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Dubai financial court system seen taking hold

difcA landmark ruling by the court system in Dubai’s financial free zone suggests the emirate is starting to influence the way international business disputes are resolved in the Middle East, partly taking over that role from London and New York.

Last month a court in the Dubai International Financial Centre (DIFC) found Switzerland’s Bank Sarasin had mis-sold $200 million of investment products to Kuwait’s prominent Khorafi family, ordering it to pay compensation.

Sarasin, which denied any wrongdoing, may appeal the ruling, and the amount of compensation hasn’t yet been fixed. But it was a startling judgement by a court system that has been operating only since 2006.”For many clients, mainly financial institutions and blue-chip corporations, DIFC Courts have become very important as a service center,” said James Abbott, partner at global law firm Clifford Chance, which operates across the Middle East. “They’re one reason, if not the main reason, for being headquartered in the DIFC.”

As the Middle East’s main banking hub, the DIFC channels much of the region’s oil wealth into Western financial markets. Many banks have been using a model in which investments are arranged by a DIFC-based subsidiary but actually sold from a foreign center.

The court judgement found that although Sarasin used that model, the parent bank was effectively still doing business in the DIFC, leaving it liable for any mis-selling.

Clifford Chance said banks might now need to review their use of the model, tighten up on the way staff presented themselves to clients and be more careful about documentation.

STRANGE

In legal terms, the DIFC Courts are a strange phenomenon: an island of British- and American-style common law inside an Islamic monarchy. They operate in English; other business courts across the Middle East work almost entirely in Arabic and tend to follow the French civil law tradition.

Like Dubai itself, the courts are entrepreneurial, actively seeking to attract more business because of the economic benefits to the emirate of hosting a big legal industry. Most of the world’s court systems simply handle cases that the law requires to be put before them.

Jayanth Krishnan, professor of law at Indiana University’s Maurer School of Law in the United States, said the DIFC Courts’ unusual position might one day threaten their independence.

“What might happen if the DIFC Courts are ever perceived as issuing judgments that contravene the interests of the political decision-makers?” he wrote in a study to be published next year.

But Krishnan added that so far, the courts had succeeded in convincing users they had enough autonomy – and that some companies welcomed the option to handle disputes within Dubai rather than taking them to courts outside the Middle East, which could be more costly and time-consuming.

“You would be hard-pressed to find somewhere else in the world like the DIFC Courts. But players in the Middle East are starting to learn about them, and are starting to recognize their value,” he said.

In 2011, Dubai’s ruler moved to attract more legal business by allowing parties around the world to agree to refer their commercial disputes to the DIFC Courts, even if the disputes had nothing to do with the DIFC.

Michael Hwang, the DIFC Courts’ Chief Justice, said it was too early to tell whether this opt-in arrangement would bring many more cases to Dubai.

But to attract business, the courts – originally modeled on London’s Commercial Court – have developed a hybrid operating system, cherry-picking what they consider best practice from around the world in an effort to be efficient.

For example, the small claims system is based on Singapore’s. The DIFC Court system is the only common law court which uses for disclosure International Bar Association standards on taking evidence in international arbitration.

“Our legislation has been shaped to reflect the polyglot nature of the community in which our courts operate,” said Hwang, a Singaporean who is one of five international and three United Arab Emirates judges on the bench.

The DIFC Courts have yet to see the high-profile Middle Eastern business disputes handled by London and New York.

Goldman Sachs and Libya’s sovereign wealth fund are to meet in a London court next month in a dispute over $1 billion of investments. Disputes involving Saudi Arabian conglomerate Ahmad Hamad Algosaibi & Brothers, whose failure in 2009 left debts estimated at over $7 billion, have been heard in New York and other courts.

But the gap may be narrowing. Abbott said the DIFC Courts were handling increasingly large finance and projects cases, with claims of around $50 million or more no longer unusual.

A study by global law firm Clyde & Co found that when courts were chosen as the forum for dispute resolution in the Middle Eastern deals it handled during 2012, DIFC Courts were chosen 21 percent of the time and English courts, 29 percent.

Over 500 cases have been decided at DIFC Courts since they began operating, according to the courts. About 95 percent of disputes under the courts’ jurisdiction were resolved before they came to judgment, said registrar Mark Beer.

In a sign that some of Dubai’s economic rivals view the DIFC Courts as a success, Qatar established an international business court in 2009 and Abu Dhabi plans one.

Two tests are likely to determine whether the DIFC Courts attract more business and continue gaining international influence, Krishnan said. One is whether they can show their judgments will be enforced outside the DIFC.

The courts argue they give foreign investors a unique opportunity to obtain enforceable rulings in the six-nation Gulf Cooperation Council under the GCC Convention of 1996, and throughout the Arab world under the Riyadh Convention of 1983.

“Because we are a Middle Eastern Court, and have treaties for enforcement throughout the Arab world, you can take our court order and enforce it throughout the Arab world,” said Beer. “You might say we have the quality of a London court with the ability to enforce in this region.”

But so far this has only been tested a few times. And the DIFC Courts also face the challenge of getting their judgments enforced in Europe, the United States and Asia, where many of the assets of companies involved in disputes are located.

DIFC Courts has signed non-binding memorandums on mutual enforcement of judgments with London’s Commercial Court and two Australian court systems, and Beer said he was seeking similar deals with courts in some of Dubai’s other big trading partners.

The other big test will be whether the DIFC Courts’ judgments begin to be cited in other courts around the world as “persuasive authorities” in disputes, Krishnan said.

Lawyers say it is too early to tell if that will happen. But by addressing the issue of mis-selling investment products – a preoccupation for the finance sector worldwide since the global credit crisis – the courts have taken a step in that direction.

“Lawyers across the world will be looking at this judgement,” said Bushra Ahmed, a barrister at KBH Kaanuun, the law firm representing the Khorafis.-Reuters