Arbitration Yearbook United Arab Emirates

By: Dr. Habib Al Mulla, Celine Kanakri, Sally Kotb

A. Legislation, Trends and Tendencies

A.1 Legislation

Arbitration in the UAE continues to be governed by specific provisions of the UAE Civil Procedures Code (the CPC).1 Various drafts of a standalone UAE Federal Arbitration Law have been released, which aims to introduce a modern legislative framework for arbitration in the UAE. As of today, a final version is still awaited.

A new commercial companies law entered into force on 1 July 2015 by virtue of Federal Law No. 2 of 2015 (the “New Companies Law”)2, which reinforces the restrictive approach for how a UAE public joint stock company (PJSC) can bind itself to an arbitration clause. The New Companies Law states that the power of the board of a PJSC to agree to arbitration as a means of resolving disputes has to be explicitly stated in the Articles of Association of the company. Alternatively, an agreement to arbitration is to be considered as one of the objectives of the company, which in practical terms would hardly be the case. Otherwise, the PJSC’s General Assembly will be required to 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 on arbitration cannot be delegated to others without a special resolution to that effect.

The New Companies Law also introduced a new Article 104, which stipulates: “Unless otherwise provided by this Law, the provisions concerning Joint Stock Companies shall apply to the Limited Liability Company (LLC).”

The introduction of Article 104 of the New Companies Law raised a controversy as to whether a manager of an LLC now needs to 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 Articles 104 and 154.3 Given that the New Companies Law has only recently been promulgated, there is currently no case law that deals with this issue. Out of caution, however, it is advisable that managers of LLCs be specifically granted the power to sign arbitration clauses in the Articles of Association of the company.

A.2 Trends and Tendencies

The UAE, and Dubai in particular, continue their endeavors to make the UAE an attractive hub for international commercial arbitration. This is not only reflected in the UAE courts’ positive approach to enforcement of foreign arbitration awards under the New York Convention, but also in the creation of locally based arbitration centers that deal with specific types of arbitration disputes. For example, the Emirates Maritime Arbitration Centre (EMAC) was established pursuant to Dubai Maritime City Authority’s Law No. 11 of 2007 as a specialized maritime arbitration center to fill the compelling need of effectively resolving maritime disputes in accordance with international standards.

On 18 November 2015, the LCIA and the Dispute Resolution Authority of the Dubai International Financial Centre (DIFC) relaunched the DIFC-LCIA Arbitration Centre. This relaunch was prompted by the promulgation of Dubai Law No. 7 of 2014, which amends certain provisions of Dubai Law No. 9 of 2004 concerning the DIFC and stipulates that the DIFC court and the DIFC Arbitration Institute are independent and separately funded.4 As an immediate reinforcement of this independence, the DIFC-LCIA was relocated away from the DIFC courts to the DIFC Gate Building, which has become an iconic landmark of the DIFC.

Another remarkable update is the DIFC Court Practice Direction No. 2 of 2015 on the Conversion of DIFC Court judgment to DIFC-LCIA Awards, which entered into force on 16 February 2015 (the “Direction”). The Direction is globally perceived as new and unique in its nature, given that no legal instrument has previously allowed a judgment creditor to convert a court judgment into an award. The Direction was specifically issued to benefit from the provisions of the New York Convention that allow an arbitral award to be enforced in 152 countries worldwide, including the world’s major trading nations and business hubs. This is because enforcement of judgments has proven difficult, particularly in the absence of a treaty or memorandum for the mutual recognition of judgments, where enforcement will depend on stringent local laws of the enforcing state.

On 27 May 2015, the Direction was amended to clarify the manner and circumstances for its application, and in particular, to reiterate that its provisions are optional and not mandatory. In other words, the Direction confirmed that it is an option available to the judgment creditor rather than a mandatory procedure to be followed.

