Ensuring your Arbitration Agreement is Valid - Contracting with UAE Registered Companies

Introduction

Arbitration agreements are commonplace in construction contracts throughout the UAE and across the wider Middle East region. This is especially so in circumstances involving a foreign entity (or local branch of a foreign entity) or a foreign subject matter, whereby arbitration is now the preferred method of dispute resolution for the majority of contracting parties.

In addition, the ability of the parties to choose members of the arbitral tribunal is seen as a key factor in construction arbitrations, as it allows the parties to include not only legal experts but technical experts as well. This is particularly important given that the nature of the majority of construction disputes includes a technical aspect, be that in relation to extensions of time, variations and/or delays.

Whilst many parties believe that simply including an arbitration agreement within a construction contract is sufficient, it has become increasingly clear, with the UAE Courts’ recent willingness to step in and rule that arbitration agreements are not valid (even for a contract that is not governed by UAE law), that parties need to carefully consider the construction of any arbitration agreement entered into.

What is an Arbitration Agreement?

An arbitration agreement allows the parties to a contract to agree that all, or specific, disputes arising out of a contract will be heard under the auspices of an Arbitration Centre such as the DIFC-LCIA, Bahrain Chamber for Dispute Resolution, London Court of International Arbitration or the International Chamber of Commerce (to name some of the global centres). 

In addition to choosing the arbitration centre, and the applicable set of Rules (which usually follow the choice of arbitration centre) to govern the dispute, a properly drafted arbitration agreement will also include the number of arbitrators that will form the tribunal (usually 1 or 3), the place of the arbitration and the seat of the arbitration (the overriding governing law of the arbitration procedure).

Although arbitration agreements are usually clauses contained within a construction contract, under UAE law they are seen as a separate agreement altogether. They therefore have specific legal provisions which entitle a party to enter into one. Therefore simply including one within your construction contract will not be sufficient to comply with UAE Law.

Requisite authority for UAE Companies

Under the New UAE Arbitration Law (Federal Law No. 6 of 2018), Article 4(1) “An Arbitration Agreement may only be concluded, on pain of nullity, by a natural person having the legal capacity to dispose of his rights or on behalf of a juridical person by a representative with specific authority to arbitrate.”

This Article highlights the requirement for there to be ‘specific authority’ for any company representative to legally bind that entity to an Arbitration Agreement.

In addition, Article 154 of the New UAE Companies Law (Federal Law No. 2 of 2015), which applies to almost all companies established in the UAE, states that unless directors are given specific authority to enter into an arbitration agreement under the Articles of Association they cannot do so without a special resolution from the general assembly.

Recent Case Law

Whilst there have been conflicting judgments emerging from the UAE, and in particular the Dubai Courts (including the Court of Cassation which is the highest Court in Dubai), it has become clear that the law will be strictly construed in relation to authority to enter into arbitration agreements.

Recently, the Dubai Court of Cassation held that a JAFZA offshore entity was required to comply with the UAE Federal Laws referred to above on the basis that there is no provision contained within the JAFZA Regulations which expressly excludes the UAE Federal Laws.

Under the arbitration agreement that the JAFZA offshore entity had entered into, the governing law of the contract was England and Wales with any arbitration to be held at the DIFC-LCIA centre, under the DIFC-LCIA Rules. The seat of the arbitration was DIFC.

Initially, the Dubai Court of First Instance accepted jurisdiction on the basis that the arbitration agreement was invalid as the signatory to the contract had no specific authority to agree to arbitrate as required under UAE Federal Law. 

On appeal, the Court of Appeal reversed this decision.

The Court of Cassation then ruled that, contrary to the Court of Appeal’s decision, the arbitration agreement was indeed invalid. This meant that the Dubai Courts had jurisdiction. The Court of Cassation found that authority to enter into the contract containing the arbitration agreement was not sufficient as there was not express authority for the signatory to enter into the arbitration agreement.

No detailed reasoning was given for the Court of Cassation’s decision.

What is clear from the above is that arbitration agreements entered into by UAE companies may be open to challenge in the UAE Courts if the person entering into such arbitration agreement does not have the requisite authority to do so under UAE Federal Law.

This ability to enter into an arbitration agreement by a UAE company is governed by UAE Federal law regardless of the choice of law of the contract. Therefore a UAE company which is subject to any arbitration proceedings may bring a case in the UAE Courts to avoid such arbitration proceedings on the basis that they did not have the requisite consent to enter into the arbitration agreement as required by UAE Federal Law.

Practical Points to Note

1. If you are a UAE registered entity (including a foreign branch) entering into a construction contract which includes an arbitration agreement:

a) Include specific authority in the Articles of Association allowing specific individuals (such as members of the Board of Directors) to enter into arbitration agreements; or

b) Obtain a special resolution for each construction contract stating that the person signing the contract is allowed to not only enter into the contract, but specifically enter into the arbitration agreement.

2. If you are either a UAE registered entity or a foreign entity contracting with a UAE registered entity (regardless of the choice of law) you should request proof of the authority of the person entering into the construction contract that confirms that they have the requisite authority to enter into the arbitration agreement as per 1(a) or 1(b) above.

3. If a construction contract containing an arbitration agreement is assigned or novated to a UAE company, the requisite authority to agree to the arbitration agreement needs to be explicit as per 1(a) or 1(b) above.

4. Do not assume that because the construction contract is not governed by UAE law that the UAE Federal Laws in this respect will not apply to the arbitration agreement. 

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This article was written by Paula Boast and Jodie Martyndale-Howard  For more information please get in touch via paula.boast@crsblaw.com or on +973 17 133212.