Gowling WLG in the Gulf: Disputes in the Desert

Imran Mufti: Hello and welcome to the latest edition of the Gowling WLG In the Gulf podcast with me, Imran Mufti, Partner in Gowling WLG. And today, I have the pleasure of being joined by Peter Anagnostou who is a Partner at Gowling WLG based in the Dubai office and who leads the regional disputes practice.

We are going to discuss a few topical areas of interest to people that are in the region, as well as people that are outside the region, touching on areas of arbitration practice, areas that are hot topics right now when it comes to issues like climate change, artificial intelligence, third party funding and enforcement of arbitral awards, which historically have always been a bit of an issue in the Gulf.

Peter, why don't you give a brief introduction to your background and what you are doing in Dubai and where you have been.

Peter Anagnostou: Thanks, Imran, nice to join you and very excited to be part of this podcast. Yes, nice to join everyone on the podcast.

A bit of background about myself. I am a construction litigator from Australia, Sydney, Australia and I moved to the UAE in 2014 so have spent the last decade here dealing with a range of disputes for various clients, both within the UAE but also in Qatar, Kuwait, Oman, Saudi so it is quite a regional practice, a very exciting practice, a very exciting industry to be part of.

Construction is very vibrant in the region, there is always some very challenging projects and complex issues that we have to address and it has been a really exciting period of time to work here in the last ten years.

Imran: Fantastic. Peter, we are going to hit a few topical areas of discussion. The first one is climate change-related arbitrations. It sounds very odd to me but maybe you can give us some insights into what it means, how it differs from ordinary arbitration. In a previous life, I did a bit of arbitration work and it was very much focussed on disputes around construction or infrastructure projects. What has ESG and climate change got to do with arbitration?

Peter: So I think that is definitely a common thread that a lot of people don'tfully appreciate or understand, how this is connected and I think it is, there is a trend to link everything to climate change these days so it is important to understand what we are talking about when we are looking at these disputes.

One thing that has come across, especially in the construction industry, but also globally from a regulatory perspective is lots of governments and industries have started imposing mandatory guidelines and regulations to achieve certain parameters or certain limits on carbon emissions, for instance on a project.

So what we are seeing now in the Middle East but also globally is issues where certain projects or certain employers, certain contractors might not be meeting those minimum requirements or maybe saying they are meeting those minimum requirements but actually aren't.

So that is something we call greenwashing in the industry and it is essentially stating that you are doing something that you are not and there has been a lot of litigation and arbitration brewing in relation to these kind of claims made by players in the industry globally and we are seeing that everywhere, very consistently.

So it is important to understand that these arbitrations are not necessarily directly disputes relating to climate change itself, it is more the efforts that companies and industry players are taking to try to address climate change but whilst they do that they might be falling foul of certain regulations or certain contractual obligations they have made to actually reach those limits.

Imran: OK, so for example if you, let us take an example, if you have a client that is falling short of its carbon emissions requirements, who would be the counterparty that would bring the arbitration proceedings and what would their, what would they be seeking in terms of remedies?

Peter: So it depends, say for instance there was a party that was saying publicly that they were meeting certain emissions requirements or that they were required by a government organisation, so the country they are working in, requires them to work under certain parameters where they must not exceed certain limits.

If they do exceed those limits in some instances the government in that case will actually bring the action against the party for saying that they have met those limits but they have actually exceeded them in practice.

So that is one example. Another one might be the parties breaking it might be just simply contractual parties, so if you have said in your contract you can deliver this piece of work and whilst you are operating on site all of the plant and machinery will not emit x amount of carbon, if you emit more than that and the employer identifies that and somehow suffers damage or somehow determines that this could be a breach of contract they could use against you in the future for other areas that they want to deal with in the contract, they may come after you for that.

Imran: OK. So I mean I guess, primarily looking at it from an outside observer, the key thing is a reputational damage right for …

Peter: Very much on the face of it.

Imran: Adjusting your undertakings to comply with climate change regulation and any kind of contractual requirements that say you are going to meet certain thresholds or not busting thresholds around carbon emissions.

