion of foreseeability means parties must move to mitigate their potential losses.

Each case will always turn on its own circumstances and the precise terms of the contract in question. An English court, unless contractually specified, is unlikely to accept arguments that the financial crisis forms a force majeure event.

It is also likely that, though granted discretion, courts in the UAE would also deem the global financial crisis as an inherent and foreseeable risk of business which all contracting parties should be wary of and consider when negotiating contracts.

Notwithstanding the above, claiming force majeure may, in the circumstances, not be without merit as economic hardship borne from the global financial crisis may lead to unforeseeable repercussions which themselves may be regarded as force majeure.

Dubai, Bahrain and Qatar are battling it out to be credible global financial centres, but which will emerge as the forerunner for the region?

In recent years there has been increasing competition among Gulf states to establish a legal and financial centre, with the key players being Dubai, Bahrain and more recently, Qatar. The impetus for this move is the opportunity presented by geography, with the chance to create a financial and legal centre, operating in the time zone between London and the Far East. The creation of a financial centre depends, to a large degree, on establishing a legal and regulatory regime that investors can trust. An efficient, transparent jurisdiction that produces readily enforceable judgments and awards gives investors the confidence to trade and hold assets there. Over time, this can also generate momentum as more bankers, lawyers and other professionals become concentrated in a geographic area and the success of that jurisdiction becomes increasingly self fulfilling.

Critical mass
Each of these three jurisdictions has sought to create a legal regime distinct from their domestic judicial process, by way of specialist courts and arbitral institutions to resolve disputes between international investors. While Dubai, Bahrain and Qatar may each have a significant role to play as smaller, regional financial centres, the likelihood is that only one will ultimately develop the critical mass necessary to make it a rival or at least a real alternative to London, Hong Kong and Singapore. The same is true of the battle between their respective arbitral centres, something that will be familiar to observers of the competition between the London Court of International Arbitration (“LCIA”) and the Paris-based International Chamber of Commerce (“ICC”), which compete to attract big disputes and have left Geneva and Stockholm behind as alternative dispute resolution centres.

Qatar
Over the past several years, the government of the state of Qatar has engaged in extensive legal reforms. Following the creation of Qatar Financial Centre (QFC) in 2005, the QFC’s Civil and Commercial Court (the “QFC Court”) and Regulatory Tribunal were established by Law No 2 of 2009 and were introduced to an international legal audience at the Qatar Law Forum in May 2009. The new international judiciary’s legal regime has been inspired by Delaware, a US jurisdiction with relatively light regulation and efficient, specialist courts.

The QFC Court, in turn, has also looked to the specialised role played by the Commercial Court in London, and it is headed by the former Chief Justice of England and Wales, Lord Woolf. The QFC Regulatory Tribunal is chaired by Sir William Blair, an English High Court judge and a banking and finance specialist.

The QFC Court is to apply elements of the common, civil or shari’a law, with parties free to elect for disputes to be heard under a foreign law to the extent that it does not conflict with Qatari public policy. The QFC Court is designed to be an integral part of the Qatari court system, with its judgments being recognised and enforceable throughout the state of Qatar. Further, the QFC Court is designed to play a role in the legislative process and is empowered to recommend new legislation to the government. In order for parties to have a dispute heard by the QFC Court, at least one of them must be registered in the QFC or the transaction must be related to the QFC.

What makes Qatar stand out in the region and what may offer it a key advantage is the QFC Court’s commitment to promoting mediation. This is in part due to Lord Woolf’s involvement, since he spearheaded the promotion of mediation at the time of the reforms of the English court system in the late 1990s. However, it may also strike a chord among businessmen and lawyers throughout the Gulf and the Middle East, since mediation has a strong cultural role in the Arab legal traditions.

The promotion of mediation has been affected, in part, through a collaboration between the QFC Court and the Centre for Effective Dispute Resolution (“CEDR”).  A Memorandum of Understanding (“MOU”) was signed on January 10, 2010, whereby the CEDR will assist the court in providing both mediation services and training in the Gulf region. The first mediator’s skills course was held in Qatar in the days immediately following the MOU being signed. It is intended that mediations will be held at the QFC Court buildings, the construction of which is to start shortly, where state-of-the art facilities have been specially designed to accommodate mediation and case management.

A well thought-out and carefully implemented document retention policy can help businesses mitigate legal risk, says Richard Dollimore.

