Arbitration: An Introduction with Special Reference to the United Arab Emirates

July 6, 2023by Admin0
Arbitration

Introduction

Disputes are a common occurrence in the business world, and in today’s fast-paced commercial environment, time is as valuable as money. Lengthy and complex court battles can result in losses for both parties involved in a dispute. To address this issue, Alternative Dispute Resolution (“ADR”) mechanisms have emerged as a means of simplifying and expediting dispute resolution. One prominent ADR method is arbitration. In simple terms, arbitration is a method of resolving disputes outside of the traditional court system.

Arbitration involves submitting a dispute, by mutual agreement, to one or more arbitrators who make a binding decision on the matter. Instead of opting for court litigation, parties choose arbitration as a private dispute resolution procedure.

Furthermore, there are certain disputes that are non-arbitral in nature. In the onshore jurisdiction of the UAE, criminal matters, family and personal status matters, commercial agency and distribution disputes, real estate ownership registration issues, bankruptcy and insolvency matters, consumer disputes, labor-related disputes, intellectual property issues, and disputes involving public policy are generally termed as non-arbitral disputes. Offshore jurisdictions like the DIFC and ADGM do not explicitly list non-arbitral dispute categories but refer to English common law, which acknowledges that certain matters involving public rights or the public interest, such as criminal liability determinations, employment disputes, bankruptcy, and specific intellectual property disputes, may not be suitable for arbitration. This article delves into detail on the various aspects of arbitration.

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Types of Arbitration

There are several types of arbitration, depending on factors such as the nationality of the parties, the arbitral award, or the arbitrators involved. The following are some of the types:

Ad Hoc Arbitration

Ad hoc arbitration occurs when the parties mutually agree to resolve their disputes through arbitration proceedings conducted by arbitrators appointed by them, without involving an institution.

Institutional Arbitration

Institutional arbitration involves employing an institution specifically established for settling disputes through arbitration or other ADR methods. These institutions, whether national or international, typically have their own rules of arbitration. Notable institutes offering institutional arbitration include the Chartered Institute of Arbitrators, the London Court of International Arbitration, the National Arbitration Forum USA, the Singapore International Arbitration Centre, the International Court of Arbitration, the Dubai International Arbitration Centre, the Abu Dhabi Conciliation and Arbitration Centre (ADCCAC), the Sharjah International Commercial Arbitration Centre (Tahkeem), and the Ras Al-Khaimah Centre for Reconciliation and Commercial Arbitration.

Domestic Arbitration

Domestic arbitration refers to arbitration conducted within a single jurisdiction where both parties are either nationals of that jurisdiction or incorporated under its laws. For example, when two UAE companies resolve a dispute through arbitration in the UAE, it is considered domestic arbitration.

International Arbitration

Arbitration is considered to be International when at least one party involved in the dispute is a foreign national or a foreign-incorporated entity. Additionally, in the case of a corporate entity, its core control and central management must operate from outside the country. If one of the parties is a foreign government, the arbitration is classified as international.

Emergency Arbitration

Emergency arbitration provides interim relief granted by an arbitral tribunal to a party seeking to protect assets or evidence from loss or alteration. The threshold value for emergency arbitration is defined as below Dhs1m (excluding interest and costs).This concept can be compared to the granting of interim injunctions by civil courts.

Sole Arbitration

  • Sole Arbitrator: In a sole arbitration, a single arbitrator is appointed to preside over the dispute. The sole arbitrator is typically chosen by mutual agreement between the parties or by following the procedures specified in the arbitration agreement or applicable rules.
  • Preference for Sole Arbitration: Sole arbitration is often favored in cases where the dispute is relatively straightforward, the quantum of the claim is lower, or the parties desire a more cost-effective and expeditious resolution process. It can provide a faster decision-making process, as there is only one arbitrator involved.