Peter: And on stage that is very much the focus. It is more reputational than anything else really.

Imran: And is it a big area you are seeing a lot of activity in?

Peter: There is a lot of interest in what it actually means. Whether it is relevant to a lot of our clients is not a question but it is an issue that has arisen that will need to be addressed at some point in the future especially some of the large public companies where shareholders might want to bring action as well.

So another instance could be some shareholders might bring action against a large company that they are a shareholder in for breaching these obligations which they consider quite important.

So there is a lot of avenue there for future disputes. It is whether they are going to be major and the primary focus of these companies, that is the question.

Imran: Which sectors are you seeing this activity in, is it mainly construction or is it banking.

Peter: Across the board, across the board, yes, it is not limited, it is actually not as much in construction as it is in other sectors. So energy is a big sector that it is in. Just corporate governance generally for many companies where they might say they are doing something they are not. So it is very much a common theme across the board.

Imran: And are there any particular steps that you would advise construction companies to think about in preparation for potential disputes around climate change issues that arise?

Peter: One thing we have been advising our clients in the region is first of all on understanding the local regulations with respect to this. So here in the Middle East there are not that many but in other jurisdictions such as the UK and Australia and the US and Europe there are a number of regulations now that dictate how certain construction projects should continue, should actually operate. What laws and what regulations will apply, whether there are any limits to carbon, whether there are offsets that need to be applied. There are a lot of regulations now that need to be considered in the construction world.

From a client perspective dealing with this is one thing, due diligence just understanding what the, what the new area of law kind of means to them and secondly a lot of our, especially contractors, are looking for innovative ways to kind of differentiate themselves from their competition. So what they might be offering is certain incentives or certain ESG related provisions in their contracts that might stand out as something different, something you need that they can offer and that might be more attractive to the employer in wanting to actually accept them.

So something to consider is whilst these are very commercially quite lucrative and they could mean that you win the project over someone else, you also need to make sure you can actually achieve these targets you have put in your contract or your bid. So that is something that our clients look at now.

Imran: So they need to make sure they are not overly onerous and

Peter: Overly promising.

Imran: Yes exactly. Ok sounds like sound advice.

We are going to move on now and another hot topic which is, not just to the legal sector but all sectors I guess, is artificial intelligence. Can you give us a brief overview of how AI is being used in the arbitration space?

Peter: So I think AI has actually been quite a common theme in the arbitration space for a while now. Just when you look at how we use tech in the conduct of arbitrations, there has always been an element of, well in the last ten years at least, of document management is one of the key parts of an arbitration so compiling the evidence, putting the evidence together, putting together a database of documentation and then being able to search that documentation for words, for certain themes, that kind of thing. We have always had an element there where we can use technology AI to help us in those document review searches so we put in some key words or the computer will tell us which key words are the most commonly used throughout the documentation and we would utilise that and we would try and bring down the documents. So that is something we have been doing for many years now when it comes to arbitration.

The way AI has developed in the last few years is that now it is able to go further than what it used to be. So it used to simply say here are the key words you should consider, here is what we have identified, here is how many documents there are. Now you can find different themes, they can start taking certain paragraphs, certain sentences, matching them up, finding them links between documents, ordering documents for you automatically, that kind of thing. So there is a lot more, a lot more computer controlled intelligence in the way that the documents are sorted. Whether it is, the question is now whether it is actually correct and whether it is accurate or whether the computer might be taking the documents and putting them in the order they think they should go in but they are not actually supposed to go in that order for instance, from a chronology perspective.

Imran: I suppose the thing is that is the systems technological assistance when it comes to the process of arbitration and that historically you have always had legal tech that assists with management, assists with compiling, you know sets of evidence that suits a particular subject matter and you can just put it into the database and say give me all the documents that relate to the liquidators damages claim for this particular part of our, you know, statement of claim.

But what about going next step or possibly further two steps forward and getting AI to think about how you formulate arbitration strategy as a claimant or as a defendant or even as an arbitrator. What, are there, has that happened, are there rules around it, how do you control it?

