DIFC Court confirms enforceability of DIFC-LCIA arbitration agreements

The landscape of arbitration in the UAE experienced significant change following the issuance of Dubai Decree No. 34 of 2021, which abolished the DIFC-LCIA and directed that future arbitrations be administered by the Dubai International Arbitration Centre (DIAC).

This shift has led to divergent views on the enforceability of existing DIFC-LCIA arbitration agreements, particularly between jurisdictions within the Middle East and those outside of it. Decisions in the US and Singapore have cast doubt over the enforceability of DIFC-LCIA arbitration agreements, whereas decisions in the Abu Dhabi Court of First Instance and Abu Dhabi Court of Appeal have upheld enforceability.

A case between Narciso and Nash in the DIFC Court of First Instance is the latest decision to weigh in on the topic. While the decisions arising in the Middle East appear to be positive for parties with legacy DIFC-LCIA arbitration agreements, a careful review of such clauses is always recommended, and consideration ought to be given as to whether amendment by agreement would be beneficial.

Background

In late 2021, the Dubai Decree No. 34 of 2021 abolished the DIFC-LCIA and directed that the DIAC administer future arbitrations arising from arbitration agreements that refer to the DIFC-LCIA.

In line with article 6 of the Decree, the UAE government made clear its intention that DIFC-LCIA arbitration agreements were to remain “valid and effective” and DIAC was to directly replace the DIFC-LCIA in hearing and adjudicating the disputes arising out of such agreements, unless the parties agreed otherwise.

Case law outside UAE

Despite the UAE government’s intention, two headline decisions subsequently cast doubt upon the effect of the Decree and the enforceability of DIFC-LCIA arbitration clauses.

In a Louisiana case between Baker Hughes Saudi Arabia Co. and Dynamic Industries, Baker Hughes contracted with Dynamic Industries to supply materials, products and services for an oil and gas project being performed in the Kingdom of Saudi Arabia. Baker Hughes commenced court proceedings against Dynamic Industries in the US, seeking payment of sums owed under the contract. Dynamic Industries sought to have the claim dismissed due to the existence of a DIFC-LCIA arbitration clause in the underlying contract.

Against the backdrop of US Federal law and precedent, the Louisiana Court ultimately held that the DIFC-LCIA arbitration clause in question was unenforceable.

Central to its conclusion was that the US Federal International Arbitration Act, as interpreted by the US Supreme Court, “reflects fundamental principle that arbitration is a matter of contract” and, accordingly, the court “cannot rewrite the agreement of the parties and order the [arbitration] proceeding to be held in a forum to which the parties did not contractually agree … Nor can the Dubai government.”

The court also noted that the DIFC LCIA “is not the same forum in which the parties agree[d] to arbitrate” and, based upon US Supreme Court precedents, “…it cannot compel arbitration when the agreed upon arbitration [institution] is unavailable or no longer exists”.

Following this, in an anonymised Singapore case known as ‘DFL v DFM’ (20-page / 208KB PDF), DFL sought to enforce in Singapore a provisional award rendered by DIAC dated 16 November 2022. DFM contested the enforcement on the basis that the contractual agreement had referred disputes to arbitration under the DIFC-LCIA Rules, not DIAC Rules.

Regarding the enforceability of the arbitration agreement, the Singapore High Court agreed with the analysis of the Louisiana case and found that the “Parties’ submission to arbitration is purely contractual. They cannot be compelled to submit to arbitration under a set of rules that they did not agree to. The Decree could not force an arbitration under the DIAC Rules on the respondent without his agreement…”.

Despite this reasoning, the Singapore High Court ultimately found DFM had “submitted to the jurisdiction of [DIAC]” by failing to raise jurisdictional objections in its answer to DFL’s request for arbitration and dismissed DFM’s application to set aside the order, granting enforcement of the provisional award. ‘DFL v DFM’ was recently upheld on appeal.

UAE case law

In contrast, both civil and common law courts within the UAE have so far supported the enforceability of DIFC-LCIA arbitration agreements.

Abu Dhabi Court of First Instance and Court of Appeal

In a recent case between Vaned Engineering GMBH and Reem Hospital, the Abu Dhabi Court of First Instance considered the Baker Hughes case and ‘DFL v DFM’ and ultimately gave effect to the parties’ arbitration agreement as a matter of UAE law.