B. Cases

B.1 Arbitration Clause Void for Failure to Timely Raise Its Existence

In early 2015,5 the Dubai Court of Cassation considered an arbitration clause to have never existed because the defendant did not expressly raise its existence at the first court hearing. The court confirmed that the general rule is that if parties agree to resolve their dispute through arbitration, they cannot disregard the arbitration agreement and turn to the court to have their agreement resolved. Nevertheless, if one of the parties disregards the arbitration clause and resorts to the UAE courts and the other party does not expressly object in the first court hearing to the filing of such court proceedings based on the existence of the arbitration clause, the court will be entitled to hear the dispute and the arbitration clause would be considered to have never existed.

In this case, the first court hearing was held on 26 June 2014, during which the defendant’s counsel requested the judge to adjourn the hearing for a review of the claimant’s documents and evidence. The hearing was adjourned to 15 July 2014, during which the defendant raised the court’s lack of jurisdiction for the existence of the arbitration clause. The court found that the defendant counsel’s failure to expressly raise the existence of the arbitration clause in the first court hearing of 26 June 2014 violated the provisions of Clause 203(5) of the CPC, which requires a clear expression to be made in relation to the existence of the arbitration clause during the first court hearing. The court hence considered the arbitration clause as never having existed and confirmed the court’s jurisdiction to hear the case.

B.2 Enforcement of Award Based on Unsigned Charter Party

In a recent judgment,6 the Dubai Court of Appeal recognized a London arbitration award in the UAE on the basis of an unsigned charter party. The court disregarded the UAE mandatory requirement that arbitration agreements must be concluded in writing and signed by contracting parties. Instead, the court decided to recognize and enforce a foreign arbitration award resulting from an unsigned arbitration agreement by basing itself on the provisions of the New York Convention.

This case reflects the pro-enforcement approach adopted by the UAE Courts in enforcing foreign arbitration awards under the New York Convention. It also confirms that a local UAE court will assess the validity of an arbitration clause in the context of the New York Convention and the foreign law governing the contract, ultimately disregarding any domestic provisions relating to the formalistic requirements of arbitration agreements.

B.3 Enforcement Not Suspended Pending Parallel Proceedings

In a recent judgment,7 the DIFC Court of First Instance confirmed the enforcement of an arbitration award disregarding the defendant’s application before the French court to set aside the award. The defendant requested the court to suspend the proceedings until the French court had ruled on its challenge to set aside the award as a result of the arbitrator’s delay in issuing the arbitration award, which the defendant alleged was to be considered a matter of public policy.

The DIFC Court found that the defendant’s challenge was unlikely to be entertained by the French court. The court based its decision on the fact that a delay by the arbitrator to render an arbitration award is not internationally recognized as a matter of public policy and that it is common for issuance of awards in international arbitrations to be delayed. The court also stated that the arbitrator did not delay in issuing the arbitration award, as the ICC had extended the time limit for rendering the final award pursuant to Article 30 of the ICC Rules.

The DIFC Court further rejected the defendant’s secondary challenge that the arbitration award should be set aside on the basis that the arbitrator dismissed the defendant’s claim in the amount of US$40,000 for not being adequately explained or documented. The court found that the arbitrator’s reasoning for dismissing the defendant’s claims for not being adequately explained or documented is justified. The court also found that even if the arbitration was mistaken on that issue, such fault relates to a matter of substantive law that does not constitute a ground to challenge the validity of the award. For these reasons, the court concluded that the defendant’s application in France was unlikely to succeed and proceeded with the enforcement of the award.

B.4 DIFC Court as a Conduit for Enforcement of Awards

In 2015, the DIFC courts in several judgments confirmed their jurisdiction to recognize 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 is to be enforced.

In one case,8 the claimants applied to the DIFC courts to recognize and ratify a Dubai International Arbitration Centre (DIAC) award, and in another case,9 the claimants applied to the DIFC courts to recognize and enforce a London Maritime Arbitrators Association (LMAA) award. In both cases, the defendants objected on various grounds, including that they had no assets within the DIFC. Again in both cases, the court rejected the defendants’ objections and held (among other things) that the absence of assets within the DIFC does not impact enforcement.

The DIFC reached this conclusion on the basis that the DIFC courts are deemed part of the Dubai court system, and hence enforcement of an arbitration award should not be impacted if the award debtor’s assets are located outside the DIFC, particularly in light of Article 7 of the Judicial Authority Law reinforcing the regime of mutual recognition between the Dubai and DIFC courts.

