Arbitration in the Middle East: Dubai Court of Cassation clarifies the distinction between jurisdiction and admissibility for the first time

In arbitration, distinguishing between jurisdiction and admissibility can be complex. A recent Dubai Court of Cassation ruling clarified that contractual pre-conditions affect admissibility, not jurisdiction. This distinction is crucial, impacting both arbitration proceedings and the reviewability of awards, and signals a more arbitration-friendly approach in the UAE.

 

Read the full article here.

Unification of Federal and Local Judicial Principles: key decisions relating to civil procedure and cheques

The Commission for the Unification of Federal and Local Judicial Principles (the “Commission”) recently issued a number of decisions aimed at harmonising certain “judicial principles”. Since the doctrine of stare decisis is not followed in the UAE, there have been instances of incongruities in the application of law by the UAE courts. The Commission was established under Federal Law 10 of 2019 (the “Federal Law”), recognising a need to avoid such inconsistencies.

 

In terms of Article 18 of the Federal Law, decisions of the Commission are binding on all on-shore courts of the UAE, including courts of emirates which are not part of the federal judicial system (Abu Dhabi, Dubai, and Ras Al Khaimah) – with the fail-safe that an inconsistency between a judgment and a “judicial principle” recognised by the Commission may constitute a ground for appeal of a judgment which otherwise would be final. Requests for unification of judicial principles can be submitted by the heads of supreme courts in the UAE, the federal public prosecutor, and local prosecutors.

 

The following are some of the key decisions issued by the Commission.

 

Scope of Article 667 of the Commercial Transactions Law (enabling direct execution proceedings for cheques dishonoured for insufficient funds) expanded to include cheques dishonoured due to account closure

 

  • In terms of Article 667 of Federal Decree Law 50 of 2022 (the “Commercial Transactions Law”), the bearer of a cheque which was dishonoured due to “unavailability” or “insufficiency” of funds is able to rely on the cheque as a writ of execution to file execution proceedings (as opposed to asserting a substantive claim) against the drawer of the cheque. This provision was introduced following the decriminalisation of the act of drawing a cheque without having a sufficient balance in the account to honour the cheque. Readers are reminded that not all acts concerning cheques were decriminalised.

 

  • The Commission has expanded the scope of Article 667 of the Commercial Transactions Law to include instances where a cheque is dishonoured due to an account being closed. Therefore, bearers of cheques which are dishonoured for this reason are now able to file execution proceedings directly against the drawer for the value of the cheque.

 

  • It should be noted that the act of closing an account prior to issuing a cheque or presenting it to the drawee for payment still constitutes an offence punishable by a term of imprisonment of up to two years. Therefore, until further clarification is provided, the prudent view is that this act has not been decriminalised.

 

Federal Supreme Court / Courts of Cassation power to reverse judgments extended to criminal matters

 

  • In terms of Article 190 of Federal Decree Law 42 of 2022 (the “Civil Procedure Law”), the Federal Supreme Court or Court of Cassation (as applicable), is empowered to ‘reverse’ final civil judgments issued by it, on its own volition or upon an application being made by the party against whom the judgment was issued, in any of the following circumstances:

 

– if the judgment contains a procedural error committed by the court or its auxiliary bodies and such error affected the outcome of its decision or judgment;

 

– if the decision or judgment is based on an abrogated law, and the application of the correct law would have materially altered the court’s judgment; or

 

– if the judgment is issued in violation of any judicial principles prescribed by the Commission, among others

 

  • The Commission has widened the ambit of Article 190 of the Civil Procedure Law to cover judgments issued by the Federal Supreme Court or Court of Cassation (as the case may be) in criminal cases.

 

Court of Appeal to decide on the substance of the claim if it declines to grant a payment order

 

  • Payment Orders are mechanisms that enable a creditor to obtain summary relief where, among others, there is a confirmed debt owed to it. Prior to the current decision of the Commission, a judgment on an application for a Payment Order could be appealed to the Court of First Instance (if the value of the claim is less than AED 50,000), or to the Court of Appeal (if the value of the claim exceeds AED 50,000). If the Court of Appeal found that a Payment Order should not be granted, and absent an appeal to the Court of Cassation (available only on issues of law and where the claim exceeds AED 500,000) the applicant was required to file ordinary proceedings anew to claim its debt.

