Dubai’s attempts to restructure the well publicized debt of Dubai World have brought about a restructuring of a different sort: that of the Emirate’s legal framework. Foreign courts, domestic courts, and now special tribunals each pose difficulties for foreign investors contemplating proceedings in which to protect their interests. In each instance, uncertainty – whether of enforceability, transparency or novelty – creates unique problems for creditors. For investors, one big question looms large: How much financial pain will be involved in settling these claims?

Dubai’s USD$4.1 billion sukuk redemption in December 2009 did more than pay off debt – it brought new scrutiny to a knotty tangle of creditors’ rights and recourse. Before the global economic crisis, investors eager to get on board the Dubai juggernaut may have given short shrift to their remedies in the event of an unimaginable default. But investors were not the only concerned parties. The government of Dubai itself recognized that the existing legal framework provided an inadequate mechanism for restructuring its debt, and left unanswered questions that threatened the Emirate’s commitment to “integrity, transparency and efficiency.”

This article will examine the manifold risks disclosed within the respective Nakheel sukuk offerings and the internal tension among the rights and immunities defined within the documents themselves. The government of Dubai could not accurately predict how its courts would react in the context of litigation. Various measures have been undertaken by the Emirate, such as promulgating a succinct, but necessary jurisdictional protocol and establishing a special tribunal dedicated to the Dubai World restructuring. Nonetheless, questions may still remain, notwithstanding laudable efforts to bring transparency to the restructuring process.

This analysis is no mere history survey in its look at Dubai World. Government-owned entities in Dubai still have tens of billions in debt coming due in the next few years. The skein of lines demarcating Dubai’s government and its many state-owned entities can be dizzying. Compounding this, the ad hoc juxtaposition of regulatory agencies, official decrees, Dubai law, Free Zone law and UAE federal law is no more easily negotiable than that of the complex legal frameworks in the West.

As would-be litigants, investors in Dubai securities face hard choices. Bringing suit in a foreign court may provide a right without a remedy. The Nakheel offerings that touched off the restructuring controversy, for example, expressly warn that foreign judgments are unlikely to be enforced in the UAE; rather, cases will require de novo rehearing of the merits. Moreover, most Dubai World assets are located within Dubai, a fact compromising recovery significantly.

Dubai courts, following the civil law of the UAE, likewise pose challenges to Western investors. Parties must be represented by Emirati counsel – and there is little to no oral hearing. The courts conduct proceedings in Arabic and courts may decline to apply foreign law irrespective of contractual choice of law clauses. Furthermore, unlike common law jurisdictions, prior decisions do not bind subsequent courts, thus providing a layer of additional uncertainty for litigants.

Given these noteworthy “gaps,” even before the Dubai World “hiccup,” the government of Dubai had begun to employ measures to bring credibility to investors wary of local courts. In creating the Dubai International Financial Centre (DIFC), the Emirate created a 110-acre Vatican-like enclave within Dubai. Here, unlike the rest of the Emirate and the UAE, banks and companies chartered by and located within the DIFC would be subject to DIFC law, viz., common law. Dubai had some time ago recognized the importance of arbitration for settling investment disputes. In 2008, before the global economic meltdown, the Emirate established a self-contained arbitration centre within the DIFC.

As if all of this weren’t worrying enough, the sukuk structures themselves pose added legal risk. Not only is the Nakheel sukuk at the center of the recent controversy but sukuk issues coming due in 2010 and 2011 provide mixed signals as to the viability of waivers of sovereign immunity. These same sukuk quite candidly reveal not only risks that could compromise the underlying assets, but the risks of enforcing foreign judgments and questions of whether sovereign immunity can be waived at all.

Although the government of Dubai expressly disclaimed liability for indebtedness of Dubai World, the Summary of the Offering provided that Dubai World and each Co-obligor (each of Nakheel Holding 1, Nakheel Holding 2 and Nakheel Holding 3) expressly waived immunity, with each entity acknowledging, “[i]t can be sued in its own name and has no right of immunity from suit or the jurisdiction of the courts under the laws of the UAE or the Emirate of Dubai.”