All organisations produce a mountain of information during their normal business operations. This includes paper-based documents, from contracts and invoices to marketing materials, and electronic information including data files and emails. An effective document retention policy can assist a business with its record keeping to make it more efficient and also to maintain control over its costs and, importantly, to mitigate legal risks in the event of litigation arising.

Reasoned logic
Why implement a document retention policy in the first place? Simply put, a document retention policy should stop employees retaining electronic and physical documents that they do not need to. There are both business and legal reasons why this is desirable. One such business reason is to save on storage. If employees know that only certain types of documents need to be archived and that anything else can be destroyed (or recycled) this will allow an organisation to save on space in its offices and/or reduce the amount spent on off-site storage facilities. The deletion of extraneous electronic information will also mean that IT facilities will be under less strain and require less ongoing maintenance, again increasing efficiency and minimising costs.

Implementing a document retention policy can also benefit a company from a legal perspective, and can be of particular importance when a company becomes involved in a dispute. Consider the situation where a company wishes to rely on an agreement or correspondence, but an over-eager employee has already destroyed what may prove to be a key piece of evidence.

However, this can work both ways in jurisdictions where disclosure or discovery applies in litigation. An organisation may find that documents that it was not legally required to retain must be disclosed to adverse parties and may damage the company’s prospects during the litigation.

The added advantage to an effective document retention policy during a disclosure exercise is that the process itself will be quicker and simpler as there are fewer documents to review and relevant documents can be identified more readily, substantially reducing management time and legal costs.

Given that a document retention policy will primarily inform employees as to how long they must hold a type of record before it can be disposed of, there are two main elements to consider when devising it. Specifically, these are what types of records are to be retained and how long records within each category are to be retained.

When deciding which categories a company’s records fall into, it will be important to have input from all departments (not just IT, personnel and records-management staff). This is because across an organisation there will be a diverse range of records and some may be used for different purposes by different departments. By undertaking a wide consultation, a policy can be designed to suit the individual needs of the company from both a business and legal perspective.

A balance will need to be found between defining categories too narrowly or too broadly and this will largely depend on the company’s history and its litigation profile.

If the categories are too narrow, this will increase the complexity of the policy and employees will be asked to interpret them, which will mean it is more likely that something will be mis-categorised. A broad category will inevitably mean that records are retained which do not need to be.

An increase in piracy, the war on terror and the financial crisis have put a renewed emphasis on political risk cover, but the insurance industry is struggling to keep up.

Global economic uncertainty in recent years has encouraged a reassessment of what “political risk” covers. Even before the current crisis the insurance industry found it difficult to keep pace with change. In the past two decades, such risks, for insurance purposes, have included (along with terrorism, riots and conflict) an expanding range of commercial risks that have a political trigger. These include:
● “Contract frustration”, ie where a foreign government or company does not abide by the terms and conditions of the contract;
● Currency transfer restrictions, ie the inability to convert local currency into foreign exchange to allow transfer outside the host country (or excessive delays in acquiring foreign exchange).
● Confiscation, ie the seizure and expropriation of private property by a government, often characterised as a penalty for an alleged breach of law.
● Nationalisation, ie the taking of control by the government over assets or over a corporation.

Increased interdependence
Although many factors accounted for this changing environment, it reflected above all the increasing interdependence between “developed” and “developing” nations. This is at its starkest, for instance, in the context of energy supply. During the early 2000s, international companies, their governments and their insurers took due notice of the seizure of control of key assets and/or businesses by a number of Latin American countries (so-called “economic nationalism”). The most prominent example was in 2007 when Venezuela took a majority stake in four oil projects operating in the Orinoco river basin worth an estimated US$30bn, to the detriment of a number of key international investors.

Other “host” governments have either shied away from such overt acts or, for instance in the case of many African countries, do not have the existing infrastructure to replace the foreign operations. Instead, some countries have adopted more indirect approaches and, in turn, insurers have increasingly recognised that, while there might be no single act of expropriation, a series of measures – tax reforms, regulatory controls, tariff adjustments arbitrary charges, etc – can together amount to such activity.

As a consequence, concepts such as “creeping”, “indirect” and “partial” expropriation have gained currency, particularly following a series of decisions arising out of arbitrations before the International Centre for the Settlement of Investment Disputes (ICSID). By way of example only, in Tecmed v Mexico, in construing the terms of the applicable bilateral investment treaty (BIT) between Mexico and Spain, the tribunal held that expropriation can include “a number of situations defined as de facto expropriation, where… actions or laws transfer assets to third parties different from the expropriating state or where such laws or actions deprive persons of their ownership over such assets, without allocating such assets to third parties or to the government”.

