Comparison of UAE and DIFC-seated arbitrations

This article analyses the options for arbitration in the UAE, including the DIFC. It analyses the advantages and disadvantages of using the UAE or the DIFC as a seat of arbitration, including issues relating to applicable law, formalities, interim measures, confidentiality, costs, and ratification of local and foreign awards.

The rapid growth of the United Arab Emirates’ (UAE’s) economy brought with it tourism, mass infrastructural projects, construction, commerce and international investment. The UAE’s exceptional growth also highlighted the need for a modern legal and judicial framework capable of instilling confidence into the growing market, and to further attract more inward investment. Most foreign investors were accustomed to operating in common law environments (as opposed to the civil law system in the UAE) which have a historical and sophisticated body of binding legal precedents and therefore offer certainty for those doing business in a market economy.

Foreign investors were reluctant to use the domestic courts to settle disputes, as both:

Proceedings in the local courts are conducted in Arabic.
There is no system of binding precedent, which can result in some instances in unpredictable judicial decisions.

An efficient, transparent and modern legal system is vital to the efficacy of any economy, but particularly in a new and rapidly expanding economy such as the UAE. The need for a modern legal framework led to the development of not only new legal and judicial platforms that are modelled on common law, but also the growth of arbitration in the UAE as the preferred option for dispute resolution.

Options for arbitration

There are three separate legal systems in the UAE:

The domestic UAE legal system.
The Dubai International Financial Centre (DIFC) legal system. This is a free zone in the Emirate of Dubai, created in 2004, that has its own civil and commercial laws, and its own courts. It is modelled on international best practice and largely follows the English common law approach. It has been designed to appeal to the international business community and attract further foreign investment to the region. The DIFC also has its own arbitration law based on the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Arbitration Law), which represents international best practice. Arbitration seated in the DIFC is subject to the procedural framework set out in the DIFC Arbitration Law 2008.
The Abu Dhabi Global Market (ADGM) legal system. This is a free zone in the Emirate of Abu Dhabi, established in 2013, that also has its own civil and commercial laws, and its own English-language common law courts. In common with the DIFC, the ADGM has been designed to attract international investment into Abu Dhabi. The ADGM also has its own arbitration law based on the UNCITRAL Model Law. The ADGM is a very recent addition to the UAE’s legal system. Therefore, very little jurisprudence has emerged from this fledgling jurisdiction and this article only makes limited reference to the ADGM.

As the popularity of arbitration has grown as a method for resolving disputes, so too has the number of arbitration institutions offering arbitration. Today, separate arbitration institutions are located in each of the Emirates of Dubai and Abu Dhabi:

The Dubai International Arbitration Centre (DIAC) is located in mainland Dubai and very recently opened a branch office within the DIFC.
The DIFC-LCIA Arbitration Centre (a joint venture between the DIFC and the London Court of International Arbitration) is located in the Emirate of Dubai but is situated within the DIFC.
The Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) is located in the Emirate of Abu Dhabi.
The ADGM can seat arbitrations within its separate common law jurisdiction in Abu Dhabi.

All of these arbitral institutions offer their own procedural rules and regulations for the resolution of disputes. There are also other domestic arbitration centres, such as in Sharjah and Ras Al Khaimah, and the new Emirates Maritime Arbitration Centre, the focus of which is to deal with specialist maritime disputes.

Legal framework

The UAE does not have a federal or national arbitration law. Arbitration in the UAE regime is governed by a small number of provisions set out in the UAE Civil Procedure Code, Federal Law No. (11) of 1992 (CPC). For example, Articles 203 to 218 regulate the framework for arbitrations, Articles 235 to 238 regulate the execution of foreign judgments and awards, and Articles 239 to 243 regulate the execution procedures. This is not ideal, given the popularity of arbitration in the UAE, and particularly given that the main purpose of the CPC is to govern domestic legal proceedings in the UAE rather than arbitration proceedings (and even less so, international arbitration).

Arbitration in the UAE would therefore undoubtedly benefit from the introduction of a federal law on arbitration. The Ministry of the Economy has circulated several draft federal laws, but nothing has been enacted. The intended purpose of a federal law on arbitration is to repeal the sections of the CPC that deal with arbitration, and modernise the arbitration framework within the UAE legal regime and bring it in line with international best practice. The federal law has been mooted for some time and it is difficult to predict when it will finally be enacted.

In contrast, arbitration seated in the DIFC or the ADGM benefit from specialist arbitration laws that are based on the UNCITRAL Model Law, and are not subject to the CPC arbitration provisions.

