Legal Briefing

Arbitration under UAE law: towards a modern legal framework?

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Corporate & Commercial | 01 September 2010

The use of arbitration is, to a considerable extent, driven by the emergence of the UAE as the regional business hub of the Middle East. Given the cultural differences between the Middle East and the Western world, the best bet is to resolve disputes arising between parties from these two parts of the world by way of arbitration (when an escalation is inevitable). To this effect, the Middle East needs a world-class arbitration centre. The UAE is fully aware of this and has been working towards its implementation.

In fact, the UAE’ s legislation, rules and court precedents have, in recent years, borne testimony to important developments in the receptivity to arbitration as a dispute resolution mechanism. In addition, the UAE has seen the emergence of arbitration institutions, with modern rules based on best international practices. The UAE also acceded to the New York Convention on 19 November 2006, along with other regional and Gulf Cooperation Council conventions.

This article will endeavour to shed some light on these points.

history of arbitration legislation in the UAE

Historically, arbitration is not new in the UAE. Several pieces of legislation are of seminal importance to its development there.

The most relevant piece of legislation is the Abu Dhabi Civil Procedure Code of 1970 (Law no 3 of 1970 – specific to the Emirate of Abu Dhabi), which regulates (at s5) arbitration proceedings in Abu Dhabi. Although s5 provides for the procedure of appointment of arbitrators or the conditions and grounds for challenging an award, it does not refer to other fundamental principles of arbitration, such as due process, autonomy of the parties, or the power of the arbitrator to act as amiable compositeur (ie an arbitrator who rules ex aequo et bono – in other jurisdictions also know as arbitrage absolu). This law is also silent on the possibility of enforcement of a foreign award.

Another example of old legislation is the UAE Labour Law (Federal Law no 8 of 1980), where arbitration is the mandatory settlement dispute mechanism for collective labour disputes.1

It is also worth mentioning the Dubai Contracts Law of 1971, which provides, at article 32, for the possibility of referring disputes to arbitration.2 However, article 32 gives no further indication as to the regime of the proceedings or the rules to be followed.

Furthermore, the Dubai Law of 1975, instituting the Dubai Chamber of Commerce and Industry, grants the chamber the competencies to settle disputes between merchants or members of the chamber through arbitration.3 Once again, there are no further indications as to the applicable procedural rules.

For the sake of completeness, it is worth noting, that the Emirates Securities and Commodities Authority (ESCA) has issued specific regulations as to the arbitration of disputes arising from the trading of securities and commodities (ESCA Decision No 1/2001 as amended in 2008). It is a mandatory means of dispute resolution when the parties have opted for arbitration. Unlike the previously mentioned laws, the ESCA Regulations are a comprehensive set of rules, formed of 55 articles.

Finally, it is noteworthy, that in Islamic law, to the extent it applies in the UAE legal system, arbitration agreements are binding on their parties and no party is permitted to withdraw from any agreement it has concluded with others by their own free and valid will.4 In addition, Islamic law puts no restrictions on the selection of arbitrators based on religion or sex. Further, fundamentals such as the place of arbitration, the procedure, the time limit or the applicable rules are left at the discretion of the parties.

Except for the Dubai Chamber of Commerce and Industry, and the ESCA Regulations mentioned above, arbitration proceedings are governed today by the UAE Civil Procedure Code (Federal Law no 11 of 1992, as amended).

current arbitrationlegislation in the UAE

The law governing arbitration in the UAE is set out in the arbitration-specific provisions of the UAE Civil Procedure Code (articles 203-218 of the UAE Civil Procedure Code). As in other Gulf countries and similar civil law jurisdictions, arbitration has been viewed as a section of the Civil Procedure Code and not as an independent and distinct set of legislation.

Articles 203-218 are specific to arbitration in the UAE and are partly of mandatory application. Particular attention needs to be drawn to the following peculiarities when arbitrating in the UAE:5

