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Drafting Dispute Resolution Clauses in the UAE

Drafting Dispute Resolution Clauses in the UAE

April, 2013
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In a region that places an unusually high level of importance on procedure, lifting dispute resolution clauses from dusty contracts where they have been hibernating in silence and never tested in practice, has so far proven to be not the wisest way to save on legal fees. Many have had their fingers burned in the UAE and the wider GCC region when they least expected it, often not being sure which door to knock on to get the dispute resolution process started. Antonios Dimitracopoulos, Partner and Head of the Arbitration and Dispute Resolution practice of Bin Shabib & Associates LLP in Dubai, UAE explains the basics of what to look out for when drafting a dispute resolution clause.

The main concern most parties have when negotiating a dispute resolution clause is: ‘arbitration or litigation’. Is this position different in the UAE?

To start with, no. However, the difficulty with this region is spelling out one’s choice in unequivocal terms that will stand the test of the local judiciary. The default position is that disputes under a given contract are to be resolved by way of local litigation. Departing from this requires a higher level of clarity in wording, finality in incorporation and authority in agreeing, than in most jurisdictions.

What would be the major areas to watch out for when drafting an arbitration clause?

I would say it would be essentially two: the authority of the person that signs the arbitration clause and the way arbitration has been incorporated into the agreement.

Can you give an example of what could go wrong?

For instance, a contracts manager may not have the power to agree in a subcontract to arbitration under UAE Law. On the other hand, a CEO may have this, but if he signed on a contract that referred to an arbitration clause existing in say the main contract, then that type of loose reference may not be effective and binding. So it pays to be careful who signs and what is being signed. Assumptions on this front can mean nullification of the arbitration by the UAE Courts.

Would you say that UAE Courts are suspicious of arbitration and possessive of their jurisdiction?

Not at all; it is simply a case of a higher threshold for proving that an arbitration clause clearly carries a departure from litigation and this is because the latter is considered a fundamental right that only authorised personnel can abandon.

Would the position be less complicated before the DIFC Courts, which apply English Law?

One would think so, in the sense that a less stringent test on whether arbitration has been agreed should apply. However, the DIFC Courts have in one single year issued two diametrically opposite and contradictory judgments on the issue of validity of arbitration clauses, which placed a dark veil of uncertainty on what practitioners thought to be an oasis of straightforward procedure.

How did those judgments affect the drafting of arbitration clauses?

In short, one judgment upheld, correctly in my view, that the DIFC Courts cannot opine on the validity of a non DIFC arbitration clause regardless of how it is drafted, and the next judgment, within the same year, reached the exact opposite decision, namely that DIFC Courts can opine on how effective and binding any arbitration clause is, and that, consequently, proceedings can be stayed for any type of arbitration clause, be it DIFC based or not. And it took eight months for that last decision to be issued.

What are some of the challenges a practitioner might face when drafting an arbitration clause?

The main aim for a practitioner is to prepare an enforceable dispute resolution clause. The UAE Courts have become infamous for invalidating arbitration clauses mainly for the reasons previously mentioned, resulting in a nullified award. Drafting Powers of Attorney, that may or may not include the power to arbitrate, is a science in itself in the UAE and can mean the difference between enjoying all the benefits of arbitration and wasting a lot of time and money.

Do you find that the business and the legal community are aware of what troubles may arise from overlooking the drafting of a clear dispute resolution clause?

In the wider business community the problem is known only to those that have experienced it. Parties often are unaware of, or underestimate the importance of drafting a valid dispute resolution clause in their eagerness to complete contractual negotiations. As for the legal community, generally lawyers stemming from Arab jurisdictions are far more sensitive to these procedural issues.

So is there a list of do’s and dont’s that one can follow to ensure the functionality of what is drafted?

Yes, but it is by no means exhaustive and certainly not static. A practitioner must be up to speed with the most recent case law to ensure functionality of a dispute resolution clause, as well as a benefit for the client’s specific interests because trends change.

Any examples of how the trend on these issues may change?

For instance, issues relating to incorporation by reference have been relaxed with the advent of the construction boom and the use of standard FIDIC contracts that provide certainty as to what is within them. On the other hand, the position has been tightened on issues of authority to arbitrate and now senior officers have been held not to have a presumed authority to sign on an arbitration clause.

Is there any mileage in agreeing mediation or adjudication in a clause?

Mediation and conciliation is recognised and, although of course not binding, may offer a filter in resolving a dispute. Adjudication is not only not recognised but the reference to it in many clauses lifted from, say UK contracts, can bring proceedings to a halt whilst the Court and arbitral bodies debate on what is meant by this term. So, is there any mileage in either? I do not think so, and given how complicated departing from local litigation can become, it is best for practitioners to master the art of advising their clients on how to effectively and bindingly agree to arbitration. The GCC region and the UAE in particular, is a respondent’s paradise in terms of how easily the arbitration process can be frustrated for the unwary.

Can the defects of an arbitration clause already signed be salvaged by practitioners?

If issues of authority or incorporation, and sometimes of applicable rules, are ambiguous, one approach often favoured is for the claimant to go to Court, in full cognizance of the arbitration clause. The benefit of this would be that, if the opponent omits to raise the arbitration clause at the very first hearing, proceedings are locked into litigation. If the opponent raises this and the Court agrees, then the matter will be dismissed but with the Court’s blessing on the validity of the arbitration clause. The claimant can then start the arbitration process without fear of whether he is walking on treacherous ground.

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Published: April 2013
Publication: Lawyer Monthly
Title: Drafting Dispute Resolution Clauses in the UAE
Practice: Arbitration & Dispute Resolution
Authors: Antonios Dimitracopoulos

 

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