Peter: So from what I'm aware, there are no rules around it. I haven'tseen in practice yet any circumstances where strategy is determined by AI in that sense because a lot of it is very much subjective and you need to work through it as you go on the actual arbitration.

One of the things that AI is doing which is useful but also quite dangerous is there have been circumstances where judgments or awards issued in an arbitration have had plagiarised other awards or other judgments so there is a risk there that you have got AI taking, searching through the web, finding publicly available judgments awards and preparing certain elements of an award for someone to issue, they make take the best parts of those other awards and plagiarise them and so plagiarism has become a red flag in the AI world when it comes to court judgments or arbitration using AI because you never really know where the source of that information or where the source of that judgment has come from.

Imran: So that has crept into the arbitration space when it comes to formulating …

Peter: Potentially, like of course …

Imran: Oh it has not happened yet?

Peter: I do know of one circumstance where it has been alleged to have happened and it is something that is very difficult to prove but there are risks there that certain counsel, arbitrators may rely on artificial intelligence too heavily and it may influence their judgement or their decisions.

Imran: OK. What are the other risks that you can identify around incorporating AI into arbitration?

Peter: I think one of the key themes is laziness. So whilst AI is very important and very useful if used correctly it can also make people very lazy because you can simply type in to ChatGPT for instance and say here is my argument against me, come up with a response and so there is a risk there that there will not be sound legal reasoning, there won't be proper analysis. A lot of lawyers under pressure might rely on this as a shortcut and so I do not see AI as the solution to all of our problems. I see it as a tool that we may be able to apply and use in the future but only if used correctly and if we understand how it should be used rather than just using it for everything.

Imran: I think it is the risks that are prevalent with the broader use of AI anyway. For example hallucinations AI tools which start to make things up, that do not have any basis in reality because of the inputs that you have put, that that particular tool is using and if you become too heavily reliant on it then you are going to be churning out nonsense and in the context of arbitration proceedings which usually are quite big in nature, government to government or investment related, when hundreds of thousands if not millions of dollars are spent on not just the lawyers but also the whole infrastructure around an arbitration dispute. The last thing you want is shortcuts being employed because you think that AI can do a better job than the lawyer so it is a fair point, it is a fair risk and I guess ultimately it is one of those things that you know to what extent can you abdicate or delegate the responsibility of judgement because in a sense what you could say is you could do away with the arbitrators completely and just say look here is my pleading, here are my pleadings as a claimant and here are my pleadings as defendant, put it into an AI tool and say what do you think is a fair result. And given the risks that we have already talked about, come up with something that is wholly unfair and wholly illegal. Right so …

Peter: One final thing to add on that is arbitration is known as being attractive to many clients because it is confidential but in order to make AI work properly, you need to import a significant amount of data and upload that to the AI machine to kind of process that data and come up with something and so there is a risk there that the more information you put in which is meant to be confidential, that could potentially be housed on servers that are not secure, that are not going to keep that information confidential, that might be distributed, it might be accessible, it might be hackable, there is a lot of risk there that by using these AI tools you are exposing your client to a breach of confidentiality essentially in the existence of the arbitration but also the subject of the arbitration.

Just be careful, you need to be aware of them.

Imran: Yes there is definitely a lot of confidentiality risks. I guess the question now becomes in terms of next steps around AI and its use in arbitration is making sure you have got a robust set of regulations that ensure that it is not used in a manner that is going to spiral out of control in the context of a particular dispute. But while at the same time you have got to be cognisant of you know existing rules for institutions like the LCIA and the ICC that have got fairly well established rules around conducting arbitration proceedings.

But seems to me that at the moment it is just an enhanced version, an enhanced tool for being able to make the arbitration process much more efficient for all parties, whether that is the claimant, the defendant or the arbitrator sitting in the arbitration.

OK, thanks for that Peter. We will move on now to discuss third party funding in arbitration. Can you give us an overview of what that means?

