Legal risk management in the fast lane: Corporate counselling in the Middle East

Session co-chairs:
Caleb Raywood, SAMEA regional counsel, Mastercard Worldwide
Mark Krutsinger, Middle East / Eurasia regional counsel, Halliburton

Session host:
Adrian Cole, commercial partner, Simmons & Simmons - Abu Dhabi. Session facilitator:
Leigh Dance, ELD International, Inc

For many international counsels, the first time they will be asked to deal with a Middle Eastern entity will be following a corporate takeover of a local business unit. The sudden introduction of a business culture that is both complex and alien to Western business practices may cause the legal function intense difficulties. How to recognise and overcome those difficulties was discussed at the recent Counsel to Counsel forum in New York, USA.

Cultural norms

One of the most striking aspects of doing business in the Middle East is the speed at which projects are moved forward. Nowhere is this more obvious than the manner in which meetings are conducted. “Sometimes, I would have a meeting with a client, and their phone would be ringing constantly – and they would answer it,” says Adrian Cole, an infrastructure partner at Simmons & Simmons’ Abu Dhabi office. “There will also be people coming in and out of the meeting, having parallel discussions. None of this shows a lack of respect or interest. It’s simply that local business leaders know how to multitask.”

For in-house counsel, one of the more practical implications of this method of working is that legal matters must be resolved quickly. To overcome this challenge, companies such as MasterCard make extensive use of standard templates, which contract administrators use to legally formalise business proposals. “When I ask for a business case to be dropped into a contract template, it can be completed within 24 hours,” says the company’s SAMEA regional counsel, Caleb Raywood, who is based in Dubai. “Then, I check through the document. If it looks OK, I stamp it and it’s gone. It’s all about completing the legal process swiftly.”

Should you develop a local in-house function?

Most general counsels working for multinational companies will face the dilemma of how to structure their company’s legal operations. Should it be a “head office” function, with limited or no local law capacity? Alternatively, should the company employ local counsel, who can provide “on the spot” legal advice to local business units. Each system has their own advantages and disadvantages, depending on the company’s internal structure, its geographical spread, and the types of legal risk it is exposed to.

Some companies may decide that their Middle Eastern operations are essentially an international outfit, with a relatively light “domestic legal footprint”. Therefore, for companies such as MasterCard, whose contracts are mainly governed by US law, a substantial local legal presence may not be necessary. Such companies are probably best served by instructing local law firms on an ad hoc basis. Indeed, because so much of MasterCard’s Middle Eastern legal work is produced using standard templates, much of their Middle Eastern legal work is actually carried out in another jurisdiction altogether – India. Conversely, those companies with a significant physical presence in the Middle East would probably benefit from developing a local in-house legal capacity – especially if they are required to deal with governments or regulatory agencies on a regular basis.

For those round the table, market conditions that are specific to the Middle East provide several extra points for consideration, which may not be applicable to other territories. Firstly, several speakers suggested that it is extremely difficult to recruit high-quality local lawyers with western experience and values - except by poaching them from rival in-house departments. “These guys tend to move companies every 18 months, and every time they move they will demand a 20-30 per cent increase in salary,” says one speaker. Developing this theme, Mark Krutsinger, Middle East and Eurasia regional counsel to energy services company Halliburton, says that in the Middle East, both outside expatriates and experienced outside local lawyers may make disappointing recruits. He says: “In my experience, you don’t always get a lot of bang for your buck by hiring an outside ex-pat or an experienced local resource. They may have too much baggage, and they may not provide value for money.” His preferred system in the Middle East is to employ at least one existing in house ex-pat lawyer, supported by a team of junior lawyers or non-lawyer local recruits. The non-lawyers, especially, are, in turn, trained to become contract administrators and, ultimately in some cases, lawyers. “It’s a very long-term approach, but this way you can teach your recruits your company’s values,” he says.

Where companies do decide to establish a local in-house capacity, counsel warned they should not be allowed to settle into the “comfort zone”. “Dubai is a nice place to live,” continues Mark Krutsinger. “Nobody wants to leave the regional office to go into the field.” For Mr. Krutsinger, the best way that regional counsel can avoid falling into the “regional office syndrome” is to spend time travelling through their company’s local field offices on a regular basis.

The private practice alternative

For companies who do not wish to build their own local in-house capacity, the obvious alternative is to outsource their legal work to external law firms. Whether the in-house lawyer should engage an indigenous firm, or one allied to a Western law practice, is often a matter of personal preference: the speakers around the table had mixed opinions of both. For Mr Krutsinger, many Western firms with recently-established local offices did not yet have comprehensive local-law capacity, while some indigenous firms had appalling levels of service. “Getting local firms to communicate with you is next to impossible,” he says. “I’ve had experiences of firms who would only send you an invoice every 1-2 years. I don’t know how they could possibly run their businesses that way.”