 

  • Following the current decision of the Commission, if the Court of Appeal finds that a payment order should not have been granted, it must proceed to adjudicate the applicant’s claim against the counter-party as it would in ordinary proceedings.

 

  • While this is advantageous to a creditor in the sense it no longer has to incur the time and expense to file ordinary proceedings anew in the Court of First Instance, it also means that the parties lose one level of appeal, unless the value of the claim exceeds AED 500,000 (thus enabling an appeal to the Court of Cassation on an issue of law). ■

Dubai Court of Cassation Issues Directions on the Imprisonment of Judgement Debtors in the UAE

Article 319(1) of the UAE Civil Procedure Law authorises an execution judge to imprison a debtor who fails to satisfy a judgment debt, unless the debtor is able to prove that he is insolvent.

 

Although the text of Article 319(1) places the burden of proving insolvency on the judgment debtor, this appears to have been reversed following a decision of the General Assembly of the Dubai Court of Cassation issued in October 2023. A judgment creditor is now required to prove that the judgment debtor is solvent before an order of imprisonment may be issued under Article 319. In its decision, the Court of Cassation refers to and codifies the principle of Islamic Sharia’ which presumes the insolvency of a debtor.

 

However, the decision maintains that Article 319(2) provides that a plea of insolvency cannot be maintained in the following circumstances:

 

a) if the debtor deliberately smuggled or concealed their assets; or

 

b) if the debt is due in instalments that the debtor has defaulted on, or if the debt arises out of a guarantee given to the court on behalf of a different debtor, except where the debtor provides evidence of new circumstances which did not exist before and which have adversely affected his financial situation.

 

This poses a significant evidentiary burden on judgment creditors, who must now prove that (a) the judgment debtor is solvent, or (b) that one of the exclusions in Article 319(2) applies in order to obtain an order for imprisonment. It also remains to be seen whether this decision would disincentivise parties from invoking the processes set out in the UAE’s bankruptcy and insolvency legislation.

 

Orders issued by the court under Article 319(1) prior to this decision have been vacated. ■

Navigating the Jurisdiction: Key UAE Court Decisions from 2023 Shaping the Arbitration Landscape

The UAE’s arbitration landscape continues to evolve and, as 2023 draws to a close, we summarise some of the more significant judgments issued by the UAE on-shore Courts in relation to arbitration this year. While the trend of the judgments reinforces the ‘arbitration-friendly’ approach of the UAE Courts of late, 2023 has not been without its outlier cases.

 

1) It may no longer be possible to circumvent an arbitration agreement by joining third parties to court proceedings

 

A popular strategy deployed by parties wishing to bypass an arbitration agreement and invoke the jurisdiction of the UAE Courts (ordinarily a claimant) is to add parties who are not party to the arbitration agreement, as in cases which involve multiple defendants, a UAE court which has jurisdiction over one defendant has jurisdiction over all the defendants.

 

In Dubai Court of Cassation Case No. 1078/2023, the court upheld a Court of Appeal decision rejecting this strategy. In its judgment, the Dubai Court of Appeal laid down several clear principles:

 

  • while a claimant may add multiple defendants, and while a court which has jurisdiction over one defendant will have jurisdiction over all the defendants, there must be ‘real claims’ against each of the defendants;

 

  • what constitutes ‘real claims’ is a matter to be determined by the trial court based on the evidence and any applicable presumptions of law (in this case, the court found that the claimant’s cause of action was clearly a contractual one, and there were no ‘real claims’ against individuals who were not party to the contract); and

 

  • adding parties solely for the purpose of invoking the court’s jurisdiction is not permitted.

 

2) Amendments to contracts need not expressly refer to an arbitration clause in the initial contract

 

In the same case, the Dubai Court of Appeal (Case No. 911/2023) also held that an amendment to a contract which contains an arbitration does not need to expressly refer to the arbitration clause in the initial contract, provided that the amendment clearly forms part and parcel of the contract which contained the arbitration clause (i.e. as opposed to standard terms or a different contract containing an arbitration clause which is incorporated by reference). However, the prudent approach remains to replicate or clearly refer to the arbitration agreement between the parties in the initial contract.

 

3) An agreement to arbitrate in a contract will extend to subsequent contracts between the same parties, provided that (a) there is a sufficiently close factual connection, and (b) there is no subsequent agreement to resolve disputes in a different forum

 

In Dubai Court of Cassation Case No. 828/2023, the court considered an appeal relating to a construction dispute. The parties had entered into a contract containing an arbitration clause, however, the dispute between the parties arose pursuant to purchase orders between the parties issued subsequent to the initial contract. One of the parties contended as the purchase orders do not contain an arbitration clause, disputes arising in connection with the purchase orders must be determined by the courts.

