Posted Dec 02, 2009 03:19 am CST
It was a deal that garnered worldwide attention, even in the heady days of 2005, when the world’s economy was booming and business opportunities seemed to be everywhere. In June 2005, a private equity firm headquartered in the U.S. landed a billion-dollar project in the heart of Dubai. Capital Partners FZ-LLC was to build offices, apartments, shops and hotels on 38 acres of riverfront property in the largest city in the United Arab Emirates.
After the deal was announced, however, Capital Partners made an unpleasant discovery. A large chunk of the 38 acres it had purchased was not owned by the party purporting to sell it, Tecom Investments FZ.
“We received information from the Dubai Department of Tourism and Commerce Marketing that it owned part of this property,” says Capital Partners’ managing director Todd C. Thiel. “It is an archaeological site, which … can’t be developed by us.”
Capital Partners doesn’t know how much of the land the tourism department owns. “It could be as little as 2 acres and as much as 10 acres,” Thiel says. “They have seven different versions of the land plats, and there are discrepancies near and far.”
By the time Capital Partners uncovered the problem, it had already spent $10 million on the project. The company declined to make a scheduled second payment to Tecom until land ownership was resolved.
Tecom denied there was a problem. And it asserted that Capital Partners’ missed payment was grounds to terminate the contract. Talks failed to resolve the dispute. So in August 2007, Capital Partners filed for mandatory arbitration, pursuant to its contract with Tecom. The company sought $1.5 billion in damages.
The matter should have been resolved fairly quickly. It wasn’t. Thanks in part to interference by Dubai courts, the arbitration process has been going on for more than two years, with no end in sight.
It’s a lesson for other companies. The legal protections that businesses rely on in developed countries are not always available in the Middle East. Not even in such a business-friendly country as Dubai. “Our experience says, ‘Buyer beware,’ ” Thiel warns.
It was not supposed to be like this. Dubai has a well-deserved reputation for encouraging foreign businesses and foreign investment. The government-created attractions include no income taxes, a law prohibiting unions, and various free-trade zones offering special protections for foreign businesses.
Dubai has good reason to promote business. The country’s relatively small oil reserves are likely to be exhausted within 20 years. So the government has attempted to turn Dubai into a regional hub for tourism, transportation, media, finance and other industries.
And it has succeeded. “Dubai has become the leading business and financial center serving a region stretching from Asia to Africa,” says Daniel J. Greenwald III, an attorney who works in Dubai.
There is, however, a problem with the country’s legal system. According to a February 2009 State Department report, “The constitution provides for an independent judiciary. In practice, however, its decisions remained subject to review by the political leadership.”
That’s a serious problem for companies doing business in Dubai because the emirate’s economy is dominated by government-owned enterprises. If a foreign company has a dispute, the other side “will almost always be a government-related entity,” says Steven A. Harr, a Dallas attorney who represents Capital Partners in its dispute with government-owned Tecom. Foreigners who seek to resolve commercial disputes in Dubai courts are likely to find themselves fighting government-related defendants with influence over the courts.
Companies can try to assert their rights in arbitrations, but they are often stymied by courts in Dubai and other parts of the United Arab Emirates. “The UAE courts have, to date, been somewhat ambivalent about arbitration,” wrote UAE legal experts James Kwan, Christopher Mainwaring-Taylor and Simon Roderick in a 2008 article. “The process of enforcing an arbitral award through the UAE courts can be protracted, and awards have been set aside by the courts.”
Don’t blame the arbitrators. The Dubai International Arbitration Centre is a well-regarded, independent organization with good rules and qualified arbitrators, attorneys say. But DIAC arbitrations are supervised by Dubai courts, and there is no arbitration law in Dubai that limits the courts’ interference.
In 2008, one of Dubai’s free-trade zones created the Dubai International Finance Center’s arbitration law, which “provides for minimal court intervention and the supremacy of the arbitral process,” says Graham Lovett, a Dubai-based attorney. For instance, it mandates that arbitral awards made within the DIFC must be enforced by the courts without reviewing the merits of the ruling.
DIFC arbitrations are supervised by special Dubai courts, staffed by judges from around the world “experienced in matters of international commercial arbitration and are known to be supportive of the arbitral process,” write Kwan, Mainwaring-Taylor and Roderick.
The law allows any party to choose the DIFC. Neither party need have a connection to it, nor need any part of the underlying transaction occur in the DIFC. It is unclear how often Dubai’s government-owned businesses will agree to the DIFC as the seat of arbitration.
But the global economic meltdown has hit Dubai hard. Property values have plummeted 50 percent in the past year. Billions of dollars in projects have been put on hold, while others have been canceled. And more arbitrations are likely.
In its case, capital partners’ arbitration started routinely. It was bifurcated, at Tecom’s request, into a liability phase and a damages phase. In July 2008, about one year after the arbitration process began, the arbitrator determined that Tecom had breached three of its four agreements with Capital Partners by essentially selling land it did not own and control.
The arbitration moved to damages. “We were confident we could get damn close to everything we asked for,” Thiel says. “The opposition felt, I believe, very nervous.”
Then a similarly named Dubai government agency—the Tecom Free Zone Authority—stepped in. Tecom Investments owns and operates a number of free-trade zones for Internet, biotech and other knowledge-based industries, and operates under the authority’s supervision.
The authority struck Capital Partners off the register of companies licensed to do business in the Tecom Free Zone. Tecom Investments then asked the arbitrator to end the arbitration because Capital Partners had legally ceased to exist.
After reviewing the issue for six months, the arbitrator denied this request, according to Harr. The arbitration continued.
In February, Tecom filed suit in the Dubai Court of First Instance, requesting a declaration that Capital Partners had ceased to exist as a legal entity. The arbitrator was informed of this, but declined to stop the arbitration. The hearing on damages was set for April 6.
On April 1, while the lawsuit was pending, Tecom asked a Dubai judge to suspend the arbitration until the Dubai courts had ruled on the issue of Capital Partners’ legal existence. On April 7, the judge suspended the arbitration. “Our opposition has figured out how to take us out of an objective third-party [arbitration] process and drag us into the local court system,” Thiel says.
After delaying the arbitration for several months, the court, in June, rejected Tecom’s claim that Capital Partners is no longer in existence. Tecom, however, is appealing the ruling. And that’s not likely to end the dispute. Should Capital Partners eventually win in court and obtain a damage award from the arbitrator, the company may have a tough time enforcing the award. “I fully expect that … we will have a battle collecting the money,” says Capital Partners’ Thiel.
Many unpaid businesses are anxiously watching— and trying to learn from—Capital Partners’ legal battle.
“There are so many companies calling us,” Thiel says, “because they are trying to figure out how to resolve their own disputes.”
Yet despite all these financial and legal problems, Dubai and the surrounding region remain a powerful draw for many businesses. “We still sit in a region … that is expected to grow 3.6 percent this year,” says Mark Beer, senior administrative officer of the DIFC courts. “We still have $2.5 trillion in projects planned or under development in the area. We’re still home to some of the world’s largest sovereign wealth funds. … Deals are not being done with the same vigor as in the past five years, but business still has to get done.”