In the Middle East, the old joke among Western lawyers goes something like this: “First you negotiate the contract, then you close the contract. And then, you renegotiate the contract… ”
All good jokes are rooted in the truth. While there certainly are some local parties in the Middle East who are committed to keeping their word and sticking to the deal they negotiated, there does exist this unfortunately common dynamic wherein the local party will test, stretch and even flat-out ignore the terms of an agreement they just executed. One might even lose money betting against a breach occurring before the ink dries.
And yet, throughout the Gulf Cooperation Council (GCC) region, billions of (US) dollars worth of business is successfully transacted each and every year by and between foreign and local parties. How does that work?
It starts with understanding what local businessmen already know: going to court, dumping your local agent (or, colloquially speaking, your “sponsor”), etc, are usually your last best options. You can see your company effectively frozen out of the market if you make such a move without an almost perfect sense of deftness. And, even if eventually successful, should your company go this route, you have embarked on a long, aggravating and expensive disruption of business that will give rise to discussions that start with, “Why don’t we just pull out of there?”
We will talk about arbitration clauses (and, the enforceability of them in GCC jurisdictions) in a subsequent posting. For now, you also need to understand that the local sponsor, or other local parties with whom your company does business, who busies himself with stretching the terms of your agreement is primarily (if not entirely) in the business of sponsoring foreign enterprises (or otherwise makes his money conducting business with foreign parties). Maintaining sponsorships or other replationships with foreign investors (and, protecting their reputations and pride) tend to be the top priorities of local companies. So, when such companies appear to breach their agreements, what do they hope to gain by playing around?
Usually, more money. And, usually, not much more. More often than not, you can settle the matter by amending a couple of terms and (slightly) goosing up their sponsorship “fee” (or, whatever other payment, profit or compensation they may be receiving).
What about the law of contracts? Why can’t I look for a new sponsor and/ or seek judicial recourse?
Remember that the laws requiring you to obtain a sponsor in the first place are protectionist in nature. On an unofficial level, shopping around for more pliant for cooperative sponsors isn’t designed to be easy.
Also, while consideration, reliance and other concepts are necessary to show a promise made in contract is enforceable under the laws of the United Arab Emirates (UAE), such is not the case to show the existence of an enforceable contract in Saudi Arabia (KSA). In the KSA, if you make a promise, you’re stuck with it.
Isn’t the other side stuck with it, too???
Well, in the Middle East, there is the law the way it is written, and the law the way its enforced. And, to further complicate things, that which is enforced is not always written, and that which is written is not always enforced. If you wind up in a KSA court, you may have a judge whose primary concern is sending a signal to his government, more than adjudicating a dispute between the parties before him. In the UAE, much may depend on whether the judge enjoyed his breakfast, or if he is miserable from a belly ache, as he reads your company’s brief… (And, keep in mind, the UAE imports its judges from other countries – those judges tend to be mindful of who gave them their jobs.)
As to getting another sponsor, while the UAE and the individual Emirates therein may not employ “black lists” per se (as does the KSA), you should nonetheless do your best to avoid running afoul of bureaucrats at relevant ministries and other governmental offices who may have a cousin, friend, or other acquaintance who may just happen to be your soon-to-be former sponsor or other business partner/ associate. Business licenses have to be renewed every year, and your specific business may well depend on successfully bidding on government tenders; and, while Abu Dhabi and Dubai, for example, may look like big cities, they still very much operate as “small towns” on many different levels.
That’s not to say successfully changing your sponsor and/ or winning a contractual dispute with a local party in the Middle East is impossible. Such has been known to happen in Abu Dhabi, and even in Jeddah (where arbitration clauses are less likely to be deemed enforceable by local courts, even though the KSA is a party to the New York Convention). Accordingly, you should protect yourself in the governing documentation the way you would in any other international agreement.
Have the standard choice of law, venue, and language clauses, as well an arbitration clause (which can be something of a contract unto itself) and, especially, a (carefully written) termination clause. If an American-based company (or, even if you are based in another Western country but have operations in the US), make sure the documentation includes language concerning your refusal to violate the provisions of the US Foreign Corrupt Practices Act (over the last several years, the trend has been increasingly robust enforcement of the FCPA). American companies might also think to include a so-called “anti-boycott” clause in the agreement, given the on again/ off again enforcement of boycotts against Israel by some Arab states.
Although the general mood in the GCC seems to favor a direction wherein the laws are being changed to relax the hold local parties (especially those deemed “sponsors”) have over foreign direct investment in their respective markets/ jurisdictions, it is usually best to try to renegotiate when a breach occurs. Such renegotiation should, generally speaking, settle upon a slight increase in the amount of earnings the local party derives from the deal.