Peter: So third party funding is something that is quite interesting. I myself have not run an arbitration that has been funded yet, I have had many instances where we have been, where we are short funding and either have not been able to obtain funding for a particular arbitration or the funder has pulled out or the matter settled. But what funding actually is, is it is using, so the client might have a claim or might be respondent in arbitration but they do not have the funds to be able to pursue their claim or defend a claim against them.

So what a third party funder will do is they will analyse the strength of the position, they will pay a small amount of money to get some advice on the strengths and weaknesses of the position and then they will determine whether they are going to offer funding, essentially like a bank would do, to cover the cost of the arbitration on the basis that they will receive a cut of whatever determination is made, whatever award is rendered in the future so it could be a percentage of that award, to go back to the funder before it goes to the actual client itself.

Imran: How does that work if you are a defendant then because in the sense you are not claiming right you are defending against so what would be the incentive for a third party funding that funder in that context?

Peter: They would not unless it is a counterclaim. So in most construction arbitrations there will be counterclaims made by the respondent in every circumstances because they will likely be claims on both sides and that is the situation where you will have the funder look at the counterclaim and the strength of that counterclaim as opposed to the strength of the claim against the defendant.

Imran: OK, that makes sense. What would you identify as the main advantages and risks going down this track if you.

Peter: Well the advantage of course is if you do not have the funding if you are struggling but say you have got a claim for one hundred million dollars you actually cannot afford to pay the lawyers to run an arbitration to recover that cost if you can you either leave it on the table and that is a right off of one hundred million dollars or if you get funding back you can potentially pursue that claim, recover some of that money, of course pay a percentage to the funder but you still end up with more than you had at the beginning so there is that.

Imran: OK so would you say that there is a big upswing in this kind of business for a prospective of third party funders.

Peter: From what I have found personally is that they tend to be more attracted to claims where the issues in dispute are quite narrow so in an arbitration for instance where the parties are fighting over the interpretation of provisions of a contract, very discrete points of law that you can easily assess and determine well the likelihood of going one way or the other is X, Y or Z and there is a 70% chance here, or a 30% chance here of winning or losing. Funders tend to be attracted to that because it gives them a bit of certainty as to how they kind of assess the risk and then fund as opposed to a construction arbitration where there may be twenty variations, twenty claims for defective works, a delay claim and various other outstanding payments have not been made. When it gets complex like that, it is very difficult for funders to kind of feel comfortable to jump on board because it is very difficult to assess the likelihood of recovery for any of those individual items.

Imran: I guess it is mainly private equity houses that have in-house legal teams that assess the credibility of a claim, or a defence or a counterclaim, that would look at this and analyse, like you say, the percentage chance of success before they, you know, holding out for cash for this.

Peter: Yes, and there are lots of funders out there. There are new ones all the time. They are definitely making a good mark on the industry and they are getting some good work and they are growing. So, it is an industry that is growing. It is an industry that is active. It is just one of those industries where it serves a purpose. It does not suit every arbitration but it suits some arbitrations. It does not suit every client but it suits some clients.

Imran: And typically, is it only actually when the money comes in that the funders are paid? So it is not like you might be successful by obtaining an award in your favour but it may still take another six, twelve, eighteen months before you actually achieve enforcement.

Peter: Enforcement risk is another criteria that they will look at before they agree the funds. So that is another issue that a lot of arbitrations may have a very black and white case but if the enforcement options are very slim, then the funder is unlikely to pursue it.

Imran: Right, and is that an issue that is more acute in the region, in the Gulf?

Peter: Well I guess that brings us to our next topic but yes, it is. And there are certain regions where enforcement has traditionally been an issue. The Gulf is getting better. It used to be a lot worse, that is a positive. I think the courts are much more educated in arbitration now and enforcement and they are much more aware of arbitration as operating in the region. They know there are new arbitration laws now in Saudi, in Qatar, in UAE which never existed before so it is definitely progressing and it is developing, which is very positive for enforcement and the landscape. It has been a traditionally difficult area, but I think as time goes on it is getting better and better.