On appeal, the Abu Dhabi Court of Appeal adopted and affirmed the Abu Dhabi Court of First Instance’s decision. The Court’s decision was based on the fact that:

• the parties had unequivocally elected for determination of their disputes by arbitration;
• the abolition of the arbitral institution the parties had nominated was not of itself sufficient to render the arbitration agreement null and void, inoperative or incapable of being performed;

   

• the provisions of UAE Federal Law No. 6 of 2018 on Arbitration - which is based on the UNCITRAL Model Law - gave effect to the parties’ bargain by supplying any absence in terms of applicable procedure.
• the Decree preserved the parties’ bargain and if the parties had not wished their arbitration after the Effective Date of the Decree to have been administered by DIAC according to its Rules, it was open to the parties to have agreed that another institution was appointed in its place; and
• as a matter of practice, institutional rules change from time to time, and when rules change, this does not permit a party to renounce the arbitration agreement.

DIFC Court

In the latest case, Narciso v Nash, Narciso was the main contractor, and Nash the sub-contractor, under an agreement for various engineering and construction related activities related to a residential project for 380 houses in Sharjah, UAE. It was a term of the agreement that the parties resolve disputes “…by arbitration under the Arbitration Rules of the DIFC-LCIA Arbitration Centre”.

Disputes arose between the parties, which resulted in Narciso terminating the agreement. In April, Nash issued proceedings against Narciso in the Sharjah Court seeking damages for breach of contract and wrongful termination. Narciso applied for, and the DIFC Court granted, an interim anti-suit injunction to prevent Nash from continuing to pursue the Sharjah Court proceedings. Nash then applied to discharge the interim anti-suit injunction.

In June, satisfied that there was a serious question to be tried, the DIFC Court dismissed Nash’s application and ordered that the interim anti-suit injunction continue until final determination of Narciso’s claim for a permanent anti-suit injunction.

Notably, in reaching this conclusion, the DIFC Court considered the effect of the Louisiana, Singapore High Court and Abu Dhabi Courts’ decisions regarding the enforceability of DIFC-LCIA arbitration agreements as a matter of DIFC Law. Ultimately, Justice Black KC provided a “strong (albeit necessarily provisional) view that [the Decree] has not rendered the Arbitration Agreement in the present case null and void, inoperative or incapable of being performed”. 

Central to the DIFC Court’s finding was that, by reason of Dubai Law No. 5 of 2021, the Decree “forms part of the law of the DIFC” and a judge was “bound to give effect to the Decree”. 

Justice Black KC found that the Decree did include the DIFC in its provisions, and that the Decree took effect under DIFC Law, as:

• article 2 of the Decree established a DIAC office in the DIFC;
• article 4(2) abolished the Dubai International Financial Centre Arbitration Institute regulated pursuant to Law No. (5) of 2021 and other legislation in force within the Dubai International Financial Centre;
• article 5 transferred the property, rights and obligations of the DIFC-LCIA (within the DIFC) to DIAC;
• article 7 concerns the jurisdiction of the DIFC Courts; and
• the Statute of the Dubai International Arbitration Centre attached to the Decree at articles 4(a)(2) and (b) addresses the choice of the DIFC as the seat of arbitration and the jurisdiction of the DIFC Courts.

He noted that “Decree 34 does not purport totally to rewrite the terms of every arbitration agreement made before the Effective Date of the Decree”.

Justice Black KC also noted that “the Louisiana Court (perhaps constrained in its thinking by authority) did not appear to appreciate the difference between forum and the procedural rules” and that the approach of the Abu Dhabi Courts appeared “to be more closely reasoned and to uphold the twin principles of party autonomy and holding parties to their agreements to arbitrate in a way that resonates with the pro-arbitration policy of the DIFC Courts”.

He went on to state that even if the decree was not binding upon him, he would have adopted the reasoning of the Abu Dhabi Courts and found that the decree did not render an arbitration agreement subject to DIFC law unenforceable on the grounds of violation of the principle of party autonomy. 

While the issue was only “provisionally” determined by Justice Black KC, this recent decision of the DIFC Court of First Instance is indicative of the approach that DIFC Courts are likely to take when considering the enforceability of such clauses, in line with the recent decisions of the Abu Dhabi Courts. As compared with the Louisiana and Singapore High Court cases, Justice Black KC considered the matter in the wider context of the Decree and constitution of the DIFC and UAE arbitral entities.

Co-written by Jack Tivey of Pinsent Masons.