Companies look to law as shield in future crises

The financial crisis has led to major changes in legal practice in the Emirates and region.

The financial crisis may have sharply reduced many fortunes but businesses are preparing themselves against future economic trouble by boosting their legal spending. The same companies that were burnt by the crisis are paying closer attention to fine print and devising stronger contracts to protect their interests, lawyers say.

"The financial crisis has fundamentally affected the drafting of contracts," said Tim Travers, a senior legal consultant at the law firm Hadef and Partners. With companies much more likely to sue business partners, there is greater focus on establishing jurisdiction to settle disputes. The Dubai International Financial Centre Courts, which have emerged as the jurisdiction of choice for many lawyers because it is more efficient than local courts, has seen cases recently in which claims were thrown out because jurisdiction could not be established.

"Contracting parties are now much more likely to seek to exercise their legal rights and proceed to enforcement in the courts where there are defaults, and especially where the non-defaulting party has its own financial position to protect and needs to move quickly to avoid losing corporate value," Mr Travers said. Some companies now include arbitration clauses in their contracts to avoid the expensive and time-consuming court process, said Michael Dark, an associate on Hadef and Partners' dispute resolution team.

More disputes were arising between shareholders in a situation that would affect how minority investments were treated in the future, Mr Dark said. "New local or foreign institutional shareholders who have bought shares in existing companies may be experiencing issues associated with agreed staggered payments," he said. "Settlement in these types of cases is difficult because existing shareholders who expected a cash injection are faced with a minority shareholder who still owes money to the company, and yet who now controls a stake of the company."

In the property sector, contracts have been radically changed to create a balance of responsibilities between buyers and investors. In the past, developers often included clauses that allowed them to delay for as much as two years if a project faced difficulties. Payment plans are now being linked to construction milestones, and the bases on which contracts can be cancelled are more clearly defined in contracts.

Matthew Hooton, a lawyer at Ashurst, said these changes were being driven "in no small part by the mistakes people have made in the past that are now coming home to roost". "A number of people would not have entered into deals if they had more carefully thought about their obligations," Mr Hooton said. "It was primarily a function of people feeling as though they were going to miss out on making quite a lot of money."

As the economy shifted from boom to bust, law firms have seen their work change from mergers and acquisitions and public offerings to litigation and restructuring. This has put pressure on regional courts that are not as experienced with large-scale economic downturns, said Abdul Aziz al Yaqout, the regional managing partner of DLA Piper. "The jurisdictions in the Middle East have been geared to growth and market entry and are clearly now facing a challenge with ? an economic downturn," Mr al Yaqout said.

"There is still work to be done for governments to modernise their legislation in order to assure that should this happen again one day" authorities will be equipped to face the problem, he said. Some of the major debt restructurings at investment companies in Kuwait have led lawyers there to privately recreate legal protocols that exist in western jurisdictions. While the laws do not back up the way the restructurings are handled, the adopted protocols help to placate lenders.

"They had to take things into their own hand," Mr Yaqout said. "We are replicating the legal system on a private basis with regards to transparency and equal treatment of the creditors." [e-mail]