Three-Member Tribunal

  • Composition: A three-member tribunal consists of three arbitrators, typically comprising a presiding arbitrator and two party-appointed arbitrators. The presiding arbitrator is usually selected by the two party-appointed arbitrators or through a separate appointment procedure as outlined in the arbitration agreement or applicable rules.
  • Preference for Three-Member Tribunal: A three-member tribunal is often preferred for complex disputes, high-value claims, or cases where the parties desire a more balanced and thorough examination of the issues at hand. The involvement of three arbitrators with diverse expertise can bring different perspectives and ensure a comprehensive consideration of the matter.

The Practice of Arbitration in the UAE

Arbitration is a widely used method of dispute resolution in the United Arab Emirates (UAE) and its surrounding regions. The growth of arbitration in the UAE is evident from the presence of several institutions that administer commercial arbitrations within the country.

Arbitration agreements play a vital role in the resolution of disputes in the United Arab Emirates (UAE). They are contractual provisions that establish the parties’ intention to submit their disputes to arbitration rather than traditional court litigation. The validity and enforceability of arbitration agreements are crucial factors in ensuring an effective and efficient arbitration process. Arbitration agreements can be held valid when it’s voluntary through mutual consent and also entered between parties having the legal capacity to do so. Arbitration agreements can be avoided under certain circumstances, including when the terms within the agreement are invalid or unenforceable according to the applicable laws, when there is non-compliance with required formalities, or when one of the parties lacks consent or is subjected to duress.

In 2018, the UAE introduced Federal Law No. 6/2018 on Arbitration, which became the country’s first standalone law on arbitration. Prior to the enactment of Federal Law No. 6/2018 on Arbitration in the UAE, arbitration was governed by the UAE Civil Procedure Code (Articles 203 to 218), which had certain limitations and did not fully address the complexities of modern arbitration practice. The Federal Law No. 6/2018 on Arbitration aimed to streamline the process of enforcing domestic arbitration awards and also replaced Articles 203 to 218 in the UAE Civil Procedure Code, facilitating the recognition and enforcement of foreign arbitral awards.

In 2021, Dubai Decree No. 34 of 2021 abolished the Emirates Maritime Arbitration Centre and the Dubai International Financial Centre (DIFC) Arbitration Institute. Their assets and liabilities were transferred to the Dubai International Arbitration Centre (DIAC), which has emerged as one of the prominent arbitral institutions in the UAE.

While construction disputes and real estate matters have traditionally dominated arbitration cases in the region since 2008, recent trends show a willingness among parties to submit a broader range of general commercial disputes to arbitration.

Legislative Framework for Arbitration in the UAE

Depending on the relevant jurisdiction, three separate applicable arbitration rules govern the arbitration process in the UAE. These three jurisdictions coexist within the country, and they are:

Onshore Arbitration

The Federal Law No. 6 of 2018 on Arbitration (the FAL) governs onshore arbitration proceedings in the UAE. This law is based, to some extent, on the 1985 UNCITRAL Model Law.

DIFC Arbitration

Arbitration proceedings in the Dubai International Financial Centre (DIFC) are governed by the 2008 DIFC Arbitration Law, as amended.

ADGM Arbitration

Arbitration proceedings in the Abu Dhabi Global Market (ADGM) are governed by the 2015 ADGM Arbitration Regulations.

All three statutes have varying degrees of alignment with the UNCITRAL Model Law of 1985.

Liability of Third Parties in Arbitration

Under the FAL, representatives of legal entities must be specifically empowered to enter into arbitration agreements on behalf of the entity. While there are UAE legal doctrines that may potentially bind non-signatory third parties to an arbitration agreement, the application and impact of these doctrines under the new regime remain largely untested.

In the offshore jurisdictions (DIFC and ADGM), whether an arbitration agreement extends to a non-signatory party depends on the application of common law doctrines such as assignment or assumption, agency and third-party beneficiaries, as well as estoppel, good faith, abuse of right, and implied consent.

Regarding the participation of third parties in onshore arbitration proceedings in the UAE, a third party may join the proceedings if they are a party to the underlying arbitration agreement and their joinder is requested by them or another party. In offshore jurisdictions, joinder is not expressly prohibited, and the ADGM allows it if the third party is a party to the arbitration agreement or consents to joinder.

