In just a few decades, Dubai has emerged as the pre-eminent centre of trade and commerce in the Middle East. This swift yet sometimes volatile ascendancy is the product of an ambitious growth plan, a stable political environment and investor-friendly regulation. Today, Dubai has become a conduit for the flow of goods, capital and labour between East and West, as well as between fast-growing emerging economies.
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To support these developments, the federal and local authorities have actively nurtured the emirate’s civil and commercial dispute resolution capabilities. As such, Dubai has quietly emerged as a global centre of legal excellence, thanks in large part to the operations of the Dubai International Financial Centre (DIFC) courts.
“In terms of English language commercial dispute resolution, the world is typically viewed in three blocs. To the west, London tends to dominate because rulings can be enforced in Europe and the US. To the east, Singapore enjoys a similar position because it is both an international hub and rulings are generally enforceable across the Asia region. Then, in the Middle East, the DIFC courts have emerged as a third regional hub thanks to the experience of their bench and the enforceability of their decisions,” says Mark Beer, chief executive and registrar of the DIFC courts.
Firm progress
The DIFC courts use common law and conduct proceedings in English. This sets them apart from their onshore – as well as many regional – counterparts, which make use of civil law, and conduct cases in Arabic. These features have lent themselves favourably to the growth of the court system, particularly as the volume and complexity of cases has increased in line with Dubai’s status as a global business hub.
“The speed of resolution and the fact that DIFC court rulings are enforceable by treaty across the Middle East and through reciprocal arrangements with many common law courts overseas are important elements of their success. In addition, more than 90% of cases are settled before they go to trial,” says Mr Beer.
The introduction of Dubai Law No 16 in 2011 is regarded as a watershed moment in the evolution of the DIFC’s court system. The law permitted the courts to hear any commercial or civil dispute with the consent of both parties, even when there was no connection either in terms of subject matter or geography to the DIFC.
“The development of the DIFC courts really accelerated [once this law was enacted],” says Faridah Sarah, senior associate at United Arab Emirates-based law firm Galadari Law. Since 2011, a new universe of dispute resolution has opened up to the DIFC courts. The court's full-year figures to September 2014 show that the volume of claims has trebled, while the average size of the cases has increased from $4.3m to more than $11m.
In addition, the DIFC’s court system has benefited from the extensive enforcement and co-operation treaties signed by the UAE with jurisdictions both regionally and internationally. “People are paying a lot more attention to enforcement. They take quality from the courts in the DIFC or London or Singapore as a given. They need enforcement as the next step,” says Mr Beer. Accordingly, the UAE has enforcement treaties in place with the Gulf Co-operation Council countries, most Arab countries under the Riyadh Convention, as well as with China and France. Moreover, the DIFC courts have signed memoranda regarding enforcement with the UK, Australia and Kenya.
On the case
These trends have elevated the DIFC courts into a truly global actor, with the reach and requisite enforcement strength to handle cases previously reserved for London or New York. This was made clear in August 2014, following a ruling by a DIFC court in which Swiss investment bank Bank Sarasin and its DIFC-registered subsidiary Bank Sarasin-Alpen were found liable for mis-selling $200m of investment products to three members of Kuwait’s well-known Al Khorafi family. The ruling has catapulted the DIFC’s courts into the limelight, in particular because the judge’s decision found the parent entity in Geneva, in part, liable.
"The judgment is one of the longest to be issued by the DIFC court. I expect the reason for this was not only the complexity of the issues but that the court was acutely conscious of the importance of the decision,” says Raza Mithani, counsel with international law firm King & Spalding.
In the ruling, issued by Justice Sir John Chadwick, the court found that Bank Sarasin-Alpen had failed to ascertain whether the family members met the status of ‘client’ which implied a high degree of sophistication. This was reflected in the ruling, where the three involved members of the Al Khorafi family were described as ‘unsophisticated’ investors, essentially marking them out as retail customers being served in a wholesale jurisdiction.
Moreover, the ruling concluded that employees of Bank Sarasin-Alpen, the DIFC subsidiary, were providing services that were ‘indistinguishable’ from that of the parent entity Bank Sarasin. This was determined by the bank’s failure to effectively supervise its client relationship management between both entities. Similar uncertainties emerged from Bank Sarasin-Alpen’s documentation. This left the parent bank open to liability for the mis-selling, for which it was ultimately required to pay $10.45m, along with its Middle East unit, in compensation to the Al Khorafi family.
"The model followed by Bank Sarasin, whereby the DIFC entity brought in the clients while the Swiss parent booked the actual business, is quite common in the DIFC. As a result of this judgment, I think a number of investment banks will be looking at their documentation and processes to ensure that they are watertight,”says Mr Mithani.
In his conclusions, Mr Chadwick notes: “I am satisfied that the present is a clear case of mis-selling unsuitable investments to an unsophisticated investor, and to his equally unsophisticated wife and mother. Bank Sarasin adopted a business model that led it to breach the financial services prohibition. It appears to have been content to allow the mis-selling to take place; in that it failed to exercise any adequate supervision over those whom it held out as its own client relationship managers.”
A global actor
In the years preceding the global financial crisis, Western financial institutions were able to book significant volumes of business from the capital surplus in the Middle East. The fallout from this trend is now being realised, as similar cases, including the Libyan Investment Authority suing Goldman Sachs, are being heard in the world’s leading legal centres. As such, this ruling has profound implications for financial institutions that have invested funds secured from the region.
Notably, it provides a strong precedent for high-net-worth individuals and other investors that engaged with complex investment products that may have been beyond the scope of their understanding. While limitation periods will restrict many cases from reaching the courts, further mis-selling cases are expected as a result of Al Khorafi versus Bank Sarasin. Here, the DIFC courts could play a sizeable role.
“[This was a] complex, high-value case and 10 years ago these types of disputes would have been handled in Europe or the US. It has drawn attention to the DIFC by boosting investor confidence in the courts and by highlighting the DIFC’s status as a global actor,” says Ms Sarah from Galadari Law.
As the significance of the DIFC courts continues to grow, the regional implications for the business and operating environment are likely to improve. The presence of a transparent and effective legal centre, with the power to enforce decisions in the wider Middle East, will mitigate issues of legal risk which have for too long blighted business development in the region.
“Commercial courts play a vital role in giving confidence to financial institutions to lend. This, in turn, allows for the flow of capital and goods that would have otherwise been excluded from the economy due to issues of legal risk," says Mr Beer.
