Contract that opts for arbitration as the dispute resolution mechanism to ensure its validity.
Omar Al-QahtaniPartner,Head of Litigation - Kuwait
Ahmed RezeikSenior Counsel,Transport & Insurance
Arbitration is a consensual dispute resolution process that typically involves parties entering into an agreement to arbitrate their existing or future disputes. Arbitration is recognized by the Kuwaiti courts as a valid and exceptional method of dispute resolution provided the mandatory requirements of Kuwaiti law are satisfied. This article considers a Kuwaiti court judgment where the court held that the litigants were bound by an arbitration agreement that was incorporated by reference, i.e., where the arbitral clause is found in a separate agreement but referenced in the parties’ agreement, finding that the clause complied with the requirements of Kuwaiti law.
Under Kuwaiti law, arbitration is recognized as a valid and exceptional method of dispute resolution that deviates from the default method of litigation provided it satisfies certain formal conditions. Article 173 of the Kuwaiti Decree by Law No. (38) of 1980, promulgating the Civil and Commercial Procedures Law (as amended) regulates the main rules governing an agreement to, as follows:
“Arbitration may be agreed upon in a certain dispute or for all disputes arising from the implementation of a certain contract.Arbitration may only be evidenced be in writing.Arbitration may not be held for matters that are not subject of conciliation. Arbitration shall only be valid when made by a party with a capacity to dispose of the right under dispute.The subject matter of the dispute must be specified in the arbitration agreement or during the hearing, even when the arbitrator is authorised to hold conciliation, or else the arbitration shall be deemed null and void.The courts shall not have jurisdiction to hear disputes agreed to be arbitrated. Objections/motions made for lack of jurisdiction may be waived explicitly or implicitly.Arbitration shall not include summary/urgent matters, unless otherwise agreed upon in an explicit manner.”
As may be seen, above, the arbitration agreement must in writing, which necessitates an express arbitration clause. And while it may be situated in a separate document, the Kuwaiti Courts require that there is no ambiguity concerning the reference to arbitration and that there is evidence that that the arbitration clause was clearly agreed by the parties. This might necessitate, for example, that the clause must be in bold and a bigger font, However, each case must be assessed on its own particular facts and the underlying circumstances.
A commercial trading company (“Claimant”) filed a civil case against a number of parties (the “Defendants”) before the Kuwait Court of First Instance. Claimants demanded the Defendants to jointly pay an outstanding amount of approximately USD 1.6 Million plus compensation for damages.
The Claimant argued that it had entered into an agreement with another company to supply certain materials, which were damaged on delivery which reduced the value of the shipment by 70%. The Claimant further asserted that such damage was a clear breach of the agreed terms and had significantly harmed the Claimant, thus entitling him to adequate repayment and compensation.
The Defendants objected to the jurisdiction of Kuwait Courts on the basis of the arbitration clause agreed between the parties.
The Claimant argued that the arbitration clause was not in the main agreement, rather it was included in another document that the parties agreed to by way of reference. Furthermore, the Claimant asserted the reference to such document was general, broad and contrary to the applicable law that necessitates a clear arbitration clause.
Judgements
The Court of First Instance upheld the arbitration agreement. Its judgment was upheld by the Court of Appeal and the Court of Cassation Courts. In this article, we will focus on the findings of the Court of Cassation.
The Court of Cassation held that arbitration is an exceptional method of dispute resolution that deviates from the default method – litigation. To ensure that such exception is clear, specific, and unambiguous, the law expressly provides that the subject matter of the dispute that is referred to arbitration must be clearly specified in the arbitration agreement or during the proceedings – Article 173 of the Civil Procedure Law.
“An arbitration agreement, as settled, may take one of two forms: an arbitration clause or a submission agreement. An arbitration clause is an agreement between two parties to submit to arbitration for the resolution of any or all disputes which may arise between them in connection with a specific legal relationship. The arbitration clause is usually embedded in the original contract underlying the legal relationship and may appear in a subsequent agreement before the dispute arises whereas the submission agreement is an agreement to arbitrate entered into by two parties after the dispute has arisen. The arbitration clause, like the submission agreement, is a binding and operative arbitration agreement. The clause must be clear and unambiguous in terms of the requirement to submit to arbitration and must specify clearly the subject matter of the dispute that is to be referred to arbitration.”
The court elaborated further and held that:“The arbitration clause may not be in the main original contract, and it suffices for such contract to refer to another document that includes the arbitration clause, provided that the reference is such as to make the clause part of the main contract. Legally, a reference is an arbitration agreement if the parties mutually agree, by such reference, to submit to arbitration. An operative reference presupposes that the referenced arbitration clause is in force and that the referenced document pre-dates the referring contract and expressly includes the arbitration clause. Also, the reference to the arbitration clause must be clear. A general reference to the terms of the pre-existing document without specific and clear reference to the arbitration clause within is inadequate to create an arbitration agreement.”
Contrary to the Claimant’s argument, the reference did make a clear reference to the arbitration with specific terms. It was not a general reference, but rather a specific one.
The Kuwait courts upheld in this case the parties’ agreement to arbitration, even when made by way of reference. This method is recognised provided that the conditions set out in Article 173 are met, including having a clear referral with specific and precise reference to arbitration of the subject matter. The underlying basis for those requirements is to ensure the parties’ intention to agree to arbitration is clear.
Whilst the reference to arbitration was recognised in this case, the assessment of the validity of an arbitration clause incorporated by reference must be considered on a case by case basis. It is therefore recommended to seek legal advice prior to entering into any contract that opts for arbitration as the dispute resolution mechanism to ensure its validity.
For further information, please contact Omar Al-Qahtani or Ahmed Rezeik.
Published in November 2022