Formalities

Clear and unequivocal intention to arbitrate

On the whole, the UAE courts construe agreements to arbitrate narrowly. This is because the UAE courts still view arbitration agreements as a usurpation of their judicial authority and an exceptional method of dispute resolution. It is therefore important that the wording of the arbitration agreement is clear and unequivocal, and reflects the fact that the parties understand and intend that any dispute which may arise should be referred to arbitration.

The parties to a contract can refer a dispute that may arise between them to arbitration either:

Through a clause in the main contract providing for arbitration or separate arbitration agreement.
By reference to an express exchange of correspondence by parties authorised to agree to arbitration or in some specific commercial transactions by reference (for example, construction contracts subject to the FIDIC general conditions of contracts).

The CPC does not require any special wording for the content of the arbitration agreement. However, most arbitration institutions provide model arbitration clauses, which contracting parties would be wise to adopt. To be effective, the arbitration agreement should be unequivocal to ensure that no potential problems arise concerning jurisdiction.

Broad interpretation of “in writing”

The DIFC legal system follows the UNCITRAL Model Law provisions regarding compliance with certain formalities for a binding arbitration agreement. The DIFC Arbitration Law provides that an arbitration agreement must be in writing. However, the concept of “in writing” is broad and the arbitration agreement is considered to be in writing if its content is recorded in any form. Further, the DIFC Arbitration Law explicitly confirms that an arbitration agreement can be concluded by the conduct of the parties, without an actual written document. In addition, an arbitration agreement is in writing if it is contained in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by the other. In light of this, in the absence of an arbitration agreement, care should be taken when served with a statement of claim asserting the existence of an arbitration agreement.

Validity

Parties often overlook the importance of the dispute resolution provisions of their contract. However, it is vitally important to consider the dispute resolution clause, specifically where arbitration is contemplated as the parties’ preferred method of dispute resolution. For an arbitration agreement/clause in a contract to be valid it must comply with a number of formalities and those formalities may differ depending on whether the arbitration is seated in the domestic UAE legal system or in the DIFC.

The CPC provides mandatory provisions on the enforceability of arbitration agreements, such as:

An arbitration agreement must be in writing (Article 203(2), CPC).
The arbitration agreement must specify the subject matter of the dispute (Article 203(3), CPC).

Where a legal person (corporate entity) is the party to be bound by the arbitration agreement, the agreement must be signed by a person authorised to bind the company to arbitration. In limited liability companies, the UAE courts consistently rule that this authority is presumed to be with the company’s general manager. In this respect, a copy of the company’s trade licence should be obtained to ensure the manager’s identity is correct. The arbitration agreement is invalid if it is signed by someone lacking the appropriate authority. Where someone other than the company’s general manager or where another type of company is involved, it is necessary to obtain a specific power of attorney or company authority (such as a board resolution) to confirm that the person signing the arbitration agreement is duly authorised to do so and can bind the company to arbitration proceedings.

Federal Law No. 2 of 2015 (New Companies Law) (entered into force on 1 July 2015, replacing Federal Law No. 8 of 1984 concerning Commercial Companies) reinforces the restrictive approach relating to how a UAE public joint stock company (PJSC) binds itself to an arbitration clause. The power of a PJSC’s board to agree to arbitration as a means of resolving disputes must be explicitly stated in the company’s Articles of Association (New Companies Law). Alternatively, an agreement to arbitrate must be considered as one of the company’s objectives (which in practical terms would not be the case), or the general assembly must issue a special resolution. This restrictive approach reinforces the provisions of Article 58(2) of the CPC, which provides a general restriction that the power to agree to arbitration cannot be delegated to others without a special resolution to that effect.

The New Companies Law also introduces a new Article 104 (regulating limited liability companies), which provides that, unless otherwise provided by the New Companies Law, the provisions concerning joint stock companies apply to limited liability companies (LLCs). The introduction of Article 104 of the New Companies Law raises a controversy as to whether a general manager of an LLC now must be specifically empowered to agree to arbitration (either by the articles of association or a special resolution of the shareholders), based on a combined reading of Article 104 and 154. This approach contradicts the principle that the UAE courts have established that general managers of an LLC are presumed to have the power to sign an arbitration clause. Given that the New Companies Law has only recently been promulgated, there is currently no case law that deals with this issue. However, it is advisable that the articles of association expressly grant LLC’s general managers the power to sign an arbitration clause. The onus is on each party to check and confirm that the other party’s signatory has the appropriate authority to execute the arbitration agreement.

