the inherent risks of doing business in the middle east .../media/files/training/2014/06 june/the...

© Simmons & Simmons LLP 2013. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

The inherent risks of doing business in the Middle East from a legal perspective

Andrew Mackenzie

Senior Associate

Dubai, Abu Dhabi

27 May 2014


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Resources to assist :

www.elexica.com

elexica

http://www.elexica.com/


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Introduction

The GCC

Specific focus today – the UAE, Qatar and Saudi Arabia

The many sources of law: – The Civil Code – The Shari’ah – Royal Decree

General commercial risks

Business set up and licensing risks

Operating risks

Termination risks


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The GCC

The Gulf Cooperative Council (“GCC”)

Made up of Multiple States: – Saudi Arabia; – UAE; – Qatar; – Kuwait; – Oman; and – Bahrain.

A risk to view it as one state or one common area.

Although similarities, there are many differences


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Today’s Focus

– The UAE – Qatar – KSA

Opportunities: – The UAE – Expo 2020 – Qatar – Football World Cup – 2022 – KSA – The world’s biggest oil exporter and planned

$400bn infrastructure spend


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Sources of Law Qatar and the UAE share a common approach to the

law

– Founded on Civil Code System based loosely on the

Egyptian Civil Code which in turn was based on the

Napoleonic Code

– This is similar to Bahrain, Kuwait and Oman

– Civil vs. Common


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The UAE

The UAE Civil Code is among the most advanced legal

systems in the GCC

The UAE itself is made up of 7 Emirates (Federal States)

– Dubai and Abu Dhabi (the Capital) being the two most

prominent of the Emirates

– Each Emirate has its own legal system to a certain extent

existing within a federal state system

– Free Zones


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The UAE cont.

– Upcoming Opportunities:

– Expo 2020

– Large infrastructure spend across the UAE – rail, road,

air, power, water etc.

– Large scale mega projects, - Mohamed Bin Rashid

City, Saadiyat island etc.


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Qatar

Civil Code similar to the UAE, but not identical

It would be risky to view it as an identical market to the UAE

Capital – Doha

Massive natural gas reserves

Upcoming Opportunities: – 2022:

– $200 billion to be spent on infrastructure – Desire to diversify its economy away from

hydrocarbons


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The Kingdom of Saudi Arabia

KSA is different in its own way: – No Civil Code – Primary source of law is the Shari’ah, which is derived

from the teachings of the Qu’ran – Royal Decrees to supplement

Upcoming Opportunities:

– The world’s biggest oil exporter with a planned $400bn infrastructure spend over the next 10 years


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Commercial Challenges/Risks Multiple opportunities, but also multiple risks:

– The commercial challenges that face any company entering the market are similar across the GCC:

– Restrictive investment – Difficulties in setting up and acquiring the right type of licence – Tax – it does exist – Difficulties in obtaining work visas – Delays in implementing government procedures – generates

uncertainty – Misinterpretation of the laws and regulations – There is a strong formality to many of the regimes – Nationalisation (Emiratisation / Saudisation) – Enforcement of rights and obligations


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Setting Up Shop

Different commercial set ups – Agency;

– Be careful – different states have different approaches – Termination can be costly and difficult

– Joint Ventures – They can be tricky – Commercial realities need to be considered – Local companies – consider ownership

– Branches – Free Zones – See elexica for a comprehensive guide

http://www.elexica.com/


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Operating in the GCC

Ignorance of the law can lead you into trouble…

Taxes

Employment and Immigration

Business Licencing

Common Issues faced …


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Contracting – in the UAE Ignorance of the law can lead you into trouble…

Freedom of Contract: – Article 257 –

– The Civil Code recognises freedom of contract: – “the basic principle in contracts is the consent of the

contracting parties and that which they have undertaken to do in the contract.”

– That freedom is restricted to the extent that an agreement will be

unenforceable if it: – Conflicts with mandatory provisions of the law in accordance

with Article 31 – Is contrary to public order or morals pursuant to Article 205(2)


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UAE - Useful Civil Code Provisions

Knowledge of the law can help you out of troubling situations:

There are many useful provisions in the Civil Code.

– Focussing on the UAE Civil Code


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Validity of Contracts

Article 210 – Void Contracts – “A void Contract is one which is unlawful in its essence

and form, lacking the elements of a contract or defective in this subject matter or purpose or form as laid down by law for the making of a contract, and such contract shall be of no effect and shall not be capable of being rectified by consent.