Imran: Yes, I think historically there as an aversion particularly in Saudi to government entities engaging in arbitration following the famous Saudi Aramco government of Saudi, the American oil company and government of Saudi arbitration that kind of did not really do any favours for that arbitration process in the eyes of the region of Saudi in particular. But you are right, absolutely, I think as ADR and non-court dispute resolution becomes much more prevalent globally, not just here, there needs to be and there is becoming a much more focus on ways in which you can bring comfort to claimants and the whole arbitration process ultimately by making sure that enforcement at right at the end is there because otherwise it just becomes a bit of a pyrrhic victory if you have got a judgment that you cannot effectively monetise right.

Peter: But even on that point, so as developed and as the courts are evolving that is very positive and there are more instances now of courts enforcing arbitral awards in the region but then the issue we face after that fact is are there any assets in the region where you are trying to enforce as well. So that is another consideration that the funders will have but also for our clients that we will look at to our clients before we commence an arbitration. Who are we commencing the arbitration against? Do they have any assets and can those assets be recovered? Because it is all well and good to go to a local court and get an award ratified for enforcement but if there are no assets to recover against, it is all a bit pointless.

Imran: Okay, are there any other challenges that you have come across other than asset identification against an audit.

Peter: I think once of things that is a theme in the Middle East which is still a theme in the contracts we see, is poorly drafted arbitration provisions contracts in clauses. So, it is very difficult to draft an arbitration condition or a clause in the contract for arbitration or courts that is perfect and so there is also a lot of elements and themes in there that confuse a lot of lawyers, let alone clients. So it is an art form and is difficult but done right it can save you a lot of problems down the line especially when it comes to enforcement but also jurisdiction for a dispute. So one thing we are looking at with clients all the time now, and I am looking at this daily, is we look at draft contracts where they have put together a provision for a dispute resolution and the key principle is keep it simple and keep the language very clear and precise because the courts in this region, as soon as they see ambiguity or contradictions in the provision, they will seek to take jurisdiction because it was not clear in the language drafted in the contract. So the key things, some of the things we are seeing for instance, is we see clients say this dispute shall be resolved fully and finally in the UAE courts of the DIFC and you and I know that that does not actually exist as a system. There are the no-UAE courts in the DIFC. There is the DIFC courts in the DIFC and there is the UAE courts in the UAE. So in those circumstances, if I took that provision and showed it to a UAE court, they would say that this does not make any sense so therefore we are taking jurisdiction where it might have been the intention of the parties that they should end up in the DIFC course and not the UAE courts but because they did not draft their provision properly, or they did not clarify clearly stating in a language of the courts, it is being taken to the UAE courts and vice versa. So, there is a lot to be done there. Arbitration especially, a lot of people do not understand the difference between seat, between the place of the arbitration. The fact that you need to specify the language. Specify the number of arbitrators. Specify the rules that the arbitration should be governed by. Specify the governing law of the contract and the governing law of the arbitration. So, there are a lot of elements there that are very, very important from an arbitration perspective which do not come into mind when you are drafting the contract because when you are drafting the contract the last thing you want to think about is a dispute.

Imran: Okay, that is helpful. Are you finding that clients are becoming much more comfortable with having provisions that refer disputes to regional arbitration if that is in Saudi, the UAE, Bahrain even Qatar? Are clients, there was a reticence previously, a lot more due diligence around what the implications of that would be if you were to include within your agreement a reference to arbitration governed by a regional law where the arbitration is held in a regional jurisdiction. There may be international rules that apply to the arbitration but is there much more acceptance, if you like, of that approach in agreements?

Peter: Yes, I feel there is. There is a lot more acceptance of arbitration as the primary form now,especially in construction. So the majority of construction contracts I see are all arbitration provisions now whereas previously, say ten years ago, there were a lot of UAE court provisions. We are also seeing some contracts that include DIFC courts and ADGM courts. So they are becoming more common as well. I think the key factor that clients consider is really the value. So when it comes to a high value dispute where there will be high legal fees and the sums in dispute are quick significant, that is where arbitration really plays a role and is the ideal forum, but when they are low value disputes for instance, under ten million dollars or ten million dirham depending on the size of the company, some clients would prefer to focus on the court system which is less expensive but also achieves a similar result and that is where the DIFC courts and ADGM courts have come in and taken that kind of work.

