The desert emirate of Dubai hit recent headlines as its state-controlled monolith, Dubai World, made the startling admission that it was seeking a six-month “standstill“ on its debt repayments.

A bailout from Abu Dhabi may have helped calm fears but others remain wary about doing business in Dubai. Already there are reports of construction companies relocating to Abu Dhabi and old complaints about a lack of corporate transparency have resurfaced.

It's important in all this to remember that the UAE remains a relatively new nation and its laws and various legal systems are still evolving. Overseas companies in Dubai would be prudent to take the same precautions as they would when operating in an unfamiliar territory. That means ensuring they obtain an understanding of the legal framework, carrying out due diligence, and identifying and mitigating any risks down to a commercially acceptable level.

The pace of legislative reform will be stepped-up in 2010

The UAE is a federation consisting of seven emirates with laws at federal and emirate levels. As these become the object of greater scrutiny, expect to see fresh legislation pushed through this year in order to restore international confidence in the country's structures.

(i) Insolvency

Some commentators have accused federal laws for commercial insolvency of being slow, expensive and untested. The regime is nowhere near as bad as some have made out, although the position regarding personal bankruptcies is in real need of remedy.

One concern about Dubai World was that, as a company formed by decree, it fell outside the coverage of the federal insolvency laws. Dubai quickly passed a law which mean the company will be governed by a form of the insolvency law which applies to Dubai's main free trade zone, the Dubai International Financial Centre (DIFC). This was likely done to give greater confidence to western creditors. DIFC Law No. 3 of 2009 was heavily based on the more familiar UK system and a binding transcription of the law is widely available in English (the DIFC's official language).

Although this does not necessarily mean that any new federal insolvency law will be based on the DIFC's, it is difficult to conceive that such precedent would be totally ignored.

(ii) Arbitration

The lack of an adequate arbitration law has come in for criticism. An arbitration award obtained in the UAE may be overturned in the local courts. Obviously, this leads to uncertainty for those involved in any arbitration proceedings. However, separate laws governing the DIFC mean any arbitration awards obtained in that free zone will be upheld in the Dubai courts. Since it is now possible for parties involved in matters with no connection with the DIFC to specify it as the seat of arbitration, expect efforts on a new federal arbitration law to be renewed not only to help restore confidence but to prevent work drifting away from the UAE's more established arbitration centres.

(iii) Competition law, foreign investment and real estate

While a cooling of the world economy may have placed demand for reform on the backburner, in the medium to long term new laws remain necessary to foster foreign investment as the UAE economy matures. At present, outside of the free trade zones, non-Gulf Cooperation Council nationals or entities cannot own more than 49% of any limited liability company registered in the UAE. This is widely expected to change with revisions due to the Companies Law.

Property law reform may also slow as the heat is taken out of Dubai's property market. Abu Dhabi should press ahead with Estidama, a set of voluntary design principles aimed at promoting sustainability.

On the other hand, plans to introduce a form of sales tax in 2010 are likely to be delayed.

Abu Dhabi comes to the fore

A few weeks ago Dubai marked the opening of the world's tallest building with a spectacular fireworks display. But is the party now over for the emirate?

2010 should be a quieter year for Dubai for new projects although it has recently pledged to complete ongoing construction. Others are assured to progress such as work on a new airport. On the other hand, the immediate prospects of certain projects such as Dubailand entertainment resort and the Trump International Hotel look less positive.

In time, Dubai should recover. Port Jebel Ali remains a large income generator for the emirate. Dubai is also attractive as a base for overseas companies in the Middle East. Excoriated by some for having modernised too rapidly, Dubai multiculturalism appeals to many expatriate professionals and it enjoys excellent transport links with the rest of the MENA region.

The truth behind the number of construction companies decamping down the E11 highway to Abu Dhabi is mostly to do with where the work has shifted as opposed to any intention to limit exposure to Dubai. The laws and company structures are, after all, not dissimilar between the two emirates.

With its large oil and gas wealth, Abu Dhabi plans to develop the emirate to remove its dependence on fossil fuel resources by 2030. Work is currently in progress on Saadiyat Island (a proposed luxury tourism and culture resort), Yas Island - already home to an F1 racing circuit - and on a zero carbon city.

As a note of caution, 2010 may be a waiting game when it comes to new construction projects in Abu Dhabi. In an economic downturn, there is a temptation for the cash-rich to wait until the market has reached the bottom to maximise value. Some have forecast that construction costs may continue their downward trend.

Whatever passes, it looks like it will be an interesting year for the UAE.

*With apologies to Arthur C. Clarke.

Francis Ho is a Senior Associate at international law firm King & Spalding LLP. He can be contacted at fho@kslaw.com.

On 18 February 2010, international law firm King & Spalding is hosting a conference on major energy and infrastructure projects in the Middle East at the Hilton Abu Dhabi Hotel in Abu Dhabi, UAE. This full-day conference is suitable for those involved in energy, construction and engineering projects in the region.

For more information on Energy and Infrastructure Projects in the Middle East Conference: Legal and Commercial Issues, please visit www.kslaw.com/globaltransactionsconference or email eventsandtraining@kslaw.com.