– Any person having an interest may rely on the voidness of the contract and a judge may so rule of his own motion…”


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Contract Interpretation

Articles 258 - 266 – Article 258 – “The criterion in (the construction of)

contracts is intentions and meanings and not words and form” … – “the primary rule is that words have their true meaning

and a word may not be constructed figuratively unless it is impossible to give it its direct meaning”

– Practical Tips – Article 259 – Clear wording – Article 265 - What if not? – Article 266 – doubt “in favour of the obligor”


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Unfair Contract Terms and Third Party Rights

Article 248 and 254 – Article 248 – “unfair provisions” – Article 254 – Awards rights to third parties:

“(1) It shall be permissible for a person to contract in his own name over rights stipulated by him in favour of a third party if he has a personal interest, whether material or moral, in the performance thereof.”

What about ‘privity of contract’?


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Contractual Set Off

Article 370 – “In the case of mandatory set-off, each of the parties

must be both the obligor and the obligee of the other, and the obligations must be of the same type and description, must be equally due and of equal strength or weakness, and the making of the set-off must not be prejudicial to the rights of third parties, whether the cause of the arising of the obligations is the same or different”

– PRACTICAL TIP – tighten those payment provisions.


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Good Faith

Performance in Good Faith – Article 246 “1. The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith. 2. The contract shall not be restricted to an obligation upon the contracting party to do that which is (expressly) contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the transaction.”

• Practical Tip


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Mutual Obligations

Article 247

– “In contracts binding upon both parties, if the mutual

obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do.”


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Payment

Article 885

– “The employer shall be obliged to pay the consideration

upon delivery of the property contracted for, unless there is an agreement to the contrary.”


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Termination

Article 218 – Unilateral Termination

“1. A contract shall not be binding on one or both of the contracting parties despite its validity and effectiveness if there is a condition that such party may cancel it without mutual consent or an order of the court. 2. Each party may act unilaterally in cancelling it if by its nature the contract is not binding upon him or if he has made it a condition in his own favour that he has the option to cancel.”


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Termination

Article 267 – Termination by Mutual consent

– “If the contract is valid and binding, it shall not be

permissible for either of the contracting parties to resile from it, nor to vary or rescind it, save by mutual consent or an order of the court, or under a provision of the law.”

– Covers Variations too


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Termination for non-performance

Article 271

– “It shall be permissible to agree that a contract shall be

regarded as being cancelled spontaneously (automatically) without the need for a judicial order failing performance of the obligations arising there-out, and such agreement shall not dispense with notice unless the contracting parties have expressly agreed that it should be dispensed with”.


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Termination for Force Majeure

Article 273 – “1. In contracts binding on both parties, if force majeure

supervenes which make the performance of the contract impossible the corresponding obligations shall cease, and the contract shall be automatically cancelled.

– 2. In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in the continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is so aware.”

– Other grounds for termination: defective work, performance being prevents etc.


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Compensation for Termination

Article 274

– “If the contract is cancelled automatically or by the act of the

parties, the two contracting parties shall be restored to the position they were in before the contract was made, and if that is not possible, compensation shall be ordered.”


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Finally – Limitation of Liability Clauses

Article 296:

“Any condition purporting to provide exemption from liability for a harmful act shall be void.”

Could you exclude limitation of liability clauses? - No


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The Civil Code is 453 pages long!

Many other helpful provisions: Joint and several liability Contributory negligence Assessment of Compensation Direct and consequential loss Effective date of performance The unlawful exercise of rights


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Disputes

Local Courts vs. Arbitration

This is one of the largest risks in the GCC – The Civil Code – No principle of precedent Choice of Forums:

– Default to the Local courts and litigation; – Substantial RISK – Make sure you have a contract in place and a proper

dispute resolution provision. – Many different ways to frame it. - DIAC, ICC, DIFC

Courts etc.


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Other Risks

Anti-corruption (FCPA, UK Bribery Act)

Export controls and sanctions

Civil unrest in certain areas of the GCC and wider Gulf

Boycott of Israel


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In Summary

Many risks, but also many opportunities

Do not generalise, every State is different, – Different legal systems – Different procedures – Different regimes – Different goals and aspirations – Different commercial and social pressures etc.

Know the law

Know your contract, know your contracting party

Seek advice if you are not certain, do not assume one size fits all


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“The riskier the road the greater the profit.”

Questions?


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Simmons & Simmons LLP


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simmons-simmons.com elexica.com

elexica.com is the award winning online legal resource of Simmons & Simmons © Simmons & Simmons LLP 2014. All rights reserved, and all moral rights are asserted and reserved. This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP.

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