Arbitrability

Further, in addition to the “in writing” and “capacity” requirements, parties should consider whether the subject matter of any potential dispute can be referred to arbitration in the chosen seat of the arbitration.

Arbitration is not permissible in matters that are not capable of being reconciled (Article 203(4), CPC). Matters of public order cannot be reconciled. That said, there are some specific areas where the UAE courts hold exclusive jurisdiction, such as in criminal matters and matters of personal statute. These matters cannot be referred to arbitration. Further, matters relating to commercial agency and labour disputes cannot be dealt with by arbitration.

The issue of arbitrability must also be considered in light of a relatively recent decision of the Dubai Court of Cassation, which held that some matters relating to off-plan real estate transactions are of a public order nature and therefore not capable of resolution by arbitration. Public order is deemed to include matters relating to, among others, personal status such as marriage, inheritance and lineage, systems of government, freedom of trade, the circulation of wealth, rules of individual ownership and the other rules and foundations on which society is based, to the extent that these matters do not conflict with the definitive provisions and fundamental principles of the Islamic Shari’a (Article 3, UAE Civil Transactions Law).

In this respect, in 2012, the Court of Cassation overturned an arbitration award on the basis of public order considerations under Article 3 of the UAE Civil Transactions Law (Case No. 180/2011 of 12 February 2012). The arbitration award declared the sale and purchase agreement for an off-plan property purchase to be null and void on the basis that the agreement violated Article 3 of Law No. 13 of 2008 Regulating the Interim Real Estate Register in Dubai (Law No. 13 of 2008). Article 3 provides for the mandatory registration of any sale and purchase of off-plan properties in Dubai in the Interim Real Estate Register through the Dubai Land Department. The sale and purchase agreement was not registered. The Court of Cassation overturned the arbitration award on the basis that the arbitrator did not have the power to adjudicate on a matter relating to registration of off-plan property, as such was a public order matter under Article 3 of the UAE Civil Transaction Law.

Following this decision, there were fears that the UAE courts may find any real estate contract to be void for violating public order. However, this decision and the public policy exemption it relates to is recognised as being limited to cases involving specific issues, in this case the particular provision requiring the registration of off-plan transactions with the Dubai Land Department as opposed to all real estate matters.

The DIFC Arbitration Law does not explicitly state that certain disputes are non-arbitral. However, as the DIFC Arbitration Law only covers civil and commercial matters, it is inferred that the scope of arbitrability within the DIFC does not extend to criminal and family matters. The DIFC Arbitration Law states that consumer contracts and employment disputes can only be arbitrated if, among other things, consent is given by the employee or consumer after the dispute has arisen. The public policy considerations set out in Article 3 of the UAE Civil Transactions Law are likely to apply in the DIFC. The DIFC forms part of the Emirate of Dubai, so it is expected to follow the same principles and rules of public order that are designed to fulfill the same public, political, social or economic interests of the UAE that are related to the higher governance of society.

Seat of arbitration

In most jurisdictions it is an accepted principle that the designated seat of arbitration determines both the:

Law governing the arbitration agreement and the conduct of the proceedings.
Court that will have supervisory jurisdiction over the arbitration. This has caused conflicts in Dubai and Abu Dhabi, as both emirates have common law and civil law jurisdictions. In Dubai, this has led to conflicts concerning the applicable supervisory jurisdiction even where the seat is explicitly stated (see below).

Justice Hwang summarised the importance of accurately identifying the seat of arbitration, in the DIFC Court of First Instance judgment in Amarjeet Singh Dhir v Waterfront Property Investment Limited and Linarus FZE CFI 011/2009: ” The moral of this case is that, if parties want the DIFC Arbitration Law to apply and the DIFC Court to have jurisdiction over an arbitration, they should expressly select the DIFC as the seat in their arbitration agreement. ”

The words “Emirate of Dubai” were not sufficiently precise to identify the DIFC as the seat.

The legal position has evolved since the Amarjeet case, such that conflicts of jurisdiction may arise despite the identification of a seat. Recently, the DIFC courts confirmed that its jurisdictional scope extends to encompass arbitrations seated outside the DIFC, in the Emirate of Dubai or abroad and with no nexus to the DIFC (DIFC Court of First Instance, ARB 002/2014 A v B, judgment of 22 January 2015 and DIFC Court of First Instance, XX (1) X1 (2) v (1) Y1 (2) Y2, judgment of 29 July 2015). In 2015, the DIFC courts confirmed their jurisdiction in several judgments to recognise and ratify domestic, onshore (non-DIFC) and foreign arbitral awards, even where the:

Award debtor does not have any assets within the DIFC against which the arbitral award shall be enforced.
Arbitrations were not seated in the DIFC.

