Arbitration and commercial law changes afoot in the Middle East

March 2024 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

March 2024 Issue

The Middle East has recently seen rapid shifts in commercial law development and dispute resolution choices. While commercial parties and practitioners continue to evaluate the Dubai International Arbitration Centre’s (DIAC’s) 2021 mandated conversion of the Dubai International Financial Centre’s arbitration tie-up with the London International Court of Arbitration (DIFC-LCIA), other jurisdictions in the region have been making substantial revisions to their laws and dispute resolution options, particularly in commercial law and arbitration.

The Abu Dhabi International Centre for Arbitration (arbitrateAD) was established in February 2024 after the dissolution of the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC). The Saudi Centre for Commercial Arbitration (SCCA) also issued new rules in 2023 to promote arbitration in the Kingdom of Saudi Arabia (KSA). As the KSA’s cornerstone arbitral institution, the SCCA continues to benefit from the country’s flagship ‘Vision 2030’ programme, through which the KSA is seeking significant commercial and social development. This includes incentives and requirements that are bringing regional headquarters to the KSA and a proliferation of arbitration agreements referencing the SCCA, all supported by the introduction in December 2023 of the country’s landmark Civil Transactions Law (KSA Civil Code).

These rapid changes are taking place to promote certainty and cement jurisdictions across the Middle East as permanent corporate hubs benefitting from updated commercial law that is being renewed and codified with clarity.

Plurality is in vogue

At one point, the United Arab Emirates (UAE), principally Dubai, was considered the epicentre of foreign commercial activity and dispute resolution in the Middle East. As The Economist reported in 2018, “free trade, openness, security and predictable rules have turned the pearl-fishing village into one of the world’s great entrepots… just as Hong Kong benefited from the British legal system, so Dubai has imported British-style common law for the Dubai International Finance Centre, a city within a city where foreign lawyers adjudicate on business matters within its confines”.

More widely and more recently, however, the position is nuanced. While questions were raised about the decree-directed DIFC-LCIA to DIAC transition in 2021, economic developments affecting neighbouring countries and jurisdictions have made what might, in times of lower growth, be described as a turf war, much more than a zero-sum game. The $100bn annual foreign direct investment goals of the KSA’s Vision 2030 programme, and corporate relocation conditions for ongoing participation in the Saudi economy for foreign corporations, has led to rapid construction, development, and the onshoring of some disputes – particularly with government entities – within the KSA.

In Dubai’s neighbouring emirate of Abu Dhabi, the Abu Dhabi Global Market (ADGM) has fostered its own unique advantages, particularly with FinTech-friendly regulations, as well as in the area of insolvency, given the ADGM insolvency regulations. Those regulations are derived from English insolvency law and permit an administrator to be appointed, or for the restructuring of a company using a deed of company arrangement in ways those familiar with English proceedings relate to.

Given arbitrateAD is a new organisation which took the place of the ADCCAC, arbitration in Abu Dhabi continues to evolve. Doubtless lessons will be learned from the DIFC-LCIA to DIAC transition in 2021 and 2022, and thus some of the immediate uncertainty experienced in Dubai can be avoided. The newly established and rebranded arbitrateAD’s rules were only scheduled to come into force on 1 February 2024 and so parties with ADCCAC arbitration agreements will need to pay close attention to the unfolding transition arrangements to understand and protect their rights.

New laws for new issues

The UAE and Qatar have had civil Commercial Civil Codes for commercial transactions for some time and the UAE introduced modernisation in its New Companies Law in 2022 to strengthen non-UAE corporate participation in local companies. In Dubai, the latest changes arrived with wider market changes to lure professionals and businesses alike, including a shift to the Monday to Friday work week. The KSA has also now introduced a new Civil Code that only took effect in December 2023 and, given the scope of the change established by the Civil Code, all parties economically engaged in the KSA will need to be aware of the provisions of the new law.