 

The Court of Cassation rejected this argument. After an analysis of the documents, it was determined that the arbitration clause in the initial contract applied to the purchase orders. This decision was based on the close connection between the initial contract and the purchase orders, involving not only the parties but also the subject matter of the contract. Following the ‘accessory follows the principal’ principle, the Court of Cassation held that “based on the implicit will of the parties deduced from all previous elements, all disputes regarding subsequent contracts are subject to the arbitration clause”. The court also took into consideration the nature of contracts entered into in the construction industry, holding that “taking into account the technical nature of the construction industry, which makes it unlikely that the parties intended to limit arbitration to specific matters and resort to state courts in other matters, which may be technically related to the matters subject to arbitration given the single nature of the subject matter of those contracts”.

 

However, the court made it clear that had there been an agreement to refer disputes to a different forum in the purchase orders, such an agreement would prevail. Where the subsequent instrument is silent, there now appears to be a presumption that the agreement of the parties to arbitrate (or other such agreement as to forum) in an earlier related contract will prevail.

 

However, the prudent approach remains to replicate or clearly refer to the arbitration agreement between the parties in the initial contract.

 

4) An arbitration agreement may be assigned and is binding on the assignee, even if there is no agreement in writing by the assignee to be bound by the arbitration agreement

 

In March 2023, the Dubai Court of Cassation (Cassation No. 1603/2022) held that an agreement to arbitrate contained in an agreement can be assigned to a third party, even where the third party had not expressly agreed to arbitrate.

 

The dispute arose in the context of a reverse factoring agreement. The defendant purchased goods from a supplier and agreed to make payment within 120 days from the date of the invoice(s). The plaintiff made early payment of the invoices to the supplier on behalf of the defendant. As a result, the right to receive payments for the goods purchased by the defendant was assigned to the plaintiff and the defendant was duly notified of such assignment. The contract between the defendant and the supplier contained an agreement to arbitrate. However, there was no arbitration agreement between the plaintiff and the defendant. The point of dispute arises from the defendant’s position that as a result of the assignment of invoices to the plaintiff, the arbitration agreement has also been assigned.

 

The Dubai Court of Cassation held upon the assignment of the right to receive payment to the plaintiff, the arbitration agreement between the supplier and the defendant was also transferred to the plaintiff.

 

The rationale of the court was that the assignment does not create new rights, but merely transfers existing rights that were vested with another party. On this basis, the court held that the arbitration agreement shall also be deemed to be assigned unless the assignment agreement expressly states otherwise.

 

5) An indirect claimant may rely on an arbitration agreement entered into by the party on behalf of whom the indirect claim is being made

 

In a dispute involving a claim asserted by a subcontractor in the context of a construction dispute, the Abu Dhabi Court of Cassation held that the subcontractor (who was asserting an indirect claim pursuant to Articles 392 and 393 of the UAE Civil Code) could resort to arbitration under the contract between the main contractor and the employer. Articles 392 provides that “every obligee …may exercise, in the name of the obligor, all of the rights of that obligor, save those that relate particularly to his person or which are not capable of being attached”, and Article 393 provides that “the obligee shall be regarded as a proxy for his obligor in exercising his rights”.

 

The Abu Dhabi Court of Cassation, in interpreting and applying Articles 392 and 393, found that they extend to a right to resolve disputes through arbitration. Consequently, a party representing another’s rights, in the context of Articles 392 and 393, may resort to arbitration under the original contract between the debtor and the creditor.

 

6) The Dubai Court of Cassation recognized the distinction between jurisdiction and admissibility and held that a question of inadmissibility does not result in the annulment of an arbitral award

 

In its judgment in Cassation Case No. 1514 of 2022 issued in July 2023, the Dubai Court of Cassation for the first time drew a distinction between the concepts of jurisdiction and admissibility.

 

The underlying dispute between the parties arose from an International Federation of Consulting Engineers (FIDIC) construction contract. The respondent in the arbitration sought to set aside the arbitral award against it on the basis that the claimant had failed to comply with the conditions precedent stipulated in the contract prior to referring the dispute to arbitration.