  • The first arbitral hearing has to be scheduled for within 30 days from the appointment of the arbitration tribunal (article 208(1) UAE Civil Procedure Code).
  • An arbitration award has to be rendered within six months after the date of the first hearing, unless the parties have: (i) expressly agreed an extension of the time within which the award is to be rendered; or (ii) have delegated to the Tribunal the right to extend (article 210, UAE Civil Procedure Code).
  • Where one party commences court proceedings in breach of an arbitration clause, the UAE courts will only give effect to an arbitration clause provided its existence is raised and pleaded by the party that wishes to rely on the arbitration clause in the first hearing before the court. Otherwise, the right to resort to arbitration is considered to have been waived (article 203, UAE Civil Procedure Code).
  • Witness testimony in arbitration proceedings under the UAE Civil Procedure Code has to be provided under oath (article 211, UAE Civil Procedure Code).
  • To become binding upon the parties, an arbitration award has to undergo a validation or ratification process, which takes the form of ordinary litigious proceedings before the UAE courts (article 215, UAE Civil Procedure Code).
  • The rules of evidence tend to be flexible. In fact, there are no restrictions on how to deal with evidence in arbitration and arbitration proceedings in the UAE (Dubai Court of Cassation, petition no 269/1995, judgment of 10 February 1996 and article 212 of the Civil Procedure Code). All variations of the theme, as agreed by the parties on a case-by-case basis, are admissible provided they do not contravene mandatory standards of due process, natural justice and defence rights.
  • The language of arbitration is flexible (article 212, UAE Civil Procedure Code). The seat of arbitration is flexible as well.
  • The procedure of arbitration per se is flexible. The arbitrator shall issue their award without being bound by any procedures, other than those stipulated in the specific arbitration provisions of the UAE Civil Procedure Code and those pertaining to calling of the parties, hearing of their pleas, and enabling them to submit their documents. The parties to the dispute may agree on certain procedures to be followed by the arbitrator (article 212, UAE Civil Procedure Code).
  • The UAE legal system specifies that, once rendered, an arbitral award becomes res judicata. This means that once an award has been rendered, the parties can no longer refer their dispute to the courts – even with new evidence – unless the award is set aside. However, the enforcement of the award is suspended until the recognition process is undergone (Dubai Court of Cassation, petition no 265/2007, judgment dated 3 February 2008).
  • Moreover, the UAE system also admits the power of the arbitrator to act as amiable compositeur.

However, the UAE is expected to imminently adopt a new arbitration law.6 This will consolidate the recent development in the arbitration industry in the UAE.

Arbitration Conventions

The development of the UAE’s internal arbitration legislation has been in parallel to the increase in ratification of international conventions, paving the way for the enforcement of foreign awards. The UAE has ratified several both bilateral and multilateral arbitration conventions. The most important one is the New York Convention, which entered into force in the UAE on 19 November 2006.7

The UAE is also party to the followingmultilateral conventions:

  • The Riyadh Convention on JudicialCo-operation between States of the Arab League;8
  • The GCC Convention for the Execution of Judgments, Delegations and Judicial Notifications;9 and
  • The Washington Convention on the Settlement of the Investment Disputes between States and Nationals of Other States (also commonly referred to as the ICSID Convention).10

In addition, the UAE is a party to numerous bilateral conventions dealing with the enforcement of arbitration awards on a bilateral basis. These include bilaterial agreements on judicial co-operation (including the execution of judgments and arbitration awards) more generally with: Morocco (2006); Sudan (2005); Syria (2002); Eqypt (2000); Jordan (1999); France (1992); China (1984); and Somalia (1972).

Importantly, joining the New York Convention has already spawned an arbitration-friendly environment and is expected to further promote the UAE as the main arbitration hub in the Middle East in years to come. In fact, and as regards foreign arbitration awards, the joining of the aforementioned international conventions should, in theory, exempt the individual award from the ordinary recognition process of a domestic award.

Arbitration centers in the UAE

The aforementioned laws are supplemented by the rules of arbitration of the different centres located in the UAE. Arbitration centres play a major role in the development of arbitration and the New York Convention has endorsed this role.11 Generally speaking, the essential elements of the rules of arbitration centres concern the appointment, the challenge and the replacement of arbitrators, the language and seat of arbitration proceedings, the conservatory measures, the jurisdiction, and the rules of law applicable to the dispute. Naturally, in this context, arbitration practices will develop and evolve.

The most prominent rules are those of the Dubai International Arbitration Centre (DIAC), and the Abu Dhabi Commercial Conciliation and Arbitration Centre. Other Emirates in the UAE, such as Ras Al Khaimah or Sharjah, have established their own arbitration centres and rules. Finally, and importantly, Islamic finance disputes are also to be referred to the International Islamic Centre for Reconciliation and Arbitration. This will further increase the choice of arbitration regimes for parties in the UAE.

Of the free zones, the most notable regarding arbitration is the Dubai International Financial Centre (DIFC), which has its own DIFC Arbitration Law and uses the DIFC-LCIA (the Dubai-based subsidiary of the London Court of International Arbitration) Rules.12

UAE Courts’ Receptivity to Arbitration

There can be no doubt that the UAE courts have shown themselves to be increasingly arbitration-friendly over the past few years.13 They have consecrated several jurisprudential principles and accordingly pushed on the development of arbitration in the UAE.

