How are Most Commercial Disputes Settled? Not in the Local Courts…

Doing Business in the Middle East, in the current business climate, can be particularly challenging. The region presents a multitude of opportunities, but regional instability, government policy, political risk and economic instability rocks business confidence on a regular basis.

Despite this, large corporations, Western Businesses, startups and seasoned business men have found a way to make it work for well over a hundred years, since the British and Americans began exporting oil from the region in the 1920s.

So how does the legal framework work for the business community?

Out of Court Action

As many law students in the United States come to learn, more than 90% of commercial litigation cases will be settled outside the courtroom. Many companies see the trial process as a risky lottery, where truth can tilt the odds in your favor slightly, but not completely. Therefore, when there is the chance to control liability and damage, they take it. This is a common theme in the Middle East as well, where countries in the GCC region, such as the UAE and Bahrain, experience a large number of out of court settlements as well.

Unfortunately, this can also encourage harassment and false threats. Oftentimes, claimants will begin the legal process by filing a claim or issuing a threatening demand letter, in the hopes that a defending party will take the bait and pay up, even if their claim holds little weight. In the United States, the defendant could file a counterclaim for malicious prosecution in such instances.

However, in most GCC countries, where there is some plausibility in the claimants pleading, usually it is difficult to claim against the plaintiff until the case is won. Only then, can the defendant maintain standing to launch a claim for malicious prosecution, libel, slander, harassment, defamation or the like, depending on the actions taken against them.

The way most companies get around this is by ensuring that their contractual obligations are clearly documented. Strong contracts, with a high degree of specificity, wit, planning, and foresight, are the antidote to false claims and harassment in the Middle East. Documentary evidence plays a very important role in the trial process (as explained below), and therefore a claim can easily be defeated if the documentation and evidence presented to a judge completely contradicts its basis.

Action in Court

The GCC countries have enacted commercial and civil codes which mirror commercial legal concepts in effect in most Western capitalist democratic nations. For example, many of the legal precedents upheld by courts in the United States, or put in place via federal or State statutory law, can be found in the commercial codes and corporate laws in effect in the GCC nations, such as Qatar, the UAE, or Bahrain.

What is starkly different, is the implementation of the trial process. For one, there is very limited oral advocacy in the GCC. That means, the trial process is based entirely on pleadings, motions and court filings. Essentially it is a documentary process. Only where a highly technical issue arises in the trial, will the court appoint an “expert” to conduct an investigation of the matter. This will be an independent individual, who will issue his opinion to the judge after meeting both parties and hearing their case. In addition, there is no concept of “trial by jury” either. There is no pre-trial discovery process for the most part, and documentary evidence is usually a must for trial, such as the evidence of a contractual relation.

With the trial process essentially “gutted” in the GCC region, the business community may view the trial process as even more of a lottery than would be the case in a “conventional western” setting. As a result, a number of alternative methods for resolving commercial disputes have evolved in the Middle East, which have helped large and small companies secure business continuity and a consistent framework of enforceable business rules and conduct.

Alternatives to the Court, Special Jurisdictions, Arbitration and Mediation

In their commercial dealings, experienced business people in the Gulf have programmed alternate dispute resolution procedures into their contracts, to ensure that their business disputes receive quick, efficient, reliable and consistent resolution. The GCC countries have signed on to the United Nations Convention for the Enforcement and Recognition of Foreign Arbitration Awards (New York Convention), and allow local arbitration via contract as well. This means that contracting parties can fix the venue for arbitration, the language, the number of arbitrators, and even the applicable law of the arbitration, by contract, and this will be enforceable by the local courts. There are also a number of longstanding commercial arbitration centers in the GCC region, with good reputations for commercial dispute resolution. This includes the Dubai International Financial Center, London Court of International Arbitration (DIFC-LCIA), the Dubai International Arbitration Center, the Bahrain Chamber for Disputes, and other similar arbitration halls. Arbitration is essentially a process of trying the case in a private setting, such as before a tribunal or a pre-selected arbitrator, whereby both parties independently submit their case before the arbitrator who issues a binding, non-appealable decision. It is a quick way to resolve corporate disputes.

In addition, there are two common law jurisdictions operating in the Gulf, which are fully recognized as part of the local court system in the United Arab Emirates. These are the Dubai International Financial Center Courts, and the Abu Dhabi Global Market. Many companies will fix the jurisdiction for their disputes in these areas by contract, and then seek to enforce decisions received in the local courts after they receive a judgment, to ensure a more consistent and predictable result, in line with their choice of law. Most GCC countries will also enforce foreign judgments of other GCC countries, and oftentimes foreign countries as well.

Finally, most Commercial Ministries in the GCC countries also maintain a mediation facility via the chamber of commerce, who will invite commercial parties to mediate in front of an appointed mediator. The mediator will hear both sides of the matter, and provide their non-binding opinion. Though these efforts do not have the force of law, they can be quite instrumental, and significantly cheaper, when it comes to resolving commercial disputes.

Concluding Remarks

In dealing with the vast majority of commercial matters, we advise and often lead our clients towards efficient out of court settlements or resolution. This helps our clients business in the long run, and allows them to avoid extremely high costs in the short run. Therefore, it is most definitely advisable for business people in the Gulf region, particularly foreign investors, to be aware of the legal framework and rules in place, for the business community and their disputes.