 

In dismissing the Respondent’s appeal, the Dubai Court of Cassation held that pre-arbitral conditions precedent does not pertain to the question of jurisdiction or competence of arbitral tribunal, i.e., they are not determinative of whether arbitration is the proper forum to hear the dispute or not. Rather, they go to the question of admissibility, i.e., whether the claims raised can be heard at that point in time, or whether such claims have been referred for arbitration prematurely.

 

Significantly, the court addressed the consequences that may flow from a finding of inadmissibility. The court stated that where an issue of inadmissibility is correctly invoked, the most likely result is that the arbitration proceedings may be adjourned pending the fulfilment of the conditions precedent by the parties, though arbitration remains the proper forum to resolve the dispute (i.e. the tribunal remains vested with jurisdiction). This is a departure from previous cases where the courts held that the failure to follow pre-arbitral questions go to the issue of jurisdiction, and annulled awards on that basis.

 

7) Non-payment of advances on costs do not result in the exhaustion of an arbitration clause

 

The same judgment of the Court of Cassation is also significant as it held that the court does not become seized with jurisdiction over disputes that do not proceed to arbitration due to the parties’ failure to pay advances on costs. This represents a departure from previous cases where the court held that non-payment of arbitration fees results in the exhaustion of the arbitration clause.

 

This was reinforced in November 2023 by Decision No. 10/2023 of the Dubai Court of Cassation which directed that the previous principle of considering an arbitration agreement be exhausted if an arbitration does not commence/proceed due to the parties’ failure to pay advances on costs must no longer be followed.

 

8) Notwithstanding the DIAC 2022 Rules, specific authority to agree costs may still be required

 

It is a long-settled principle of UAE law that arbitral tribunals require express authority to award legal costs. This remains the case even following the enactment of the Federal Arbitration Law, which was expected to dispense with this requirement. Possibly in response to this, the Dubai International Arbitration Centre (DIAC) Rules of 2022 (Article 36) appeared to suggest that tribunals are empowered to award legal costs by including the “fees of the legal representative” within the costs of arbitration. The Federal Arbitration Law does not require tribunals to possess the express authority to award the costs of the arbitration.

 

However, the Dubai Court of Cassation, in a matter involving the ICC Rules (in which Article 38 make provision similar to Article 36 of the DIAC Rules), set aside the part of the award in which the tribunal awarded legal costs on the basis that “Article 38 of the International Chamber of Commerce Rules, which the arbitrator relied upon, did not explicitly empower the arbitral tribunal to decide on the legal fees of the parties’ legal representatives in the arbitration.”. On the face of it, this appears to be an incorrect finding by the court, as Article 38.1 of the ICC Rules expressly provides that the “costs of the arbitration shall include the fees and expenses of the arbitrators … and the reasonable legal and other costs incurred by the parties for the arbitration.

 

Given the similarity between the DIAC 2022 Rules and the ICC Rules, there now appears to be a question whether Article 36 of the DIAC 2022 Rules (of itself and without express agreement by the parties empowering the tribunal) is sufficient to empower a tribunal to award legal costs.

 

9) There is a risk that a finding of invalidity of a contract could extend to an arbitration clause in the contract, notwithstanding that the Federal Arbitration Law recognizes the separability of an arbitration clause.

 

In Court of Cassation No. 585/2023, the Dubai Court of Cassation held that a finding of invalidity of a contract extends to an arbitration clause contained in the same contract. The dispute arose in the context of a dispute between shareholders of a limited liability company established in the 1990’s. As required under law at the time, the majority shareholder was an Emirati national, and this was reflected in the company’s Articles of Association. However, at the same time, an addendum was executed to the Articles to provide that, among others, the Emirati national did not own any shares in the company.

 

The Emirati shareholder successfully asserted certain claims arising out of the addendum in an arbitration conducted under the DIAC Rules. The respondent sought to set aside the award, and the Court of Appeal set aside the award on public policy grounds as provided for in Article 53(2)(a) of the Federal Arbitration Law.

 

The Court of Appeal went on to hold that “the arbitration agreement as well as filing the arbitral proceedings on the basis of such invalid contract is against public policy” and, in doing so, appears to have linked the invalidity of the contract with the invalidity of the arbitration agreement. The judgment of the Court of Appeal was upheld by the Court of Cassation which found that a decision to invalidate a contract extends to all its terms including the arbitration clause.