Notwithstanding this waiver, the sukuk appear to turn back on themselves, qualifying the bondholders’ rights with a host of serious warnings, including:

• Dubai courts are unlikely to enforce an English judgment without de novo review of the merits, and the courts may not observe a contractual choice of law provision;
• Judicial precedents have no binding effect upon subsequent decisions—moreover, decisions are not generally recorded;
• Under Dubai law, no debt or obligation owed from the Ruler or the Government can be satisfied by attachment, or sale at auction or by otherwise taking hold of other assets or property;
• No assurance can be given that Dubai law will recognize a waiver of immunity as valid and binding; and
• The waiver of sovereign immunity could be possibly be revoked.

This give and take of immunity, coupled with the admitted risk that foreign judgments may not be respected by UAE courts, put Dubai in the uncomfortable position of having to acknowledge a significant obstacle in its bid to be recognized as a big-time global financial hub.

The government of Dubai established the DIFC “for the benefit of the UAE and the wider region as a whole . . . to create a regional capital market, offering investors and issuers of capital world-class regulations and standards” with hallmarks of “integrity, transparency and efficiency.” Thus, in theory, both the emergence of DIFC courts and its arbitration centre reflected Dubai’s commitment to bringing transparency to financial dealings in the Middle East. But when Dubai World announced its intention to restructure its debt, bond holders scrambled to grasp the limits of their rights. What emerged was potential conflict regarding jurisdiction of courts of Dubai and of the DIFC.

With the creation of the DIFC courts in 2004, there emerged a problem of overlapping jurisdiction with courts of Dubai.  For several years, questions of interpreting terms like "executed", "transactions", and "incident" lacked further definition.  The courts of the DIFC and Dubai resolved this issue by promulgating its Protocol of Jurisdiction in December 2009.  As a result, DIFC courts have now established their exclusive jurisdiction over a host of enumerated civil or commercial cases or disputes: involving companies, branches and establishments licensed by the DIFC; arising from or related to contracts performed in whole or in part within the DIFC; related to transactions taking place in whole or in part within the Centre and related to activities performed within the DIFC; and incidents (except criminal cases) occurring in the Centre. Dubai courts remain courts of general jurisdiction for everything not enumerated within the DIFC courts’ exclusive jurisdiction.

Even this measure, however, exposed another potential concern with Dubai World: Dubai World was not incorporated in the DIFC, a Dubai Free Zone or pursuant to UAE federal law; the ruler of Dubai established the corporation in 2006 by a special decree. Because of the uncertainty of Dubai World’s place among these jurisdictional interstices, the government of Dubai acknowledged the insolvency laws of the UAE might not apply to the corporation or its creditors.

In order to mitigate this issue, on December 14, 2009, the ruler of Dubai decreed that a special tribunal (“the Tribunal”) within the DIFC would have exclusive jurisdiction to hear all claims and demands arising out of the proposed Dubai World restructuring. The extraordinary mandate of this Tribunal provides that its decisions and orders are to be “final, irrevocable and not subject to any appeal or review.”

These recent judicial and regulatory measures should demonstrate the bona fides of the government of Dubai in its attempt to provide a viable framework for a multi-billion dollar debt restructuring. For example, while the sukuk offerings exposed the tension within Dubai law, the effect of foreign judgments, and sovereign immunity, potentially overlooked is a possible elision within the Tribunal’s jurisdiction. The maxim inclusio unius est exclusio alterius is a well-worn canon of statutory construction in the common law. Article 3 of Decree 57 provides that the Tribunal has jurisdiction to:

“Hear and decide any demand or claim submitted against: (a) [Dubai World and/or its Subsidiaries], including hearing and deciding any demand to dissolve or liquidate the Corporation; and (b) Any person related to the settlement of the financial obligations of the Corporation, including the Chairman and members of the Board of Directors, as well as the employees and workers of the Corporation.”

What this mandate does not include is any reference to jurisdiction to hear claims against the government of Dubai or the ruler of Dubai. Does this omission operate as a de jure exclusion from jurisdiction? To suggest otherwise would appear to re-write the Decree itself.

The efforts to restructure not only Dubai World’s debt, but the Emirate’s legal framework may be steps in the right direction, but significant questions remain. What degree of diminution, if any, might creditors expect? How expeditiously will the restructuring occur? With no right of review or appeal from the Special Tribunal, what leverage do creditors have within the restructuring? Lastly, how will counsel go about protecting the creditors’ extant interests? The billions of dollars at stake in this high-profile restructuring can only heighten the attention of the legal and financial communities.