Client Update: Enforcement of contractual rights in Dubai
2 December 2009
In brief: Last week's announcement that a Dubai state trading entity, Dubai World, would suspend debt repayments for six months has raised the possibility of a significant sovereign default. Many foreign investors with exposure in Dubai are now asking how they can enforce their contractual rights in the troubled emirate. Partner Stephen McComish and Lawyer Dr Sam Luttrell report on the options available.
- Enforcement options
- International commercial arbitration
- Investor-state arbitration
- Practical considerations
On 25 November 2009, Dubai World, a key state trading entity and holding company of property giant Nakheel, asked its creditors for a six-month stay on repayments of its reported $US60 billion debt. The proposed standstill agreement will extend the maturity of the emirate's sovereign bonds and grant Nakheel a six-month holiday on repayments. The exact terms of the standstill agreement are, however, not widely known, as are the prospects of United Arab Emirates (UAE) federal capital Abu Dhabi again bailing Dubai out. Off the back of the announcement, US stocks fell 1.5 per cent, costs of insuring Dubai government bonds rose, and banks owed money by Dubai World saw significant falls in their share prices.
Depending on whether or not their contracts contain arbitration clauses, foreign investors in Dubai may have a number of enforcement options. These options include enforcement by:
- international commercial arbitration, and the subsequent execution of the arbitral award in Dubai and against Dubai-owned assets elsewhere under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention);
- commencing investor-state arbitration under one of the UAE's 11 Bilateral Investment Treaties (BITs) and, depending on the BIT, enforcing the arbitral award in Dubai and against Dubai-owned assets elsewhere under the New York Convention or the Washington Convention on the Settlement of Disputes between States and Nationals of Other States 1965 (the Washington Convention); and
- litigation in Dubai and UAE federal courts, and enforcing the judgment in Dubai, Abu Dhabi and against Dubai-owned assets in other Gulf states (including Saudi Arabia, Qatar, Oman and Bahrain) under the Ryadh Convention on Judicial Cooperation 1983 (the Ryadh Convention).
Which of these enforcement options is available and appropriate will depend upon the terms of the relevant arbitration clause and the status of the Dubai counterparty. For example, where the Dubai counterparty is a state trading entity (such as Nahkeel or its parent Dubai World), although there may not be a direct contract with the emirate of Dubai, there will be a basis under international law for arguing that the actions of the state entity are attributable to the emirate, and that the action should be able to be brought in the form of a BIT claim against the UAE.
In the past three years, as part of its aggressive program of economic modernisation, Dubai went to great lengths to promote itself as a centre for the conduct of international commercial arbitration. As a result, Dubai has sound arbitration law. In 2006, the UAE acceded to the New York Convention; and in 2008 Dubai enacted an arbitration law based on the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration. There is also a special Model Law Arbitration Act in force in the Dubai International Finance Centre, where the practice of arbitration is supported by a special court system staffed by foreign judges.
Today, there are almost 3000 BITs in force worldwide, and it is this interlocking web of BITs (together with the supporting framework of the New York and Washington conventions) that makes investor-state arbitration possible.
BITs are typically short, simple documents that focus on conferring certain substantive rights and privileges, such as 'most favoured nation' status. In practice, the majority of BIT claims relate to breaches of the 'no expropriation' and 'fair and equitable treatment' provisions of the applicable BIT. Following its sovereign default in 2001, Argentina faced dozens of BIT claims framed in these terms.
The UAE has BITs with eleven countries: Austria, Germany, Italy, the United Kingdom, Morocco, Malaysia, Lebanon, the Czech Republic, Finland, France and Switzerland. Investors that have invested in Dubai from (or using vehicles incorporated in) any one of these states may qualify as protected investors under a UAE BIT. Significantly, the UK-UAE BIT contains an 'umbrella clause' at Article 2(2), which allows a UK party that has a contract with the emirate of Dubai (such as a contract for the construction of an airport) to prosecute a breach of that specific agreement as a breach of the UK-UAE BIT.
Investors that have not invested from these 11 treaty states may still place themselves under a UAE BIT by 'treaty shopping', although this requires careful planning as certain jurisdictional problems may arise depending on the wording of the BIT.
Parties with exposure to Dubai may wish to
- examine the contracts underpinning their investment to determine whether or not they contain arbitration clauses;
- determine the nationality of the vehicle that they used to invest in the emirate to ascertain whether they may qualify as a protected investor under a UAE BIT;
- determine the status of their Dubai counterparty to determine whether their possible claims may be actionable under a BIT with, or attributable to, the UAE; and
- seek appropriate legal advice on the options available to them.
- Peter O'DonahooPartner,
Ph: +61 3 9613 8742