As a result of these recent developments, issues of conflict of jurisdiction between the DIFC courts and the local Dubai courts arise. In June 2016, the Ruler of Dubai issued Decree No. 19 of 2016, which created a new judicial authority to exclusively deal with conflicts of disputes between the DIFC courts and the Dubai courts. To minimise the risk of conflict of jurisdiction, it is advisable for contracting parties to agree in advance to the jurisdiction of either the DIFC courts or the local Dubai courts as their preferred option as the supervisory court of arbitration.

Contracting parties need to understand the advantages and disadvantages of seating an arbitration under the UAE legal regime as opposed to the DIFC legal regime. Arguably, seating an arbitration in the DIFC is more advantageous, by virtue of the fact that the DIFC Arbitration Law will apply to the arbitration. The DIFC Arbitration Law provides a modern and comprehensive framework for arbitration proceedings as opposed to the CPC’s more limited provisions that apply to an arbitration seated in the UAE (outside ADGM).

Interim remedies

The DIFC Arbitration Law enables the tribunal to order a range of interim remedies that are not available in arbitrations seated in the UAE. For example, a party in an arbitration seated in the DIFC can apply for injunctive relief such as security of costs. Additionally, in DIFC seated arbitrations, the DIFC courts can issue interim relief in the same manner as it would in cases in the DIFC courts. However, this should also be achievable for arbitration proceedings seated in mainland Dubai, in light of the latest position adopted by the DIFC courts extending its scope beyond the DIFC to mainland Dubai (given that the DIFC forms part of the Dubai judicial system). The UAE courts can grant interim reliefs in support of arbitration, but these are not as sophisticated and varied as those available before the DIFC courts.

The DIAC is opening an office in the DIFC. This move will permit parties who agreed to apply the DIAC Rules to both:

Seat their arbitration in the DIFC.
Apply to the DIFC courts for interim remedies in support of their arbitrations and to enforce their awards.

Confidentiality

The DIFC Arbitration Law provides that proceedings are confidential. Under UAE law, proceedings are not by default considered to be confidential (apart from institutional arbitrations where confidentiality is provided for the in the respective rules). Therefore, parties that want their proceedings to be confidential should ensure that confidentiality is explicitly stated as a condition applicable to the proceedings in the arbitration agreement or terms of reference.

Costs

In the DIFC, the common law approach to legal costs applies (that is, the losing party is usually ordered to pay some or all of the successful party’s legal costs). In contrast, UAE law does not empower the arbitral tribunal to award legal costs from its own motion. The Dubai courts recently ruled that the DIAC rules do not empower a tribunal operating under the auspices of those rules to award legal costs. Therefore, where arbitration proceedings are subject to the DIAC rules, it is important for the parties to record in the arbitration agreement or the terms of reference the arbitral tribunal’s power to award legal costs.

Ratification of arbitral awards

Local awards

In the UAE, an award must be ratified by the courts and “converted” into a court judgment, before the successful party can seek to execute and enforce it in the UAE against the losing party.

The ratification process adds another layer of complexity to arbitration proceedings, and adds to time and expense for the parties involved. The unsuccessful party in the arbitral proceedings usually resists the ratification application in the UAE courts and seeks to have the application annulled by submitting a defence to the action for ratification. The ratification procedure can take up to two years depending on the complexity of the issues involved and whether the unsuccessful party remains resolute and decides to exhaust all avenues of appeal. Only when the Court of Appeal or Court of Cassation has ratified the award can it then be recognised and enforced.

However, historically, the process of ratifying and enforcing a final arbitration award was problematic. In some cases the UAE courts refused to ratify awards based on the grounds for annulment of arbitration awards in Article 216(1) of the CPC. For example, in International Bechtel Co. Ltd. v. Department of Civil Aviation of the Government of Dubai; Dubai Court of Cassation, Petition No. 503/2003 (judgment dated 15 May 2005), the Dubai Court of Cassation ruled that a US$25 million arbitration award in favour of the claimant should be set aside on the grounds that the arbitrator had failed to swear in witnesses in the manner prescribed by UAE law for court hearings. However, despite decisions like Bechtel, the UAE courts on the whole adopt a pro-arbitration approach to ratification and enforcement.

