Abu Dhabi Courts uphold the DIFC-LCIA transition to DIAC

This represents a positive shift towards a more arbitration-friendly approach in UAE courts. 

On 26 February 2024, the Abu Dhabi Court of First Instance, Commercial Division, ruled in Case No. 1046/2023, presided over by Judge Ahmed Bakri Abdullah Hassan Al-Sayed, affirming the validity of a DIFC-LCIA arbitration agreement. This decision was further upheld by the Abu Dhabi Court of Appeal on 24 April 2024, in Case No. 449/2024. The ruling sheds light on the evolving arbitration framework in the UAE and addresses the transition from the DIFC-LCIA to DIAC. 

Table of Contents

Background 

The case concerned a substantial claim for unpaid money under a contract for medical equipment supply, where the parties had agreed to arbitration under the DIFC-LCIA rules, seated in the DIFC and governed by UAE law. Despite the arbitration agreement, the claimant had initiated proceedings in the Abu Dhabi court. The defendant contended that the court lacked jurisdiction due to the existence of a DIFC-LCIA arbitration agreement. The claimant argued that the arbitration agreement was invalid under article 54(4) of the UAE’s Federal Arbitration Law No. 6 of 2018 (the Federal Arbitration Law) because it was incapable of being performed following the abolishment of the DIFC-LCIA. 

The court considered the Decree, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the NY Convention), the Federal Arbitration Law, and certain foreign judgments. It dismissed the claim, citing lack of jurisdiction due to the existence of a valid and binding arbitration agreement. 

The Court’s Rationale 

The court concluded that the abolishment of the DIFC-LCIA does not invalidate the arbitration clause. It acknowledged that the Decree places DIAC as the successor to all rights and obligations of the DIFC-LCIA. The court reasoned that the NY Convention’s travaux préparatoires did not consider the abolishment of an arbitration institution as a criterion for invalidating an arbitration agreement. 

The court noted that arbitration rules in place at the time of the parties’ agreement may be amended, and such updates do not automatically invalidate arbitration agreements. The DIFC-LCIA rules had been amended since the parties entered into their arbitration agreement, and the claimant had not argued that these changes would harm them. 

Significance of the Intent of the Verifying Parties 

The court emphasized the importance of verifying the parties’ intent to arbitrate, considering the following elements:  

• an explicit agreement not to resort to courts,  
• an exclusive agreement to arbitrate,  
• the scope of the tribunal’s authority, and  
• procedural aspects of the arbitration.  

The court held that the arbitration agreement remained valid and binding despite the abolishment of the DIFC-LCIA. 

The court also relied on the severability clause in the underlying contract, which supports the idea that the remainder of an agreement remains valid even if a particular clause is inoperable. The court used this clause to sever references to the DIFC-LCIA, maintaining the arbitration agreement’s validity. 

It is unusual for UAE courts to refer to international jurisprudence in their decisions since the UAE has a civil law system. However, in this case, the claimant cited a U.S. decision to argue the arbitration agreement’s invalidity. Additionally, the court reviewed judgments from French, Swiss, German, Hong Kong, and U.S. courts. These precedents upheld the principle of party autonomy and the validity of arbitration agreements, even when the specified arbitration institution had ceased to exist or never existed. 

The UAE Legal Framework Supports Arbitration 

The Judgment notes that arbitration has become the “prevailing norm” in settling commercial disputes in the UAE, and the Federal Arbitration Law mandates that arbitration agreements should be interpreted broadly. This represents a positive shift towards a more arbitration-friendly approach in UAE courts. 

Comparative Views: Louisiana Court  

The divergent judicial approaches to DIFC-LCIA arbitration agreements are highlighted by recent rulings in Courts around the world. Wherein the court in Louisiana, United States had refused to enforce a DIFC-LCIA arbitration agreement, asserting that the DIFC-LCIA is not synonymous with DIAC. 

To read more about the Louisiana Court judgment please read: US Court Declines to Enforce DIFC-LCIA Arbitration Agreement through DIAC – ATB Legal 

Reassuring a pro-arbitration landscape 

The Abu Dhabi Court of First Instance and Court of Appeal judgments demonstrate a flexible, pro-arbitration approach of UAE, aimed at stabilizing the UAE’s arbitration landscape. It remains to be seen if the Abu Dhabi Court of Cassation will affirm this stance if either party wishes to pursue the appeal. Meanwhile, the contrasting decisions in other Courts world around, highlight the uncertainties revolving around the DIFC-LCIA arbitration clause, urging parties to revisit existing DIFC-LCIA arbitration agreements to mitigate any future jurisdictional risks.