First, they have adopted the pacta sunt servanda principle. For instance, the UAE courts have ruled that contracting parties can subordinate their arbitration to so-called conditions precedent, which have to be fulfilled prior to a referral to arbitration (Dubai Court of Cassation, petition no 124/2008, judgment dated 16 September 2008). A failure to fulfill the conditions precedent is ruled to be a breach of the pacta sunt servanda principle and accordingly a submission for arbitration should be rejected where the relevant condition remains unperformed.

Secondly, although there are no time limits under the current UAE Civil Procedure Code to initiate nullification proceedings, it bears noting that the Dubai Court of Cassation has adopted a proactive and progressive position in this respect.14

Thirdly, UAE jurisprudence has recognised that the transfer of a contract also includes the transfer of the arbitration agreement contained therein (Dubai Court of Cassation, petition no 40/2004, judgment dated 26 September 2004).

Fourthly, and after resistance, UAE courts have ruled that the validity or termination of the arbitration clause must be assessed separately from that of the main contract of which it forms part as the arbitration clause is autonomous and enjoys a separate ‘subject’ from that of the main contract (this is the position of the DIAC Rules (article 6)).15 In fact, in so ruling, the UAE courts confirmed that the arbitrator has the authority not only to determine their own jurisdiction (the ‘competence-competence’ principle), but also the validity of the main contract.

As a final example of the receptivity of the UAE courts to arbitration, it must be noted that the courts have ruled very recently (in Dubai Court of Cassation, petition no 146/2008, judgment dated 9 November 2008) that although public order is not one of the grounds on which one may seek the setting aside of an award (article 216 of the Civil Procedure Code does not enunciate public order as a ground for annulment) domestic public order should be taken into consideration at the enforcement stage as it is one of the essential elements that applies to judgments and awards.16 But, more importantly, the Court of Cassation ruled, in this same decision, that not all imperative (mandatory) rules are part of public order.

This is, in no doubt, a distinctly narrow approach to the definition of the public order concept. The rules of evidence, for instance, are mandatory rules but form no part of public order. However, the Court of Cassation refers only to domestic public order (ordre public interne) and not to any international public order (ordre public international).

Weaknesses of the current system

Length of the ratification process

As mentioned above, to be enforceable in the UAE, domestic arbitration awards have to undergo a recognition process before the courts. Given that the ruling on the enforcement of an award is subject to the ordinary and extraordinary channels of appeal before the Court of Appeal and then the Court of Cassation, the overall recognition process may take in excess of 18 months, during which the enforcement of the award is suspended.

UAE courts’ formalistic approach

Although UAE courts are nowadays receptive to arbitration, they should adopt a less formalistic approach with respect to some legal notions, such as the signature of the award, the capacity and authority to enter into an arbitration agreement or the witness oath taking.17 This conservative, formalistic approach, stems from the fact that, historically, UAE courts consider arbitration agreements to be vested with a certain degree of seriousness as they imply a waiver of the natural right to recourse to ordinary courts. Accordingly, as an alternative mechanism of dispute resolution, arbitration agreements should be narrowly construed.18

Effects of a successful challenge

The main effect of a successful challenge is that the award is declared null and void. However, what will be the effect of such a declaration on the arbitrators themselves and on the arbitration agreement? Although the UAE Civil Procedure Code does not provide other remedies than the annulment of the award, the UAE courts have answered this question: the dispute cannot be remitted back to the arbitrators, unless the parties consented to the contrary, as the mission of the arbitrators ends by their rendering of the first award.19 The dispute can then be referred to the courts, but such referral is not automatic. The court that set aside the award is denied the power to judge the case on the merits once the award has been annulled. The aggrieved party should initiate separate new proceedings in this respect.

In conclusion, although the road for recognition and enforcement of awards has been greatly paved in the recent years, arbitration practitioners are keen to see additional efforts succeed. For example:

  1. A less formalistic approach by the courts regarding certain legal notions must to be taken to facilitate the enforcement of awards in the UAE.
  2. A new arbitration law (based on the UNCITRAL Model Law) is to be promulgated.
  3. A differentiation between domestic arbitration and international arbitration should be encouraged, as the current UAE Civil Procedure Code makes no distinction in this respect. The notionof international public policy shouldalso be introduced in the UAE legal system.