 

This was a surprising outcome, given that the Federal Arbitration Law expressly recognizes the separability of an arbitration clause.

 

10) Parties choosing to resolve disputes through arbitration under the ICC Rules in the UAE may find the ADGM deemed to be the seat of arbitration.

 

Earlier this year, the Abu Dhabi courts ruled that they lacked supervisory jurisdiction over an arbitration conducted under the ICC Rules, even though the agreement stated that the seat would be in Abu Dhabi. However, the agreement did not specify whether the seat would be in the Abu Dhabi Global Market (ADGM) or on-shore Abu Dhabi. The Abu Dhabi Court of Cassation held that, because the parties chose the ICC Rules, and that because the ICC maintains a representative office in the ADGM, the ADGM should be taken to be the seat of arbitration, thereby vesting the ADGM Courts with jurisdiction to hear applications related to the arbitration. It is relevant to note that following this judgment, the ADGM Courts have accepted jurisdiction in matters arising out of arbitrations conducted under the ICC Rules and where the seat was specified to be Abu Dhabi.

 

A similar judgment was issued approximately two years ago by the Dubai Court of Cassation, in which it held that it had no jurisdiction over claims arising from a Dubai International Financial Centre (DIFC) and London Court of International Arbitration (LCIA) arbitration seated in Dubai and that as the DIFC-LCIA was a DIFC establishment, the DIFC Courts are the courts vested with jurisdiction. While this issue is no longer likely to arise as the DIFC-LCIA no longer exists, it highlights the need to specify the seat of arbitration with care, particularly in the Emirates of Abu Dhabi and Dubai, given that four jurisdictions exist within the two Emirates. ■

Amendment to the UAE Federal Labour Law

Article 54 of the Labour Law (Federal Decree-Law 20 of 2023 on the regulations of labour relations, as amended) dealing with employment disputes has been amended to give greater powers to the Ministry of Human Resource and Emiratisation (the Ministry). The amended provision shall come into effect from 1 January 2024.

 

Authority to issue a decision

 

Under the Labour Law, in case of an employment dispute, before filing a case before the Court of First Instance, the employer or the employee is required to file an application to the Ministry. The Ministry is required to examine the application and take appropriate actions it deems necessary to amicably settle the dispute between the parties.

 

In case the parties fail to amicably settle a dispute, while earlier the Ministry was required to refer the matter to the courts (i.e., the Court of First Instance), now the Ministry has been given powers to decide a dispute with a final decision:

 

i.  if the claim amount in the dispute is less than AED 50,000; or

 

ii. where a dispute relates to failure by either party to comply with an amicable settlement decision previously issued by the Ministry (irrespective of the claim amount).

 

The party in whose favour the Ministry has issued its decision can directly proceed with execution (a mechanism for enforcement of a decision) of the said decision as per the rules of execution under the UAE Civil Procedure Law.

 

The requirement to file an application to the Ministry is not applicable to free zone companies (employers) and its employees wherein an aggrieved party is required by the relevant free zone authority’s rules to first approach the free zone authority instead of the Ministry. Although a free zone employer/employee is still required to approach the Ministry in order to obtain a referral letter to the court (stating that the employee can file a case before the court), the Ministry does not look into the substance of the dispute and its role is just to issue the referral letter. It will be interesting to see if the applicability of these provisions will also be extended to apply to disputes between free zone companies (employers) and its employees.

 

Right to file the claim before the Court of Appeal

 

Within 15 working days from the date of notification of the Ministry’s decision, either party may file a case directly before the Court of Appeal (and not the Court of First Instance). The Court of Appeal shall set a date for hearing within three working days and issue its decision within 15 working days from the date of starting the proceedings before the Court of Appeal. The decision of the Court of Appeal shall be final.

 

If proceedings have commenced before the Court of Appeal, there will be a stay on the execution of the decision issued by the Ministry.

 

Failure to Amicably Settle a Dispute or Claim Amount of more than AED 50,000

 

If the parties fail to amicably settle a dispute (within the timeframe provided under the law) and if the claim amount in the dispute is more than AED 50,000, the Ministry shall refer the dispute to the competent court (i.e., the Court of First Instance) together with a memorandum which shall include a summary of the dispute, the arguments of the parties and the Ministry’s recommendation. Within three working days from the date of receipt of the application from the aggrieved party, the competent court is required to set a date for the hearing and promptly decide on the dispute.

