Rising tide of litigation forecast

Investors who have been hurt in the economic downturn go to court alleging fraud and mismanagement.

Lawyers say that many civil cases are likely to be pursued by shareholders seeking damages against firms and directors as investors become more knowledgeable of their legal rights.

Fraud and mismanagement disputes in the Emirates are expected to multiply in a surge of litigation connected with the global financial crisis. An increasing number of civil cases are likely to be pursued by shareholders seeking damages against companies and directors as investors learn more about their legal rights, lawyers say.

"The first cases are starting to come to DIFC Courts and we are likely to see more [outside of the Dubai International Financial Centre Courts]," said Hamish Walton, a partner in the corporate group of the law firm Clyde and Co in Dubai. "Many of these cases will concern proven fraud or clear breaches of management. "For four or five years, shareholders have seen their share prices keep going up and seen a return on their investment. Since the financial crisis, that has all changed, and they are starting to educate themselves about their possible legal rights to claim damages if an offence has been committed."

Focus on the management practices of Gulf companies has intensified after corporate scandals hit some companies in the region. The Saad and Al Gosaibi conglomerates of Saudi Arabia have been locked in a long-running legal battle with claims and counter-claims lodged in courts around the world, and lawyers expect more cases to emerge, with some civil claims triggered by criminal investigations. "There is increased attention on the corporate ramifications of criminal prosecutions of directors and officers, as some of these cases may give rise to civil liability," said Sadiq Jafar, the managing partner in the Dubai office of Hadef and Partners.

With many investments turning sour in the downturn, stakeholders are more likely to assess potential litigation options in an effort to minimise losses, Mr Jafar said. Companies in the DIFC are subject to laws specific to the free zone and requiring directors to act in good faith and in the best interests of their companies, with fines for those found to have breached the requirements. The DIFC laws also allow for shareholders to seek damages for wrongful business practice.

"The courts are always there to resolve disputes, but it is hoped that parties can resolve disputes without judicial intervention," said Mark Beer, the registrar of the DIFC Courts. Businesses operating outside the DIFC and other free zones are subject to the commercial companies law. Fraud and mismanagement, such as non-disclosure of information by company directors, can be punished with fines and imprisonment.

Shareholders of joint stock companies can bring court proceedings to revoke decisions they deem to be harmful to the companies' interests. And investors holding at least 25 per cent of share capital can ask the Ministry of Economy to investigate breaches of the commercial companies law. Many firms do not have enough liability insurance to cover directors and officers against damages or defence costs in the event of a lawsuit for wrongful acts, said Richard Wynn, the executive director of Howden Insurance Brokers in Dubai.

"The culture of insurance has to change here," Mr Wynn said. "The bulk of organisations don't buy insurance or don't buy enough of it to cover their assets." Companies with liability insurance for directors and officers were making more claims to cover official investigations of their business practices by government departments and regulatory bodies, Mr Wynn said. [e-mail]