These decisions confirm the DIFC courts’ role as a potential conduit for the enforcement of both domestic and foreign arbitral awards, even if the award debtor’s assets are located in onshore Dubai. The DIFC court also confirmed that upon the successful recognition of an award by the DIFC courts, an award creditor can take advantage of executing the DIFC recognized award before the Dubai courts subject to certain conditions as set out in Article 7 of DIFC Law No. 16 of 2011.

C. Costs In International Arbitration

C.1 Allocation of Costs

Under UAE law, an arbitration tribunal has a discretionary power to award costs, taking account of the parties’ submissions, the complexity and nature of the dispute, and the time spent in the arbitration proceedings. The costs usually incurred by the parties in international arbitration include: (i) administrative charges; (ii) tribunal fees and expenses; and (iii) legal fees.

In principle, the unsuccessful party may be liable for the successful party’s costs under UAE law. The “loser pays” principle or awarding costs to the prevailing party in an arbitration is commonly recognized under UAE law. Article 218 of the CPC confers upon the tribunal the power to estimate the fees and costs of the arbitration and to decide that such amount in whole or in part will be borne by the unsuccessful party.

In addition, Clause 4.1 of the DIAC Cost Appendix confirms the tribunal’s powers to award costs at any time during the arbitration proceedings. Clause 4.2 of the DIAC Cost Appendix further confirms that the tribunal must, in the final award, fix the costs of the arbitration and decide which of the parties shall bear them or apportion them between the parties.

Under the DIFC Arbitration Law, the tribunal must fix the costs of the arbitration in its award, and these costs include legal ones. The “loser pays” rule is prevalent in the DIFC.

C.2 Security for Costs

Under UAE law, there are no specific provisions regulating security for costs in arbitrations. Further, there are no specific provisions under the DIAC Rules or the Rules of the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) that deal with security for costs. However, tribunals constituted under the rules of both the DIAC10 and the ADCCAC11 have broad interim measures powers, which encompass their power to award security for costs.

Pursuant to Article 24(1) of the DIFC Arbitration Law, when interim measures are ordered by the tribunal, the tribunal may also request the applicant to provide appropriate security for such measures, including security for legal or other costs. Furthermore, a tribunal constituted under the DIFC-LCIA Rules is empowered to order security for costs. In accordance with Article 25(3), such powers are reserved to the tribunal and the parties are considered to have waived their right to apply for security for costs through the courts.

C.3 Recovery of Costs

The UAE Arbitration Chapter of the CPC does not empower an arbitration tribunal to award legal costs. This is separate from an arbitration tribunal’s right to award administrative and tribunal costs within the meaning of Article 218 of the CPC. Hence, if the parties do not agree on the recoverability of legal costs, they will not be recoverable. It is thus best practice for the terms of reference prepared during the arbitration to explicitly confer power on the tribunal to award legal costs. This is of particular relevance for arbitration cases administered under the DIAC Rules, as the UAE courts have recently held that the DIAC Rules do not themselves confer power on the tribunal to award legal costs.

  1. Commonly referred to as the “UAE Arbitration Chapter.” There have been no amendments to this legislation in 2015.
  2. The New Commercial Companies Law replaced Federal Law No. 8 of 1984 concerning commercial companies.
  3. This approach contradicts the principle that has constantly been established by the UAE courts that managers of an LLC are presumed to have the power to sign an arbitration clause.
  4. See Article 3 of Dubai Law No. 7 of 2014.
  5. Federal Supreme Court, Case No. 19 of 2015, judgment of 11 March 2015.
  6. Holman Fenwick Willan, Dubai Court issues landmark judgment recognizing and enforcing a foreign arbitral award, September 2015.
  7. DIFC Court of First Instance, ARB 005/2014 A v B, judgment of 26 July 2015
  8. DIFC Court of First Instance, ARB 002/2014 A v B, judgment of 22 January 2015.
  9. DIFC Court of First Instance, XX (1) X1 (2) v (1) Y1 (2) Y2, judgment of 29 July 2015.
  10. Article 31 of the DIAC Rules.
  11. Article 25 of the ADCCAC Rules.