 

These are welcome amendments to the Labour Law which will result in quick resolution of disputes where the claim amount is low and will reduce the workload of the UAE Court of First Instance. ■

DIFC Courts to oversee disputes in all free zones?

A survey published by the Dubai Statistics Center has called for input from the public in what appears to be research relating to the application of ‘Common Law’ in all free zones in Dubai. The survey is not about the use of ‘Common Law’ in a general sense. Instead, the Dubai government is focused on integrating DIFC laws and giving jurisdiction to the DIFC Courts for overseeing civil and commercial disputes within the free zones.

 

The DIFC

 

The DIFC is governed by its own body of laws with an independent judicial authority, the DIFC Courts. The DIFC Courts currently have jurisdiction to hear disputes in connection with an entity established in the DIFC, disputes which are connected to the DIFC or disputes in which the parties have agreed to the jurisdiction of the DIFC Courts.

 

The rules of procedure in the DIFC Courts largely follow the Civil Procedure Rules followed by the English courts. The DIFC Courts apply DIFC laws in disputes before it, unless there is an agreement to the contrary. DIFC laws are largely a codification of English common law. The DIFC Courts can also apply any other law agreed among the parties to the dispute, such as UAE law.

 

Under the current legal framework in Dubai, unless a free zone company agrees to resolve its dispute through arbitration or through the DIFC Courts, all disputes will have to be referred to the on-shore Dubai Courts. The on-shore Dubai Courts operate under a civil law system and apply UAE laws by default. Proceedings before the Dubai Courts are conducted exclusively in Arabic, whereas in the DIFC Courts they are conducted in English.

 

The Survey

 

The survey published by the Dubai Statistics Center appears to suggest that the Dubai government is considering two possible means by which the jurisdiction of the DIFC Courts and the laws of the DIFC may be extended to all free zones in Dubai: a hybrid system and a standalone system.

 

a) Hybrid System: DIFC Courts having jurisdiction with UAE laws as default

 

Under this framework, the DIFC Courts would be responsible for overseeing civil and commercial disputes within the free zone. UAE laws will be applicable by default to the dispute. However, for matters concerning litigation procedures and evidentiary rules, the DIFC laws will take precedence. This means that while disputes will be adjudicated by the DIFC Courts, the foundational laws of the UAE would influence and guide the decisions in court cases.

 

b) Standalone System: Extended jurisdiction of DIFC to selected free zones

 

In this setup, the entire legal framework of DIFC’s civil and commercial laws (excluding licensing regulations) would extend to the selected free zone. This would mean that companies in these zones will function entirely under DIFC laws and regulations (e.g. company law, bankruptcy law, employment law, etc.), with the DIFC Courts handling all respective disputes.

 

Outcomes

 

As noted above, if the Hybrid System is implemented, the DIFC Courts will have jurisdiction over any entity in any free zone in Dubai without the need for agreement among the disputing parties to submit to the jurisdiction of the DIFC Courts. However, the DIFC Courts will only apply UAE law (and not DIFC law) unless there is an agreement among the parties to apply a specific different law. In other words, the lex fori (the law of the Court) would be common law.

 

Under the Standalone System, the DIFC Courts will, in addition to having jurisdiction over disputes concerning other free zone entities, also apply DIFC Laws by default. In effect, this system will determine disputes under common law, through a common law process of court (lex fori and lex loci). It is unclear whether a non-DIFC free zone entity engaged in financial services will be subject to the supervision of the Dubai Financial Services Authority in the same manner that applies to DIFC entities. ■

Asymmetric jurisdiction agreements; DIFC Courts give guidance

Asymmetric jurisdiction clauses (or unilateral option clauses as they are also sometimes described) confer on one contracting party the option to bring proceedings in a court or forum of its choosing, while restricting the counterparty’s ability to bring claims to a single jurisdiction. Such clauses could provide, for example, that the party who enjoys the benefit of the provision may unilaterally opt for either arbitration or court litigation to bring a claim, or that its claims may be brought in any court of competent jurisdiction of its choice.

 

Asymmetrical clauses are commonly found in financing transactions (primarily for the benefit of lenders) and give lenders the discretion to initiate action in whichever jurisdiction best serves their interests. However, such clauses have to be carefully drafted and can be subject to challenge (particularly those that include asymmetrical options to arbitrate). Such clauses have in the past been held to be unenforceable in certain jurisdictions (e.g., France, Russia), usually on the grounds that they violate public policy.

