What Lawyers Need to Know About Doing Business in the Middle East

The Middle East is increasingly emerging as one of the most attractive locations for foreign investors looking to deploy capital, as the region boasts some of the world’s fastest-growing economies driven by oil and gas reserves and diversification efforts, like the United Arab Emirates (UAE), Qatar, and Saudi Arabia.

However, legal systems in the region can be complex and opaque, making it difficult for foreign investors to navigate. There are numerous pitfalls under the laws of the Middle East, some of which may not be obvious to a Western lawyer and may have material consequences. Years ago, an Ohio-based agricultural chemical products company decided to expand to the Middle East and engaged a person in the UAE to register its products locally. The company proceeded to sign a simple one-page letter appointing that person as its “representative” in the UAE for that purpose. The representative immediately went to register this document as a “commercial agency agreement” with the local Ministry of Economy. Without realizing it, the company had just found itself locked in an exclusive agency relationship applying to its entire product line, for an indefinite period, and covering the entire territory of the UAE. However, that was only the beginning of the company’s troubles; due to UAE law being remarkably protective of registered local agents, the company could never settle on terminating the agency agreement on reasonable terms, and it remained hostage to an unwanted agent. As a result, the company has had virtually no sales in the UAE for many years. By signing a one-page letter, this company — now one of the market leaders in the U.S., generating several billions of U.S. dollars in annual revenue — was unable to serve the second-largest market in the Middle East. This situation could have been very easily avoided; all it would have taken was to add a one-line sentence in the appointment letter stating that the letter did not constitute a commercial agency agreement.

This article discusses how choosing the right market entry strategy, understanding the cultural landscape, and being mindful of local legal nuances can help capture business opportunities in the Middle East while avoiding significant business setbacks.

Choosing the Right Market Entry Strategy

Market Research and Due Diligence

The amount of information publicly available on official trade registries is usually very limited, so independent market research and due diligence are vital for a successful entry into Middle Eastern markets. Evaluating potential partners and local stakeholders through due diligence can mitigate risks and facilitate a better understanding of the reputation and connections of local partners and commercial agents.

Joint Ventures and Strategic Alliances

Joint ventures and strategic alliances are popular structures to enter the region’s market. These partnerships offer several benefits, such as access to local market knowledge, distribution networks, and valuable business groups. However, they also come with challenges, such as alignment of business objectives, legal and operational complexities, and lengthy contractual negotiations. Important themes to consider in the region are the partnership structure, management control, ongoing funding requirements, and exit mechanisms.

Government Incentives and Free Zones

Several Middle Eastern countries entice foreign investors with incentives like subsidies and simplified administrative procedures. Free zones offer compelling advantages such as full foreign ownership, tax exemptions, and unrestricted profit repatriation. Being aware of these incentives and carefully selecting the ideal free zone can yield a significant competitive edge. The UAE alone has around 40 free zones, which all come with distinct laws and authorities, making the choice of free zones particularly challenging for foreign investors.

Understanding the Cultural Landscape

Importance of Relationships

In the Middle East, cultivating personal connections and trust is fundamental to business success. Establishing these relationships demands considerable time and effort, as it is often the case that family and tribal affiliations profoundly impact business decisions. Unlike the (often) impersonal attitude of Western commercial practice, forging strong personal bonds is essential for achieving successful ventures in the Middle Eastern market.

Business Etiquette

Communication often follows rigid protocols, with an emphasis on hierarchy. Addressing people by their titles and showing respect for their positions is generally important. Greetings and gestures also carry significant weight, but the appropriate use of such gestures can vary. A handshake is a common greeting in the region, but the use of the right hand is important. Placing the left hand on the heart while shaking hands will show extra respect to your counterparty. Additionally, respecting cultural norms, such as dressing modestly and behaving appropriately, is essential for successful interactions.

Negotiation Styles

Negotiations in the Middle East differ significantly from those in the West. Indirect communication is often preferred, and patience is highly valued. Negotiations tend to take longer, with a focus on building trust and mutual understanding rather than rushing to close deals. Hospitality is a key element, and lengthy discussions about personal matters prior to business talks are common and lay the groundwork for deeper business discussions.

Appreciating the Local Legal Nuances

Legal Systems in the Region

The legal landscape in the Middle East is a complex mix of common law, civil law, and Islamic law influences. Each country has its own legal environment; for instance, the UAE, Saudi Arabia, and Qatar each have civil law frameworks. However, these countries also offer free zones within their territory that constitute separate legal jurisdictions with their own common law-inspired legislation and court systems. Understanding these differences is crucial for an optimized business structuring and effective legal risk management.

Legal Entity Establishment

Selecting a suitable corporate structure is critical. Choices range from limited liability companies (LLCs) to joint stock companies (JSCs), branches, and free zone establishments, with each carrying its own distinct regulations and advantages. The registration procedures, costs, and requirements also vary considerably, while the involvement of local sponsors, partners, representatives, or commercial agents can introduce further complexities.

Contracts

Contracts in the Middle East require increased attention to governing law and jurisdiction clauses. Additionally, enforceability may vary. For example, while governing law clauses designating a foreign law are in theory enforceable, local courts in practice tend to disregard them and apply local laws. Formalities and language considerations can be critical, as contracts may necessitate translation into Arabic and scrutiny for cultural and legal appropriateness.

Compliance and Risk Management

Countries in the Middle East continue to be perceived as high-risk jurisdictions from a bribery, corruption, and money laundering perspective. Implementing robust compliance practices is essential to mitigate local risks effectively. Further, understanding the regional implications of U.S. trade controls and international sanctions is essential, as the region maintains relatively substantial trade relations with Russia, China, and Iran.

Be Proactive 

Navigating business in the Middle East demands awareness of the legal nuances, strategic market entry tactics, and a thorough grasp of the cultural dynamics. Collaborating with regional specialists and advisers and establishing a robust professional network can provide the necessary support and guidance. Seeking counsel from local legal experts is vital for navigating the various complexities and hurdles while maintaining compliance with local laws. By taking these proactive steps, businesses can mitigate risks and position themselves for success in this vibrant region.

Hasan Al-Musawi, Cambridge University L.L.M., is thanked for his valuable research on this topic.