Jurisdictional Issues of Arbitration in the UAE

The UAE recognizes the concept of kompetenz-kompetenz, which means that arbitral tribunals have the power to rule on their own jurisdiction. This principle is acknowledged in the Arbitration Law and various institutional rules. For instance, in accordance with the 2022 DIAC Rules, the Arbitration Court of the DIAC may declare that the arbitration must proceed, without regard to the merits, provided the existence of an arbitration agreement is prima facie established. The tribunal itself decides any jurisdictional objections raised by the parties as a preliminary issue. If the Arbitration Court is not satisfied, the parties are notified that the arbitration cannot proceed, and any party can then seek a court’s determination of the existence of a binding arbitration agreement.

According to the DIAC Rules, a plea challenging the jurisdiction of the arbitral tribunal must be raised no later than the submission of the respondent’s statement of defense.

Under the 2022 DIAC Rules, the Tribunal has a 3-month time limit to issue the Final Award from the date of case file transmission, with limited extension possibilities by the Arbitration Court only in exceptional circumstances (Article 32.5). As per Article 34.2 of the DIAC Rules 2022, the awards are binding on the parties involved. Once issued, an arbitral award holds significant weight, treated on par with a court judgment, reinforcing its enforceability, subject to necessary enforcement procedures.

In conclusion, arbitration is a popular method of dispute resolution in the UAE, offering a more streamlined and efficient alternative to lengthy court battles. The UAE has established various institutions to administer commercial arbitrations, and the legislative framework for arbitration varies depending on the jurisdiction involved. While there are limitations on the arbitrability of certain disputes, the UAE recognizes the principle of kompetenz-kompetenz, giving arbitral tribunals the power to rule on their own jurisdiction. With the continued growth of arbitration in the UAE, it remains an effective and preferred method for resolving commercial disputes in the region.

Arbitrability In International Commercial Arbitration 

Arbitration is an alternative means of dispute resolution and is often preferred by parties as it is more flexible, efficient and private. Furthermore, for commercial disputes, it is often preferred over litigation as arbitration orders are internationally binding with regards to the New York Convention, which UAE entered into force on 19th of November 2006. Due to these strong benefits, parties often rush into implementing re-used arbitration clauses into their contracts. Nonetheless, these clauses are not always applicable nor an appropriate means for resolving their disputes because, contrary to their ambitions, there are limitations imposed on the arbitrability of disputes 

Arbitration infrastructure, agreements, choice of law, appointment of arbitral tribunal, arbitration procedures, admissibility of evidences, costs and interests and many important factors impacting commercial arbitrations 

As a precursor it is worth noting there must be a valid arbitration agreement either within or supplementary to the contract which is separate from the contract and will not be terminated along with it. And there are certain conditions to make a dispute arbitrable in a particular jurisdiction. Having met this criterion, the dispute must nonetheless be arbitrable. This means that the dispute must be capable of being resolved amicably through arbitration. The reason for this definition being rather vague is, although generally, disputes relating to matters such as criminal law and divorces are not arbitrable, there is no universal definition for what is arbitrable and is subject to change between not only states but also among jurisdictions.  

The arbitrability of commercial agency disputes has often been misrepresented. This section of the article will analyse legislations and cases to understand the arbitrability of this type of disputes.  

Commercial Agency Disputes 

Articles 27 and 28 of the UAE commercial agency law have vested a special committee with the exclusive jurisdiction of reviewing and deciding on commercial agency disputes and Article 6 has vested similar powers to UAE courts for disputes arising from such contracts and therefore, any agreements contrary to these articles would be null and void. It was therefore held in judgement 814 of 2011 of the UAE Federal Supreme Court that any dispute relating to a commercial agency, so as long as the agency was registered in the commercial agency register, would not be arbitrable.  

