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AHK Article on Arbitration

So you think you can Arbitrate?

Arbitration in the UAE is an ever-important legal topic, as more and more companies decide on arbitration as their preferred means of dispute resolution in the UAE. Especially international companies often favour arbitration over court litigation in Arabic in high value cases or in cases with complex technical issues.

Although arbitration seems like a straightforward means of solving disputes, the practical aspects of starting arbitration proceedings and receiving a valid and enforceable arbitration award in the UAE are not as easy as it might appear. This article aims to briefly highlight frequent hurdles claimants in UAE-based arbitrations face and how best to avoid these hurdles.

Arbitration in the UAE

The most often chosen UAE arbitral institutions are the Dubai International Arbitration Centre (DIAC), the DIFC London Court of International Arbitration (DIFC-LCIA) and the Abu Dhabi Commercial Conciliation & Arbitration Centre (ADCCAC).

In 2018, the UAE enacted its first stand-alone law on arbitration, Federal Law No. 6 of 2018 (Arbitration Law). The Arbitration Law repeals the chapter on arbitration (Articles 203 to 218) contained in Federal Law No. 11 of 1992 (the Civil Procedure Code) and is based on the UNCITRAL Model Law on International Commercial Arbitration. The Arbitration Law is now the primary guide to arbitration proceedings and enforcements of arbitration awards in the UAE, with the exception of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) free zones as these have their own arbitration laws.

Procedural Hurdles in UAE Arbitration Proceedings

Under the Arbitration Law and other applicable legislation, there are a few mandatory requirements to be adhered so that the parties ensure a valid arbitration agreement and can enforce an arbitration award. In practice, non-compliance with these seemingly small procedural issues are the main cause for invalid arbitration agreements and the increased risk that an arbitration award is set aside during enforcement.

1. Formal Requirement

A valid arbitration agreement must be in writing. Article 7(2)(a) of the Arbitration Law provides that this may be fulfilled if the agreement is contained in a document signed by all contracting parties, or in any other written correspondence and email exchanges. Article 5(3) of the Arbitration Law permits the incorporation by reference in any commercial contract to any document containing an arbitration clause (e.g. general terms and conditions). However, such reference must be clear in its meaning and in stating that it forms part of the agreement. Failure to comply with the above will render the arbitration agreement null and void.

2. Special Authority Requirement

The UAE courts practice a strict distinction between an arbitration agreement and an actual business agreement, even if the arbitration clause is included within the business agreement. In other words, while a business agreement can be validly agreed by any representative, expressly or impliedly appointed by the company, for the arbitration agreement to be valid, a specific and express power of the signatory to agree on arbitration is required (Article 58(2) of the Civil Procedure Law). The courts are so strict in this case because an agreement on arbitration is considered as a waiver of the parties´ right to a hearing of their case in court.

In this context, according to Article 4(1) of the Arbitration Law, an arbitration agreement to be entered into by a legal entity can only be concluded by one of its authorised representatives who has the authority to arbitrate. This is important as one of the grounds for challenging an arbitral award is that the party to the arbitration does not have the legal capacity to enter into an arbitration agreement. For an LLC incorporated in the UAE, this generally means that the arbitration agreement has to be concluded by either the General Manager or a person having the authority to act on behalf of LLC with a special authorisation to arbitrate, usually granted in a notarized power of attorney (PoA) or a notarized shareholder resolution.

There have been long debates as to whether this authority should be express or “apparent” authority should suffice. In a case No 386/2015, the Dubai Court of Cassation held that: “If the name of the legal person is only mentioned in the agreement without the name and capacity of its legal person, and the agreement is illegibly signed and if such agreement includes the arbitration clause, this shall constitute a crucial pretext affirming that the natural person who signed the agreement is the representative of such legal person and has the competency to act and agree to arbitration.” However, the cases were apparent authority was held to be sufficient are still limited and it is not advised to rely on them.

Practice Tip → Before signing a business contract with an arbitration clause, request the PoA of the signatory and the company’s constituting documents of any counterparty to avoid the risk of the arbitration agreement or arbitral award being nullified by the UAE courts as per UAE law and the existing case-law of the Dubai and Abu Dhabi courts of cassation.