An alternative to ratifying awards in the UAE courts has recently emerged. Parties can now seek to ratify their UAE awards in the DIFC, which avoids the UAE courts’ sometimes erratic ratification process. The DIFC courts have jurisdiction to recognise and enforce on arbitral award, including one made in the UAE (Article 42(1), DIFC Arbitration Law). Importantly, in recognising and enforcing an award, the DIFC courts do not have to consider the CPC’s provisions. Further, once the award is ratified it can be sent for execution within the UAE (that is, outside the DIFC). Judgments and orders made by the DIFC courts, including arbitration awards, can be converted into a Dubai court judgment through a fairly straightforward procedure (Protocol of Enforcement between the DIFC courts and Dubai courts and Dubai Law 12 of 2014 (Judicial Authority Law)). Further, in contrast to the UAE system, the grounds on which the DIFC courts can refuse to recognise an award are limited and largely follow those provided by the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). Nevertheless, as stated above, parties should be mindful of the possible conflict of jurisdictions.

Given that the DIAC will be soon opening an office in the DIFC, parties to arbitration disputes governed by the DIAC Rules will have the further option of resorting to the DIFC courts to obtain recognition and enforcement of their awards.

Dr Habib Al Mulla (Chairman of the Board of Trustees of the DIAC, and shareholder and co-managing partner of Baker & McKenzie) said that arbitration is about choice, and that the presence of the DIAC in the DIFC office will give arbitration parties the choice of resorting either to the DIFC courts or to the Dubai courts to enforce their awards (http://mediaoffice.ae/en/media-center/news/24/5/2016/dubai-arbitration.aspx). The DIAC and the Dispute Resolution Authority (DRA) in the DIFC signed on 21 September 2016 a co-operation agreement that paves the way for faster enforcement of arbitral awards in the future. The DIAC office in the DIFC will be launched on or around 27 September 2016.

Foreign awards

Enforcing foreign arbitration awards is a relatively straightforward process both in the UAE and the DIFC. Foreign arbitral awards are recognised and enforced within the DIFC (Article 42(1), DIFC Arbitration Law). As outlined above, the DIFC courts recently confirmed their role as a potential conduit or host jurisdiction for the enforcement of both domestic and foreign arbitral awards, even if the award debtor’s assets are located outside of the DIFC (DIFC Court of First Instance, ARB 002/2014 A v B, judgment of 22 January 2015 and DIFC Court of First Instance, XX (1) X1 (2) v (1) Y1 (2) Y2, judgment of 29 July 2015). The DIFC courts also confirmed that on successful recognition of an award by the DIFC courts, an award creditor can execute the DIFC-recognised award before the Dubai courts. This makes the DIFC an even more attractive option for ratification.

Additionally, the UAE (and the DIFC, as constitutionally the DIFC courts form part of the Dubai court system) is a signatory to the New York Convention. The New York Convention allows a party to enforce an arbitration award made in one country in another country that is a signatory to the New York Convention. Accordingly, the UAE courts should enforce foreign arbitral awards unless the limited grounds to resist enforcement in the New York Convention have been proved by the party seeking to resist an enforcement application (Article 5, New York Convention).

UAE courts have generally confirmed the UAE’s obligations under the New York Convention by enforcing foreign awards. However, on very rare occasions, the UAE courts have shown a reluctance to enforce foreign judgments under the New York Convention. In a judgment of 30 March 2016 in the case of Fluor v Petrixo Oil & Gas, the Dubai Court of Appeal refused to enforce a foreign award that was issued in an ICC International Court of Arbitration proceeding with a London seat. The court reasoned that no evidence had been submitted to establish that the UK had signed and ratified the New York Convention. This decision shocked the UAE legal community. However, this decision was appealed to the Court of Cassation and has been recently overturned on the basis that UAE courts are bound by international treaties and the New York Convention.

Current climate and future outlook

The growth of arbitration as the preferred choice of dispute resolution in the UAE has resulted in a unique blend of innovative options available to those contemplating arbitration in the UAE. The UAE’s three legal systems offer a number of separate arbitral institutions each with their own institutional rules. There are pros and cons associated with seating an arbitration in each jurisdiction. The DIFC courts’ latest move in extending their jurisdiction beyond the DIFC and within Dubai eases a number of concerns in terms of ensuring a smooth and swift ratification and execution process. The DIAC’s move into the DIFC is a signal that the applicable law of the DIFC is much sought after, particularly in terms of the availability of interim remedies, ratification and enforcement. However, if the much anticipated Federal Law is finally introduced, this may level the playing field between arbitrations seated in the UAE and the DIFC, and make any difference negligible.