A single act of expropriation by the state is not required. It is enough if the measures adopted by the state are irreversible and if the effect of those measures is that the investment is permanently deprived of economic value.

Of course, it may be difficult to identify interference with an investor’s rights. It will be a question of fact in each case whether the effect of the state action is such that the investor’s rights can no longer be exploited.

The global financial crisis since 2007 – and the social and political instability that has accompanied it – has led to yet further re-assessment of political risk.

DIRECTORS CONVICTED OF FRAUD WILL BE SENT TO JAIL UNDER NEW DRAFT LAW

Directors’ and officers’ liability insurance will become more relevant domestically over the next 12 months as directors’ responsibilities expand through increased legislation.

Directors’ and officers’ (D&O) liability insurance has become increasingly significant in the UAE in recent years. Substantial economic growth, combined with the influx of large multinational companies and the establishment of several key financial centres and regulatory authorities, has created the necessary framework by which D&O insurance can become an important and relevant part of a company’s risk mitigation activities.

Regulatory bodies such as the Dubai Financial Services Authority (DFSA) and the Emirates Securities and Commodities Authority (Esca) play an important role in ensuring transparency and accountability among all the listed companies in the UAE stock markets. They regulate respectively companies in the DIFC and companies listed on the Dubai Financial Market (DFM) and the Abu Dhabi Security Exchange (ADX) and have provided clear definitions of the duties directors owe to their company. Esca is currently in the process of finalising a new corporate governance code for joint public stock companies listed on DFM and ADX, which will regulate duties of directors of publicly listed companies.

Corruption crackdown
Continuing with the rise of corporate governance and transparency in the country, there has been a crackdown on corruption and fraud in the workplace. The financial crisis has exposed a large number of indebted local companies as well as illegal acts by directors, officers and employees of large firms. A draft of a new law on acquiring funds by illegal means has recently been negotiated by the ruler of Dubai, His Highness Sheikh Mohammed bin Rashid Al Maktoum, which has implications for directors’ liability in the event of fraudulent transactions by individuals, directors or companies in Dubai. Harsher penalties have been proposed for illegally obtaining money. These include:
● Five-year prison term if the illegal funds range from AED500,000 to AED1m.
● Ten-year prison term if the illegal funds range from AED1m to AED5m.
● Fifteen-year prison term if the illegal funds range from AED5m to AED10m.
● Twenty-year prison term if the illegal funds exceed AED10m.
The draft further states that if the debtor fails to present the court with the correct sum of money, he/she will be placed in a separate detention centre specifically for individuals convicted of financial crimes.

Out of bounds
Under UAE Federal Law No 8 of 1984 (the “Commercial Companies Law”), it is generally accepted that a director should not act outside the scope of his/her duties or commit the company to transactions which are illegal or outside the boundaries as set out in the company’s constitution. Although not defined, the general duties expected are:
● To abide by the company’s memorandum of association and articles of
association.
● Not to disclose confidential information about the company.
● Act with loyalty towards the company.
● Avoid any conflict of interest between a director’s personal interests and those
interests of the company.
Directors of Esca-regulated companies are bound by Decision No 32\R of 2007, which puts into place certain corporate governance requirements. Specifically, directors must:
● Adhere to loyal behaviour taking into consideration the company’s and shareholders’ interests.
● Take such due care, diligence and skill as taken by a normal person in similar
circumstances.
● Comply with the applicable laws, regulations and decisions as well as the company’s articles of association and bylaws.

DIFC-based companies are governed by DIFC Law No 2 of 2009 (“DIFC Companies Law”). Articles 53 and 54 set out the duties of a director or other officer of a company. These include to act honestly, in good faith and lawfully, with a view to the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Article 54(1) and article 54(2) refer to a director’s duty to disclose any interest in a transaction entered into by the company or by a subsidiary of the company, specifically that a director must disclose any interest in a transaction, direct or indirect, where there may be a conflict with the interests of the company and the disclosure referred to above shall be made as soon as reasonably practicable.

Although D&O insurance is not mandatory, it is only a matter of time before the legislative bodies of the UAE and the DIFC regulate the D&O market as similar steps have been taken in the personal indemnification and medical malpractice arenas. Company directors should negotiate a standard indemnification clause in the memorandum or articles of association as well as ensuring the company subscribes to a strong D&O insurance policy from a reputable broker or insurance provider.