The definitiveness of such a ruling was later tested in Case 362/2019 Commercial Cassation. As a bit of background to this case, the commercial Agent (Agent) had exclusive rights to sell the French manufacturer’s (Principal) cars in the UAE and was entitled to receive a commission for all sales of the Principal in the country. The commercial agency committee presided in favour of the agent when the Principal refused to pay a commission for a transaction the Principal had orchestrated without the Agent and it directed the agent to resort to courts to claim its entitled commission.  

Subsequently, when the Agent filed for such in the UAE courts, the Principal raised a defence contending the jurisdiction of the court based on an arbitration agreement between the parties. This defence was upheld, and Agent appealed all the way to the Courts of Cassation (CC). While the CC’s reasonings for not allowing the appeal was convoluted, what could be understood is that disputes relating to the existence, registration and maintenance of an agency agreement are not arbitrable due to the Courts of UAE’s exclusive jurisdiction, however, the same exclusivity does not apply for disputes relating to an agents commission and are therefore, arbitrable. 

Disputes Pertaining to insurance policies 

Another category of disputes with intricate specifications for arbitrability is disputes relating to insurance policies. Art 1028 of the UAE Civil Transactions Code (CTC) states an arbitration clause is not valid unless it is in a special agreement separate from the printed general conditions of the policy. A dispute regarding such was raised with the Court of First Instance and was elevated to the Federal Supreme Court. In judgement 278 of judicial year 15, it was confirmed by the courts that any arbitration clause in the general conditions of the policy would be null and void where the CTC applies.  

However, the courts found that in this instance the policy would be governed by the Commercial Transaction Code and not the Civil Transaction Code and thus, the arbitration clause was valid even though there was no separate agreement. Art 1 of the Commercial Transaction Code clarifies when this statute applies as, ‘to traders and to all commercial business undertaken by any person, whether or not a trader.’  

As insurance policies are extremely important to every individual, it is essential that big insurance companies aren’t able to abuse their powers and take advantage of individuals and the provision in the CTC exists for such. The power dynamic changes drastically when the insurer is a company itself. That is likely why a similar provision does not exist in the Commercial Transaction Code.  

Other non-arbitrable Disputes 

A key feature of arbitration is the fact that the arbitrators and the seat of the arbitration (and the attached legislation) is chosen by the parties and not by the state. As such there are limits on the arbitrability of certain disputes to ensure that the powers of the government are intact and that the orders passed do not contradict with public policy and affect third parties.  

As such, disputes regarding bankruptcy and insolvency proceedings are not arbitrable as it affects the legal status of an individual or a company. Similarly, certain property rights disputes (intellectual or real) are not arbitrable as the right is essentially granted by the state. The Abu Dhabi the Abu Dhabi Lease Law mandates all rental disputes to be referred to the Rental Disputes Committee, except disputes relating to agricultural buildings, government buildings rented for residential purposes, ADNOC-related properties, tourism-related properties and certain residential properties 

The last form of non-arbitrable disputes this article will discuss will be ones relating to consumer and labour-related disputes. Interestingly however, Art Article 12(2) of DIFC Law No. 1/2008 allows arbitration for such dispute provided that written consent has been given subsequent to the dispute and the courts are satisfied that an order on the dispute would not be detrimental to the statutory rights of either the employee or consumer. For example, an employee is entitled to payment in lieu of garden leave and as such a dispute relating to this payment would not be arbitrable. 

To conclude, while arbitration is potent means of alternative dispute resolution, its flexible nature of it requires limitations to exist to ensure that it is neither abused nor does it undermine the government’s policies. As such arbitration on certain commercial agency disputes, civil insurance policy disputes without a separate agreement, certain real estate disputes and certain labour and consumer-related disputes are not allowed in the UAE. 

About ATB Legal

ATB Legal is a full-service legal consultancy in the UAE providing services in dispute resolution (DIFC Courts, ADGM Courts, mainland litigation management and Arbitrations), corporate and commercial matters, IP, business set up and UAE taxation. We also have a personal law department providing advice on marriage, divorce and wills & estate planning for expats. Please feel free to reach out to us at office@atblegal.com for a non-obligatory initial consultation.

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