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Arbitration in UAE, Recent Court Rulings & Development

Published on : September 2014
Author(s):Ashraf Ibrahim

Any discussion on recent developments in the field of civil litigation must address the virtual revolution that has taken place with regards to alternative dispute resolution. Needless to say that the legal system has witnessed a steady growth in litigants’ recourse to Alternative dispute resolution (the ADR). ADR has undergone significant growth and is increasingly incorporated into the litigation process. Such alternatives are now viewed as modes to help alleviate the strain on the judicial legal system and to assist the parties in resolving their disputes faster, at less cost and with satisfactory results.

In my previous two articles, I discussed at length matters on arbitration in Dubai and the United Arab Emirates. The first article discussed the legislature’s intention to introduce arbitration as an alternative form of dispute resolution between two or more disputing parties. The second article addressed implications of the arbitration award, the binding nature of such awards, grounds available to challenge arbitral award and claims to set aside arbitration award based on - a) arbitration agreements; and b) arbitration proceedings.

In the present article, we continue to explore arbitration in Dubai and the UAE under the context of the doctrine of separability and invalidity of contracts. The subsequent series will cover other forms of dispute resolution that emanate from within the framework of arbitration, and understand the difference between arbitration, conciliation and other forms of dispute resolutions.

As ADR has gained prominence in legal, academic and commercial circles, it also attracts the attention of critics. For instance, some critics may argue that ADR fails to address real problems of the legal system. They challenge the notion that such alternatives are more efficient than litigation, questioning whether it saves time and disputing the asserted judicial overload itself. Some argue that ADR creates ethical concerns for legal practitioners while others fear that such process may be biased and not neutral.

To begin with, we discuss the precedent rules set by Court of Cassation on deciding whether invalidity of a contract entails ispo jure invalidity of arbitration. The Court of Cassation recognized the doctrine of separability (the Doctrine) in the present case and ruled that an arbitration clause in a contract is separate from the main contract itself (except if the award results in the violation of public order). The Civil Procedure Code of the United Arab Emirates does not expressly refer to the Doctrine, but the same has been recognized by Dubai International Arbitration Centre’s Arbitration Rules of 2007 under clause 6.1 of the above Rules providing as under:-

Unless otherwise agreed by the parties, an Arbitration Agreement which forms or was intended to form part of another agreement shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and the Arbitration Agreement shall for that purpose be treated as a distinct agreement.”

In a matter placed before Dubai’s Court of Cassation (Appeal number 164 of 2008 and dated 12 October 2008), a subcontracting agreement dated 23 December 2004 provided for arbitration in Dubai. Clause 13 of the said agreement provided that any dispute or difference that may arise between parties, parties should resolve such disagreement amicably, and if an amicable resolution is not possible, such dispute or difference should be referred to arbitration.

The court in the present case had to decide on the validity of the arbitration clause by considering whether the managing director of a limited liability company had the authority to bind a company to arbitration. In sum, the court confirmed that company’s manager does have the authority to bind a company to arbitration. The court held that "if the company’s constitutive document (namely the memorandum and articles of association) - afford broad powers, and authorities to a company’s manager, the manager, in such event has the legal right to take any action, and carry out all such acts as he may deem expedient or best in the interest of the company." In the presence of broad powers vested in company’s managing director under company’s constitutive documents, the formal requirement to obtain a special power of attorney to initiate arbitration proceedings is absolved.

In addition, taking into consideration the concept of breach, the argument that invalidity of contract does not affect the arbitration clause is in contrast to another rule decided by Court of Cassation (Appeal number 61 of 2009 dated 11 April 2010; Real Estate) which sets out that invalidity of contract renders all the clauses invalid (including the penalty and compensation provisions, since the annulment or dissolution of a contract leads to demise of contract including the penalty provisions). The courts ruled that in cases where a contract is annulled by agreement or court, then the contract is no longer enforceable and the parties are restored to their respective position as prior to entering into the demised agreement. As a consequence, everything forming part of contract ceases to exist, including without limitation all obligation set out under the contract, penalties and agreed compensation. The courts placed reliance on Article 274 of the Civil Code which reads out as under:-

If the contract is canceled automatically or by the act of the parties, the two contracting parties shall be restored to the position they were in before the contract was made, and if that is not possible, compensation shall be ordered.

A review of the above two decisions suggests that there is contradicting view expressed in two previous decisions passed by Court of Cassation. The decision adopted in penalty and compensation matter suggests that if a contract becomes dissolute, the creditor earns specific rights against the debtor who is in breach of contract, whereas an arbitration clause does not have such independence. Additionally, the doctrine of separability adopted in the arbitration ruling was not adopted in the above matter. The difference in the above two decisions calls for further clarification.

Although corporate, commercial, financial and other matters may be referred to arbitration, parties cannot resort to arbitration to resolve their disputes, and these include:-

Criminal matters and matters affecting public order: criminal matters cannot be a subject of an arbitration dispute.  Accordingly, if during the course of arbitration proceedings a party to arbitration raises an objection citing forgery of paper or criminal action being lodged in respect of forgery or some other acts, the arbitrator must suspend the proceedings until a final judgment on such criminal matters has been pronounced.

Matters wherein reconciliation is not possible: Arbitration of matters that are irreconcilable are inadmissible. Accordingly, personal status issues such as marriage and divorce, matters where person or persons wish to acquire a nationality, claims concerning rights of minors, cases that are against the public order and urgent matters cannot be subject to arbitration.

The next series will focus on other forms of dispute resolution including mediation and conciliation and will compare these alternative forms with arbitration under the context of UAE law taking into consideration precedents passed by courts. Continue reading other articles on arbitration in Dubai and arbitration in UAE from our expert team of arbitration lawyers in Dubai and UAE on Court Uncourt - Your Source for Legal News!

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