 

Background

 

The DIFC Courts, in Lara Basem Musa Khoury v Mashreq Bank Psc [2022] DIFC CA 007 dealt with the question of whether Ms. Khoury could bring a claim against the Bank before the DIFC Court where the right to do so under their agreement was conferred only on the Bank. The relevant provision reads as follows:

 

“This Agreement shall be governed by, and be construed in accordance with, the laws of the Dubai International Financial Centre (‘DIFC’). The [Claimant] agrees, for the benefit of the Bank, that any legal action or proceedings arising out of or in connection with this Agreement against it or any of its assets may be brought in the relevant courts of the DIFC”.

 

“The [Claimant] irrevocably and unconditionally submits to the jurisdiction of the relevant courts of the DIFC. The submission to such Jurisdiction shall not (and shall not be construed so as to) limit the right of the Bank to take proceedings against the [Claimant] in the courts of any other competent jurisdiction…”.

 

It was Ms. Khoury’s contention that, in the absence of a provision dealing with claims that the customer may have against the bank, the forgoing clause should be interpreted such that she was entitled to bring proceedings against the Bank in the DIFC Courts. The Bank argued that the clause gave only the Bank the unilateral right to bring claims against Ms. Khoury in the DIFC Courts, and that the same right was not reciprocally available to Ms. Khoury.

 

The DIFC Court of First Instance ruled that Ms. Khoury had agreed that claims could be brought against her in the DIFC Courts, but that the Bank had made no such reciprocal agreement. As a result, Ms. Khoury would only be able to sue the Bank in the Courts of Dubai, where the Bank was registered and incorporated. Ms. Khoury appealed the ruling to the Court of Appeal.

 

The Appeal

 

The DIFC Court of Appeal, while noting that the asymmetry of the clause “makes for a degree of disquiet, serving to reflect the imbalance between the comparative market power of banks as contrasted with their customers”, went on to dismiss Ms. Khoury’s appeal. The Court rejected Ms. Khoury’s argument that the clause was an ‘opt-in’ clause that conferred jurisdiction on the DIFC Courts by virtue of Article 5(A)2[1] of the Judicial Authority Law because the agreement lacked a clear and specific provision by which Ms. Khoury could bring her claim before the DIFC Courts, holding that the clause was only for the benefit of the Bank.

 

The Court of Appeal specifically commented that asymmetrical clauses “are familiar as a matter of international banking practice and, in part at least, serve a legitimate commercial purpose” while citing with approval the English Court decision in AG v Pauline Shipping Ltd [2017] EWHC 161 (Comm), which noted that “[a]symmetric jurisdiction agreements are a long-established and practical feature of international financial documentation…”

 

Comment

 

Even though the Bank ultimately succeeded, the extensive debate in the Khoury case demonstrates that asymmetrical dispute resolution clauses can lend themselves to challenge and must be carefully drafted. It is to be noted that the Khoury case turned on the interpretation of the clause, rather than the enforceability of a unilateral option clause as a matter of principle. Ms. Khoury does not appear to have argued that an asymmetrical clause was repugnant per se. Nevertheless, it is clear that this case represents an affirmative acceptance of asymmetric dispute resolution contracts and the validity of such clauses by the Courts of the DIFC. The Courts of the ADGM had also previously adopted the common law approach and affirmed such clauses.[2]

 

It should be noted that, while the two common law courts in the UAE appear to have affirmatively accepted the enforceability of asymmetrical dispute resolution clauses, the position as to their enforceability in the UAE federal courts (or courts of Dubai outside of the DIFC) is far from certain. The civil law courts in the UAE will likely not be as open to enforcing such provisions, and could invoke principles of public policy, requirements of good faith and balance of rights such that a party seeking enforcement would have a higher threshold to meet. The enforcement of unilateral option clauses that confer on one party the exclusive right to opt for arbitration could be particularly problematic, given that the UAE Courts have consistently held that arbitration is an exceptional form of dispute resolution and that, in order to divest the Court from its ordinary jurisdiction, there must exist a clear and unambiguous agreement evidencing the joint intention of the contracting parties to resolve their disputes by arbitration. Whether a unilateral option clause would satisfy such requirement remains to be seen. ■

 

 

***

 

[1]Article 5(A)2 “The Court of First Instance may hear and determine any civil or commercial claims or actions where the parties agree in writing to file such claim or action with it whether before or after the dispute arises, provided that such agreement is made pursuant to specific, clear and express provisions.”