While the KSA Civil Code contains several concepts familiar to global business and common law lawyers – for example, recognising the general sanctity of a contract – it departs significantly from the common law emphasis in the DIFC and ADGM. In this respect, the Civil Code maintains the KSA’s adherence to Sharia for those matters not directly codified in the Civil Code or elsewhere in KSA law. In these cases, the codification of key Sharia principles within the Code, which apply wherever it is silent on an issue, provides more clarity regarding the rights and obligations of parties than was previously the case, particularly where it had been necessary to refer to scholars and consider potential differences between fields of Sharia thought. The setting out of the relevant principles in the Code is thus a significant step forward.

In terms of the details of the law, below are three other changes among those in the Civil Code that require the attention of commercial parties, particularly those accustomed to common law jurisdiction.

First, good faith, including in contract negotiations. There is an obligation under article 29 not to exercise rights in an abusive manner, particularly when the benefit generated from exercising the right is substantially disproportionate to the harm it causes to others. There is also an obligation in article 41 that similarly extends good faith, and a requirement not to negotiate in bad faith, to contractual negotiations. Examples may include a lack of seriousness in negotiations and knowingly withholding any substantial information relevant to the contract. This creates a duty to other contracting parties at the negotiation stage, one which does not typically exist in other jurisdictions and is matched with the requirement in article 95 of the Civil Code to implement a contract in a manner consistent with good faith principles.

While it is unclear how far these rules will be interpreted, it is likely to be the case that decision makers, including arbitrators and the courts, will look unkindly upon bad faith negotiations or contracts deemed to significantly favour one party in terms or in the exercise of these.

Second, liquidated damages. The Civil Code codifies the interpretation of liquidated damages clauses, such that under article 179 decision makers have the power to reduce or eliminate liquidated damages, if a party establishes that they were overestimated compared to actual losses or no loss was sustained. Likely to be more rare, such damages can also be increased where it can be shown there was fraud or gross negligence against the receiving party, causing greater harm. Consideration of this provision will be required for all contracts governed by KSA law and containing pre-set damages.

Third, retroactive effect of the KSA Civil Code. While not an individual change, it is important to observe that the new Civil Code applies to cases and facts that arose or bargains entered into before its coming into force on 16 December 2023, unless to do so contradicts other law or an established judicial precedent, or otherwise where a limitation period had already begun to run before the commencement date of the Civil Code.

This necessarily means that parties to contracts and existing transactions in the KSA need to be familiar with the Civil Code and importantly comply with its provisions. Special consideration needs to be given where it is thought a limitation period, for example for breach of an agreement prior to December 2023, is already running. Disputes about this are inevitable, bringing into issue not only an assessment of the law the Civil Code, but also the prior law and the difference, if any, to the potential dispute.

Increased clarity and diversity are likely to promote opportunities

The proliferation and pace of change in the Middle East is both significant and much needed. There has been substantial growth, for example in very large construction projects as part of the KSA’s 2030 Vision for modernisation and private sector investment. These are cutting-edge infrastructure projects, often in previously uninhabited parts of the country, aimed to cater to the needs of modern and future life. Across the region, solar, wind and hydro power plants are also under construction, including as part of the KSA’s target to produce 50 percent of its energy from renewables by 2030.

The KSA’s famed megacity under construction, Neom, and separately its capital, Riyadh – with its towering new buildings and imminent Metro system – reflect other examples in the region, which is also experiencing economic change that cannot be so easily physically observed, such as FinTech and cryptocurrency companies starting up or relocating within the UAE.

All of these developments require new and readily understood laws that parties can come to rely upon for transactions as much as in times of dispute, which, while often capable of being avoided or mitigated, will inevitably arise out of the enormous projects and capital shifting of the kind currently underway. Parties investing ought to therefore ensure arrangements are in place to minimise the risk of conflicts turning into full-scale disputes. Effective risk management, conflict resolution mechanisms and legally-backed decision-making processes are vital in order to achieve this. Fortunately, the Middle East now offers parties a wide array of choices.

Adam McWilliams is a partner at Quinn Emanuel Urquhart & Sullivan. He can be contacted on +44 (0)20 7653 2052 or by email: adammcwilliams@quinnemanuel.com.

Adam McWilliams

Quinn Emanuel Urquhart & Sullivan