Gide Loyrette Nouel opened its Dubai and Abu Dhabi offices in March 2009 to a fanfare. Gide observed at the time: “The simultaneous opening of [the] offices further strengthens the firm’s expansive network in the MENA region.” The theory was sound but, just 18 months later, Gide has pulled out of Abu Dhabi, Dubai and also Riyadh (where it had been for over 20 years). This not only ends its presence in the UAE and Saudi Arabia but, significantly, made it the first internationally-recognised firm to withdraw from the region completely.

“We took the decision to open in the Middle East before the financial crisis,” remarks Gide’s senior partner Pierre Raoul-Duval. “The original idea was to follow our French clients and French investments into the region, with particularly focus on the big projects, financial and construction matters. By the time we finally opened it was early 2009 and, with the crisis in full swing, things were difficult.”

Middle East promise

Gide’s projects practice was central to the launch strategy. Gide had clients including Oman Wastewater Services Company, the IFC and the Government of Qatar. The fledgling PPP sector in the region was also highlighted; Gide was counsel to a bidding consortium for a PPP for the King Abdullah Economic City; acted for the World Bank and the Government of Kuwait on the drafting of local PPP laws; and advised the IFC and the Government of Egypt for the concession of Cairo-Alexandria Freeway.

“The strategy was to get a presence on the ground and then develop our practice teams,” explains says Raoul-Duval. “After 18 months, I am not sure we could ever achieve that goal and the investment needed would not be justified.”

Gide is not the only firm to have experienced problems. DLA Piper, which has six offices in the Gulf, had a troubled 2009 when local clients put deals on ice. Middle East fee income was reported to be down 40% last year and led to cutbacks (some 45 staff were affected). The slowdown in the region was attributed to the drop of in average profits per equity partner; down from £645,000 to £527,000.

So are these the first signs that the Middle East is over-lawyered and on the verge of a retrenchment?  The influx of law firms (see table for 2010 entrants) has created numerous challenges. The increased number of competitors may not be a concern in the boom times but, when deals and projects are sluggish, it can become a hindrance as clients make a “flight to quality”.

“In the Emirates and, in particular, in Dubai, it is fair to say that the preference was to go to major UK or US firms rather than a firm like Gide. This does not mean there was not any work, just not enough work for us to operate at a profit so we opted to close.” says Raoul-Duval

In the energy and infrastructure markets, the abundance of legal practices and a top-heavy projects portfolio (historically the Gulf has had a high-value rather than high-volume model) means that a group of international firms has become a dominant force.  Because most projects involve international developers and banks, the number of firms that can offer a cross-border, global perspective on contracts and financings is limited.

“If we have a big energy project in the Middle East and we need outside counsel our preference would clearly be a law firm with an international network and a presence in the region,” states in-house counsel at a project sponsor. “There are some decent local firms but there have little understanding of the markets or the global issues. There just is not the depth or breadth of practice, particularly outside domestic markets like the UAE.”

This rings true for the financings too. While there is often a local involvement, the preference has been for international banks to arrange project financings. This is partly down to the perception that they can offer more generous terms but, from the legal perspective, the debt itself will be financed under English or Islamic-compliant law. Once again, it is the top firms – like Allen & Overy, Norton Rose, Clifford Chance, White & Case, Millbank Tweed Hadley & McCloy and Linklaters – that have the strongest capacity.

“Most of the big project financings will be done under English law, which puts the UK and US firms with English law capability in a strong position,” remarks Robin Abraham, a partner in Clifford Chance’s Dubai office. “I do not think that has changed much over the years and it is very hard for new entrants to crack the projects sector in the Middle East. It is important to have something tangible to start with, for example, some of the newer US law firms leverage off their global relationships with sponsors that are active in the region.”

Ever decreasing circles

The large amount of law firms competing for a dwindling number of deals in the harsher economic environment is putting pressure on fees, which are lower than during the peak years. According to Francois Duquette, the general counsel-interim at UAE energy company TAQA and also a partner in Allen & Overy’s Abu Dhabi branch: "Generally, we feel that there is now more competition on fees. But blue chip clients continue to favour quality over cost.The Middle East was certainly over-lawyered in recent months and probably still is, but we are getting back to a more sustainable level now."

A law firm must offer the highest-level of quality, an international platform and be flexible on pricing. The premium projects, which often run into billions of dollars and require increasingly complex, multi-faceted contractual and financing agreements, tend to go to a small pool of credible options that can match the criteria.

"International law firms now have more realistic expectations regarding the Middle East market. This is still a key region for a number of firms like A&O and we are continuing to invest in people, resources and client development. There is no doubt that many firms, especially newcomers to the market, have scaled back their presence and ambitions for the region. It's possible we will see other firms exit the region in 2011 or significantly reduce their presence," adds Duquette.

There has been activity in the last three years but sponsors have often been financing from their own balance sheets and some projects have taken a long time to progress. As such, it is not a lack of projects per se; just the instructions are hard to secure. While the figures banded around for Gulf projects are a far cry from the trillions of dollars suggested in the middle 2000s, with the Middle East market project finance market estimated to be worth between $20 billion and $70 billion this year, there is still optimism, which explains the continuing interest of firms.

 “I sense that things have started to improve rapidly over the last 12 months,” says  Abraham. “Clifford Chance, for instance, has several active projects on the go in the region and we are expecting projects to be a busy area for us in 2011. There remains a huge infrastructure need in the region.”

Nevertheless, law firms now have to look beyond project finance in the Gulf. The requirement is to shift from a projects and construction focus and roll out wider international commercial support. The economic slowdown, and the logjam in projects, is clearly impacting on some more than others. The real test for law firms is to ride out the recession and take advantage of the opportunities outside of the projects and real estate sectors.

Table: Announced law firm Middle East offices in 2010