 

[2] A3 v B3 [2019] ADGM CFI 0004

 

Dubai Court of Appeal shuts down ‘guerilla tactics’ aimed at bypassing arbitration agreements

There are a number of reasons why parties who have agreed to arbitrate disputes (ordinarily by way of an arbitration clause in a contract) may later wish to litigate their dispute in the UAE courts. A common reason is the cost of arbitration, which can be quite significant compared to the cost of litigating in the UAE Courts. Further reasons may be that the party wishes to take advantage of the relative unpredictability of outcomes in the UAE Courts, which do not follow a system of binding precedent as understood in common law jurisdictions and, perhaps more importantly, do not award legal costs except in a token amount, thereby minimizing the cost of a failed claim.

 

Irrespective of the reason, a popular strategy deployed by parties wishing to bypass an arbitration agreement and invoke the jurisdiction of the UAE Courts (ordinarily a claimant) is to add parties who are not party to the arbitration agreement, as in cases which involve multiple defendants, a UAE court which has jurisdiction over one defendant has jurisdiction over all the defendants.

 

In a recent judgment issued by the Dubai Court of Appeal, this strategy was comprehensively rejected. The case in question involved a contract for the construction of a pavilion at Expo 2020, which contained an arbitration clause. The contractor asserted several claims against the employer and, in an attempt to bring the matter within the jurisdiction of the Dubai Court, impleaded the employer’s manager as a co-defendant.

 

The Dubai Court of Appeal saw through this stratagem, and held that the courts have no jurisdiction over the dispute because the proper parties to the contract have agreed to resolve disputes arising out of the contract by arbitration. In its judgment, the Dubai Court of Appeal laid down several clear principles:

 

– while a claimant may add multiple defendants, and while a court which has jurisdiction over one defendant will have jurisdiction over all the defendants, there must be ‘real claims’ against each of the defendants;

 

– what constitutes ‘real claims’ is a matter to be determined by the trial court based on the evidence and any applicable presumptions of law [in this case, the court found that the claimant’s cause of action was clearly a contractual one, and there were no ‘real claims’ against individuals who were not party to the contract; and

 

– adding parties solely for the purpose of invoking the court’s jurisdiction is not permitted.

 

Interestingly, while the multiplicity of defendants was the principal argument advanced by the claimant in this case in its attempt to bypass the arbitration agreement, this issue was not the basis of the judgment of the Court of First Instance which held that the courts have jurisdiction. The basis of the judgment of the Court of First Instance was that the amendment to the contract between the parties (necessitated by the delay to Expo 2020 due to the Covid-19 pandemic) did not expressly refer to the arbitration clause, and consequently that it did not meet the requirements of Article 7(2)(b) of the UAE Federal Arbitration Law, which provides that an arbitration agreement shall be deemed to be in writing if there is a reference in a written contract to any model contract, international agreement, or any other document containing an arbitration clause and the reference is such as to make that clause part of the contract. This finding was set aside by the Dubai Court of Appeal, which held that there was no requirement to expressly refer to the arbitration clause as the amendment clearly formed part and parcel of the contract which contained the arbitration clause (i.e. as opposed to standard terms or a different contract containing an arbitration clause which is incorporated by reference). Nevertheless, following the judgment of the Court of First Instance, the prudent practice appears to be to make express reference to an arbitration clause in the main document in all subsequent contractual documents, even where the subsequent document is only an amendment to the contract. ■

 

LexisNexis UAE Managing Partner Report 2023

The 2023 UAE Managing Partner Report is here!

 

Brought to you by LexisNexis Middle East and supported by Abu Dhabi Global Market, this year’s report titled, ‘Where the Future is Still Bright’, is packed with positive growth and optimism in the UAE legal market.

 

Bashir Ahmed shares his insights on the growing compliance landscape in the UAE legal market. Read his interview by downloading the PDF.

Arbitration (UAE chapter), Lexology Getting The Deal Through

This Q&A provides a multi-jurisdictional in-depth understanding of Arbitration. This particular chapter explores the UAE process and challenges faced when considering Arbitration as a course of action. The chapter covers a broad spectrum of truths, a sample of topics covered are as follows; laws and institutions, arbitral proceedings, jurisdiction and competence of arbitral tribunal, interim measures and sanctioning powers and updates and trends.