Dubai – Lawsuits Starting to Fly

The global financial crisis has hit Dubai particularly hard and Dubai’s property bubble has burst in a big way. Banks and property companies are renegotiating or defaulting on contracts left and right. The lawsuits are already starting to fly according to Reuters news agency.

Ashley Painter, partner at Clyde & Co’s Middle East financial services unit specializing in banking and finance, said his company was dealing with dozens of law suits.

“Anything that is not completed I think would be under some form of negotiation. It depends, of course, which developer you are talking about…” Painter told Reuters Islamic Banking and Finance Summit in Dubai.

“They are looking to give haircuts to the sub-contractors so that the cost of building the things is going down… They are renegotiating the payment terms with the borrower…” he added.

“We are dealing with numbers of them, dozens.”

Dubai, which put itself on the international map with developments such as the world’s tallest building, has seen its once-booming real estate sector battered by the global financial crisis as credit dries up and major projects are canceled.

Over half of the residential and commercial property projects due for completion in Dubai between 2009 and 2012 have been suspended or canceled, Jones Lang LaSalle said last month.

Several Dubai-based contractors have said they are owed millions by state-linked developers and may face bankruptcy. As it is, the British Business Secretary, Lord Mandelson had to approach the rulers of Dubai and Abu Dhabi regarding non-payment of bills to British firms.

“The level of litigation we are seeing, especially in the construction sector, suggests that there are bills that are not being paid,” said Peter Hodgins, partner at Clyde & Co’s Middle East financial services unit and expert on Islamic insurance.

The Dubai government said in February it had paid all outstanding obligations for public sector infrastructure projects after a short delay.

Malaysian engineering firm WCT and Dubai’s Arabtec Holding ARTC.DU are seeking at least $460 million in compensation after their contracts to build a racecourse in Dubai were canceled.

Both firms are initiating a civil suit and arbitration proceedings against the developer Meydan over an alleged breach of contract for cancelling the deal.

But with most of Dubai’s major developers entirely or partly owned by the government or ruler, smaller contractors are often loath to press their claims in court for fear of losing future work in the world’s largest oil-exporting region.

“If you decide to sue the government here you have to take the view that it is worthwhile doing so and that perhaps you don’t want to do any more business in the Gulf,” said Painter.

Whether companies decide to sue, try to renegotiate contracts out of court or cut their losses and wind down their business, cases can be complicated by the lack of a paper trail, the lack of sophisticated bankruptcy laws and the fact that developments were financed by pre-selling units off-plan.

“Dubai, but also other parts of the Gulf, because it was such a bubbly environment, the documentation did not necessarily keep up with the pace of the deals…” Painter said.

“In this part of the world the end user actually financed the construction… so it is more complicated…The great thing about the banks is that they are often linked to Dubai or Abu Dhabi governments so they can get more deposits.”

The UAE central bank and finance ministry have together launched 120 billion dirhams ($32.67 billion) worth of funding facilities for banks since September. The central bank has also bought $10 billion in Dubai government bonds to enable it to help state-linked firms to meet obligations.

UAE bankers and central bankers say liquidity is returning but Islamic banks tend to have more exposure to the real estate sector because their products are linked to physical assets and they tend to shy away from litigation or arbitration, placing the onus on agreeing in good faith, the partners said.

“Their costs of funding can be quite expensive… A lot of the deals have to do with real estate and it is no secret that real estate has taken a dive… and they are looking to see how they can manage their exposures,” said Painter.

Things do seem to be going from bad to worse in Dubai, although one of the major developers, Nakheel,has started receiving funds from the Dubai Government.

In an interview with Emirates Business, Nakheel’s Chief Executive Officer, Chris O’Donnell, confirmed the company is recieving government bailout money. However when asked if the figure stood at Dh2 billion, he said: “The actual figure is confidential and so are all the other details. But yes, Nakheel is receiving funds.”

Nakheel is also talking to its contractors and re-negotiating payments plans and contracts. “Yes, we are trying to help them and ourselves through our current situation. We are at the stage of commercial settlements and negotiations. Rather than detail on percentages, it is a true statement to say that construction costs are falling and there is definitely a reduction,” said O’Donnell.

“Part of our obligation to our customers is to ensure that we get them the best buildings. Hence, we are talking to our contractors to get cost-effective solutions.”