Instead, he advocates either instructing a growing number of “hybrid” local law firms who typically operate offices throughout the region and comprise of both local and international lawyers. “These firms are hungry for business, and tend to be open to negotiating innovative fee structures,” he says. Another counsel said: “I’ve negotiated a deal where I pay a fixed rate, whether the matter is handled by a lowly associate or the most senior partner – and guess who does all the work. That works out at a 50 per cent discount of the typical rate for a Dubai senior partner.” Others though, warn against pushing too hard on fee rates, especially in relation to fixed fee projects. “The trick is to get value,” says one in-house lawyer. “I don’t think you always get value in fixed fee work, especially if the scope of the work is uncertain. In this situation, there will inevitably be a large contingency built into the price, to allow for the element of risk.”

For counsels who are unhappy with the service offered by local law firms, there may be an alternative. It was suggested that in-house lawyers may prefer to outsource some of their legal work to the local offices of the global accountancy practices. “The accounting firms can be a good local resource,” says one participant. “I’ve used them for visa and work permits, and also major employment law problems.” In-house counsel also suggested using accountants for company registrations, initial tax planning, nominee directors and virtual offices.

Legal risks

Outside free trade zones, companies operating in Middle Eastern countries tend to require local business entities to be majority-owned by local nationals. For Western companies, concerned about their ability to control a company they do not have a majority stake in, this may not be acceptable.

For this reason, many Western companies prefer to make use of government-registered agents. These agents sell their goods and services on their behalf, in return for a commission. However, agents can prove a legal nightmare for global counsel in terms of US Foreign Corrupt Practices Act (FCPA) compliance. One counsel told the meeting how they had discovered that most of the agents engaged by their company were either government officials or related to them. Despite the wealth of influential contacts that agents bring to the commercial equation, this particular in-house lawyer could not wait to dispose of agents as quickly as the trade liberalisation process allowed. Other speakers were equally disparaging of the agency system.
Of course, counsel should remember that, for many companies, the use of agents is the price of doing business in the region. Nevertheless, this is not to say that agents hold all of the cards when negotiating the terms of their engagement. For many agents, the cachet of acting for major western multinationals is a significant factor in their ability to do business in the region. Counsels should therefore be mindful of the power of their brand when negotiating terms.

Another legal problem facing companies operating in Middle Eastern Countries is the prevalence of litigation, and also the enforceability of court awards. And, while some speakers said they did not regard the region as being unduly litigious, others had suffered severely. “It’s the most litigious place I’ve been to outside of the US,” said one speaker. Another said: “It’s much worse that either Europe or Asia. We’ve had more litigation here than those two territories combined.” What is worse, they recalled that it was impossible to enforce foreign law rulings, even when both parties had agreed to submit to English law. “We were unable to enforce one of our judgments in Saudi Arabia – they just weren’t interested,” they said. “We gained nothing from agreeing to submit to English law.” Whether this culture will now change – in 2006, the UAE finally ratified the New York Convention on the Recognition and Enforcement of Arbitral Awards – remains to be seen.

If all of these issues pose problems for local counsel, they will be relieved to hear that other legal challenges are less important in Middle Eastern countries than in the West. In particular, while countries such as the UAE and Saudi Arabia are now beginning to introduce competition / anti-trust legal regimes, this remains an under-developed area of law in the region. The tangled relationships between Middle Eastern businesses and their governments means that, for now, local counsel are unlikely to suffer from a dawn raid or high-profile anti-trust investigation. In addition, unlike in other parts of the world, bribery by government officials is not regarded as endemic. “When I first arrived in the region, I didn’t have the correct change for my visa,” says one speaker, by way of example. “I said he could keep the change, but he refused.” For this particular in-house, his dealings with immigration personnel is often a reliable indicator of the attitude towards corruption by government officials.

Nevertheless, legal risks do occur, particular in the private sector. One in-house speaker told the meeting how his company had purchased a large Dubai-based company as part of a wider acquisition. Although the company had received a clean bill of health from a respected auditor company as part of the acquisition, the paper trail they had supplied had proved misleading. Parallel documents, which would not have been picked up in the normal due diligence process, revealed a completely different picture on the company’s business dealings. At the time of the acquisition, the company employed 300 local staff and had a turnover of some US$300 million. “There’s nobody left,” he says. For this corporate counsel, the lesson was salutary: “You don’t need due diligence, you need a forensic investigation. As a company, we will no longer make an acquisition unless we’ve crawled over every single agent and related party, to ensure we’re absolutely satisfied that what they say is true.” The whole episode culminated in a voluntary disclosure to the US regulatory authorities.

Takeaways

■ The Middle East is a fast-moving legal environment. Consider using document templates to speed up the production of legal documents.

■ Experienced local counsel are expensive to recruit and difficult to retain. Beware of “regional office syndrome”. Local counsel should spend time in field offices to ensure they do not lose their objectivity.

■ If you do not wish to develop your own in-house legal function, consider using high quality “hybrid” law firms to handle your legal matters. The market for legal services is competitive, and discounting is available. For routine legal matters, the local offices of the accountancy firm may provide a viable alternative.

■ The Middle East has its own specific legal risk profile. Try to employ local counsel who are familiar with the market – but be aware, their service will be in high demand. Be cautious when employing agents. Not only are they expensive to remove, they may expose your company to FCPA liabilities. However, you are unlikely to be subject to a competition-law investigation.

Last updated - 23 April 09

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