Imran: Okay. Again coming to the back end of a dispute, how receptive or cooperative have the local courts been in honouring foreign judgment or local judgments for that matter as a result of an arbitration proceedings?

Peter: So it is very fluid here in the UAE, so some years it is very positive. Some years it goes backwards. It seems to be on a trend towards the positive again in the UAE where there is a lot more understanding between the courts, a lot more cooperation between the courts. So, the UAE courts and the DIFC courts have a lot more connection and a lot more communication as to what their role is and how they should collaborate. There is a lot more regulation around that now and in theory everything should work pretty smoothly when it comes to enforcing DIFC court judgments onshore and in the UAE courts as well as arbitration awards in the UAE courts and the new arbitration in the UAE is made a lot easier to enforce arbitral awards both foreign and domestic here in the UAE as well. Qatar to some extent is similar but not as progressed as UAE and then Saudi is just the beginning of that process. But I think given what we have seen in the UAE over the last ten years, I see no reason why the other jurisdictions in the region will not achieve the same level of transparency and collaboration as they have in the UAE in just a matter of time, I think.

Imran: Are you finding that clients once they, for example, accept that they are on the wrong side or an award that has not necessarily gone their way, are they willing to put their hands up and say okay right we have got an award against us for twenty-five million dollars or twenty-five million dirhams or riyals, we will pay up? Or do they dig their heels in until you have to really thrash it out of them?

Peter: I think it depends on the client. I have seen everything. There are some clients who will accept it and say yes, let us move on, next but there are other clients who will fight to the death and they will try every argument they can make. They will try to resist enforcement. They will challenge the arbitration award. They will challenge the arbitrators. They will throw every argument they can to stop enforcement.

Imran: There is no consistent trend as such. I think in other jurisdictions, Western jurisdictions in particular, there is an acceptance that ultimately if I drag this out, I still will have to pay it. There is an award against me. Assuming that there is no successful appeal or a setting aside of the award or any of that stuff, they can take the view that well look, okay, let us just settle it and draw a line under it. Whereas if you know that it can be drawn out for eighteen months, two years, three years until you have to actually have to stump up the cash or whatever the judgment says, or the award says, then you might take view and say well look we may not even get there in the end and it has been an expensive process. So from my experience of dealing with dispute lawyers there is this element of well let us just see how far we can take this because we know ultimately it is going to take a lot longer that it would take, for example, in London or Paris or New York right?

Peter: Yes, and I think that is the problem with the regions here in the sense that historically because there were those options prior to the arbitration law being in place prior to the UAE courts fully understanding arbitration, in the past there was a lot of that so it was basically drawn out as long and as difficult as possible to prevent enforcement in every way possible. It is still an option to fight and to throw as many arguments as you can at the courts. From what I understand the courts are less likely to receive such kind of arguments now and the arbitration law makes it very clear what type of arguments are legitimate and what are not and what may be considering and what might not. So there is a lot less a party can do to resist enforcement now under the new laws but there is still a lot of avenues they can take to try to make it difficult. So, it is one of those developing things. It is always evolving here and until it gets to the point where we have got in the UK for instance or Paris or Australia where essentially you cannot appeal an arbitral award save for some very specific unique circumstances which are much more narrow than the ones that exist here in the region right now, then there will always be those lawyers and those parties and clients that will argue as long as they possibly can to resist enforcement. But is up to the courts and the parties to kind of address that and demonstrate that certain arguments or certain conduct will not be accepted.

Imran: Well it looks like and sounds like things are heading in the right direction, accepting of the way in which arbitration is practiced, is developing in the region. Peter, thank you very much for your insights. It has been really educational for me and I look forward to you taking the practice forward with Gowling WLG.

Peter: Thank you. It was great being here.

Imran: Pleasure. Thank you very much.

Peter: Thanks.

END OF TRANSCRIPT