US Court Declines to Enforce DIFC-LCIA Arbitration Agreement through DIAC

February 17, 2024by Jerome Jose0

A look at the fate of existing DIFC-LCIA arbitration clauses after Dubai’s Decree 34 of 2021 dissolved the DIFC-LCIA and transferred its functions to the DIAC (Dubai International Arbitration Centre).

In a recent development in the sphere of international dispute resolution, a United States court has refused to enforce a Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA) arbitration agreement, asserting that the DIFC-LCIA is not synonymous with the Dubai International Arbitration Centre (DIAC). This landmark decision by Louisiana State District Judge Greg Guidry has significant implications for international arbitration, particularly in cases involving arbitration agreements affected by regulatory changes. The US Court has now held that Decree 34 of 2021 cannot compel parties to arbitrate before DIAC where parties had contracted to arbitrate before DIFC-LCIA. The judgment demonstrates the ongoing uncertainty regarding the enforceability of DIFC-LCIA arbitration agreements and is a salient reminder that parties with such agreements should seek to amend their contracts.

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Background

Article 6 of the Dubai Decree Law 34 of 2021 provides that all arbitration agreements referring disputes to the DIFC-LCIA or the Emirates Maritime Arbitration Centre (EMAC) will be “deemed valid and effective” and DIAC will replace those centers in considering and determining disputes that arise under those agreements unless otherwise agreed by the parties.

Following the issuance of the Decree, the DIFC-LCIA and the LCIA announced that:

  • All pre-existing DIFC-LCIA arbitrations would be administered directly by the LCIA under the Rules of the DIFC-LCIA Arbitration Centre.
  • Parties should no longer incorporate the DIFC-LCIA Arbitration Rules (the “DIFC-LCIA Rules”) into their arbitration agreements; and
  • All DIFC-LCIA arbitrations that are commenced after the Enactment Date would be administered by DIAC under the DIAC Arbitration Rules (the “DIAC Rules”) unless the parties agree otherwise.

The dispute centers around an arbitration agreement with a DIFC-LCIA seat, where the defendant argued that the Dubai government’s 2021 decree abolishing the DIFC-LCIA had transferred its assets, rights, and obligations to the DIAC. The defendant contended that the Decree of 2021 explicitly deemed existing DIFC-LCIA clauses as valid, preserving the enforceability of the arbitration agreement.

Legal Analysis

The court faced a pivotal decision regarding the enforceability of a DIFC-LCIA arbitration agreement after the Dubai government’s 2021 decree abolished the DIFC-LCIA and replaced it with the Dubai International Arbitration Center (DIAC). The defendants contended that the contract mandated arbitration under the Arbitration Rules of the DIFC LCIA, while the plaintiff argued that the dissolution of the DIFC-LCIA rendered the arbitration provision unenforceable.

Despite the defendant’s argument, Judge Guidry held that neither the U.S. court nor the Dubai government possessed the authority to alter or rewrite the arbitration agreement, mandating proceedings in another forum. The judge emphasized that while the DIAC and DIFC-LCIA might share similarities, they are distinct forums, and the parties had specifically agreed to arbitrate in the DIFC-LCIA. Citing landmark cases such as Atlantic Marine Construction Co., Inc. v. U.S. Dist. Court and Barnett v. DynCorp Int’l, LLC, the court emphasized the significance of forum-selection clauses in arbitration agreements. However, the core contention arose due to the dissolution of the DIFC-LCIA and its replacement with DIAC.

The plaintiff contended that the Dubai government lacked the authority to unilaterally change the agreed-upon arbitration forum. Relying on the Federal Arbitration Act (FAA) and Supreme Court precedents, the court acknowledged the FAA’s liberal policy favoring arbitration, but underscored the fundamental principle that arbitration is strictly a matter of consent.

Crucially, the court referred to binding precedents, such as National Iranian Oil Co. v. Ashland Oil, Inc., and Ranzy v. Tijerina, where the Fifth Circuit held that a court cannot rewrite the parties’ agreement and compel arbitration in a forum to which they had not contractually agreed. Despite the defendant’s argument that the Dubai government’s decree validated existing DIFC-LCIA arbitration agreements, the court maintained that the DIAC, while similar, was not the same forum as the DIFC-LCIA. It affirmed that the court cannot compel arbitration when the agreed-upon arbitration tribunal is unavailable or no longer exists, citing the strict adherence to the parties’ contractual choices.

In essence, the court rejected the argument that the Dubai government’s decree could override the parties’ contractual agreement, reinforcing the principle that arbitration remains a matter of consent. This case serves as a notable example of the intricate legal challenges arising from the dissolution of arbitration forums and the courts’ adherence to the parties’ original contractual intentions.

Implications of Arbitration

This case represents the first reported instance of a U.S. court refusing to enforce a DIFC-LCIA arbitral clause after the Dubai government’s 2021 decree. Legal experts view this decision as a pivotal development that underscores the importance of contractual precision in arbitration agreements. Parties entering into contracts with arbitration clauses must be vigilant in updating references to arbitration institutions, especially considering regulatory changes that could impact the validity of such agreements.

Key Takeaways

  1. Governmental Decrees and Arbitration Agreements:

The case highlights the complex interplay between government decrees and International arbitration agreements. Parties should be aware that changes in regulatory landscapes may impact the enforceability of existing arbitration clauses.

2. Specificity in Arbitration Clauses

This decision underscores the significance of specificity in drafting arbitration clauses. Parties should designate the chosen arbitration forum to avoid ambiguity and potential disputes regarding the enforceability of the agreement.

3. Adapting to Regulatory Changes:

Businesses and legal practitioners are reminded of the need to stay abreast of regulatory changes and promptly update contractual references to arbitration institutions to align with evolving legal frameworks.

The U.S. court’s refusal to enforce a DIFC-LCIA arbitration agreement serves as a noteworthy precedent, emphasizing the importance of precision and vigilance in international arbitration. As businesses navigate the evolving landscape of international dispute resolution, this case underscores the need for proactive measures to adapt to regulatory changes and safeguard the enforceability of arbitration agreements.

This development underscores the continued legal challenges and potential difficulties in enforcing DIFC-LCIA arbitration agreements, especially in jurisdictions beyond Dubai and the broader UAE. Consequently, parties currently bound by contracts specifying DIFC-LCIA or EMAC arbitration should take prompt action, if they haven’t already, to mutually modify such agreements. Failure to amend these clauses poses a tangible risk, as courts may decline to acknowledge the validity and enforceability of the arbitration agreement. Respondents might then have compelling grounds to contest DIAC’s jurisdiction, particularly if their consent was not explicitly given.

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.

by Jerome Jose

Jerome is a legal consultant at ATB Legal, handling corporate and commercial matters. He is a law graduate from Christ University, Bangalore, and has practised with legal consultancies in the UAE and India.

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