 
3. Exhaustion of an Arbitration Clause

In arbitration proceedings the parties need the advance the costs and fees of the tribunal and the arbitration institution. A usual scenario in an arbitration case is that the respondent is requested to pay his fee contribution to the arbitration proceedings, but he rejects as there is no obligation to do so. This seems to be a reasonable reaction, however, the parties may not be aware that if then the claimant refuses to advance the arbitration fees also of the respondent, the case will be considered as closed for arbitration. The UAE courts consider such actions by claimants and respondents as basically waiving their agreement to arbitrate and thus provides the courts with jurisdiction to hear this matter (Dubai Court of Cassation case no. 379/2013 (Real Estate)).

It is therefore necessary to be aware of this consequence should a party wish to proceed under an arbitration agreement to avoid the local, Arabic-speaking courts.

Practice Tip → If a claimant wanted to avoid arbitration despite an arbitration clause, he could commence arbitration proceedings and then fail to pay the fees. If the respondent does not pay up (which is anyway mostly the case), the claimant could then proceed with filing a case at the local courts.

 
4. Exclusion of Arbitration

Although arbitration might be the preferred dispute method for international companies, there are certain disputes that cannot be resolved by means of arbitration in the UAE. These are cases related to public policy, labour law, criminal matters, family matters and – particularly relevant for foreign companies conducting business in the UAE – commercial agencies and distributorships1. Any arbitration clause included in an agreement covering the above- mentioned matters would be disregarded by the courts.

5. Enforcement Hurdles

If the award-debtor does not comply with the award, the winning party may not simply execute the award through the execution courts and must instead initiate separate legal ratification proceedings with the UAE appeal court to enforce their arbitral awards. This ratification procedure further delays the implementation of the award and a court might find the award unenforceable for formal reasons set out in Article 53 of the Arbitration Law (as e.g. for reasons outlined above).

Conclusion

Arbitration is a fast-growing and effective dispute settlement mechanism in the UAE. The new Arbitration Law made further positive changes in order to make the UAE a preferred seat for international arbitration in the region. Nonetheless, the Parties need to pay special attention to certain procedural details to enter into valid arbitration agreements, or they risk invalidating their agreement or the arbitral award, thus creating delays and additional costs. However, as long as the procedural requirements are fulfilled, you are indeed able to arbitrate.

Commercial agency and distributorship disputes are usually regarded as being non-arbitrable based on Article 6 of the Federal Law No. 18 of 1981, as amended (UAE Commercial Agency Law). This law provides that the UAE’s courts must rule in any disputes which may arise between the principal and an agent/distributor due to its implementation. However, in a recent case No. 362 of 2019 (Commercial) the Abu Dhabi Court of Cassation demonstrated a more arbitration-friendly attitude and held that Article 6 of the Commercial Agency Law does not apply to claims of an agent for commission payment. The court found that Article 6 regulates matters arising out of the commercial agency agreement itself (e.g. the existence of the agreement, its validity and the position of the principal and the agent). However, if the agent claims commission, this is to be regarded as being in fulfilment of certain tasks for which he should be entitled to a remuneration. The court found that this matter is separate from the issue of the implementation of the agency agreement as such. Hence, the Abu Dhabi Court of Cassation came to the conclusion that the parties can agree on arbitration for such claims and rejected the case brought by the Emirati agent in the Abu Dhabi courts against the principal due to an arbitration clause included in their agreement.

Contact Details

If you have any questions or require any advice or legal assistance regarding the above, please do not hesitate to contact Dr. Clemens Daburon (clemens@daburon-partners.com) or Ms Sali Jumah (sali@daburon-partners.com).

Daburon & Partners Legal Consultants LLP

Email: info@daburon-partners.com

Phone: +971 2 6948655

Web: www.daburon-partners.com

Address: Office 2404, 24th Floor Al Sila Tower–Abu Dhabi Global Market Square–Abu Dhabi–UAE

This article is provided on a complimentary basis as general information. It does not constitute legal advice, and the authors do not assume any legal liability whatsoever.

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