The validity of arbitration agreements on non-signatories: A recent judgment of the Dubai Court of Cassation
Dispute Resolution / UAE
Mohamed Al Marzouqi Partner,Regional Co-Head of Litigation
Malak NasreddineAssociate,Dispute Resolution
In a recent case before the Dubai Court of Cassation, the court held that the arbitration clause contained in a company’s memorandum of association extends to a director, who is a non-signatory, in circumstances where (among other things) such party is a “direct adversary” to the dispute. This article provides a brief background to the dispute, and reviews the courts’ approach and reasoning in its decision.
As a brief summary, this dispute involved an application by eleven claimants against the defendants for the removal of the first defendant from the management of the second defendant, which is a limited liability company incorporated under the laws of the UAE (the “Company”). The first defendant is the executive director of the Company and holds 35% of its shares (hereinafter referred to as the “Director”). Nine of the claimants became partners in the Company following the death of their legatee, who established the Company together with two of the other claimants.
Proceedings before the lower courtsThe claimants commenced legal proceedings before the Dubai Court of First Instance under Case No. 2512 of 2022. The claimants alleged that the Director (i.e., the first defendant) committed financial misconduct, particularly as a result of (a) allegedly disbursing substantial sums from the Company’s profit without the requisite approvals and authority, (b) allegedly establishing a fictitious debt in the balance sheets in favour of a third party Company (which the Director owned), thereby seizing substantial sums from the Company, and (c) allegedly committing other negligent acts that resulted in the deterioration of the Company’s financial position and its inability to meet its financial obligations.
In their defence, the defendants argued that the claim is inadmissible due to the existence of an arbitration clause in the Memorandum of Association of the Company dated 6 May 1998 (“MOA”), irrespective of the fact that the Director (i.e., the first defendant) was not a signatory the MOA. Clause 16 of MOA provided that any disputes between the shareholders or their heirs related to the contract must be resolved through arbitration.
The Dubai Court of First Instance rejected the defendants’ jurisdiction argument and ordered the removal of the first defendant from the management of the Company. Notably, the Dubai Court of First Instance observed that, in any case, the arbitration clause does not extend to the Company (i.e., the second defendant) since Clause 16 of the MOA applies only to the shareholders and their heirs, not the Company itself.
The defendants appealed the lower court’s decision before the Dubai Court of Appeal in respect to the validity of the arbitration agreement under Appeal No. 1324 of 2023. The eleventh claimant appealed the decision on the merits under Case No. 1626 of 2023. The Dubai Court of Appeal consolidated the two appeals and, on 27 December 2023, rejected the appeals and upheld the lower court’s ruling.
Proceedings before the Court of CassationThe defendants appealed the Dubai Court of Appeal’s decision before the Dubai Court of Cassation on the validity of the arbitration agreement under Case No. 137 of 2024, and the eleventh claimant appealed the decision on the merits under Case No. 146 of 2024. As with the lower court, the Dubai Court of Cassation consolidated both appeals.
In respect to the validity of the arbitration agreement, the appellants argued that the Dubai Courts do not have jurisdiction to hear the present case because the arbitration clause in the MOA refers the dispute to arbitration. The appellants argued that the lower courts erred in their decision and misapplied fundamental legal principles relating to the validity of arbitration agreements under UAE law.
The decision of the Dubai Court of CassationOn 6 June 2024, the Dubai Court of Cassation overturned the lower court’s decision and held that the arbitration agreement is valid and binding, and extends to the shareholders’ dispute against the Director. The court held that the lower courts erred in their decision and did not have the jurisdiction to determine the dispute between the parties.
In making its decision, the Dubai Court of Cassation referred to Articles 1, 4, 7, and 8 of Federal Law No. 6 of 2018 (the “Arbitration Law”), and confirmed that:
An arbitration agreement is an express agreement between the parties to resolve their dispute through arbitration and opting out of the courts’ jurisdiction; and
The court before which a dispute is brought that is subject to an arbitration agreement must decline to entertain the action if the defendant has so pleaded before submitting any request or plea on the merits, unless the court is satisfied that the arbitration agreement is void or incapable of being performed.
In considering the validity of the arbitration agreement, the Dubai Court of Cassation explained that arbitration agreements are binding only if they meet the requisite legal requirements, including being (a) in writing, and (b) entered into by signatories with the requisite legal authority.
In addition, the court further explained that, as a general rule, arbitration agreements only bind their signatories and do not extend to third parties, unless they are “direct adversaries” to the dispute. However, the court noted that, in multi-party disputes, if a third party (who is a non-signatory) is a “direct adversary” to the dispute, the proper administration of justice requires that the dispute not be divided and to be heard before one judicial authority.
With that said, the Dubai Court of Cassation observed the following:
The Company is a limited liability company, which has a corporate legal personality and financial liabilities independent of those of its shareholders and employees.
The Company, being the second defendant in the original claim before the lower court, is not “a true opponent” because (a) no claims were submitted against it, (b) it did not submit any claims, and (c) the court did not rule against it.
The Director ought to have been litigated in his capacity as a shareholder and/or representative of the Company, and not in his personal capacity. This shift results in the lower courts’ decision being flawed.
By virtue of the fact that the Director submitted a defence that the dispute is subject to the arbitration agreement in the MOA, the court is satisfied that this is deemed as the Director’s agreement to arbitrate and the extension of the scope of the arbitration clause to include the present dispute.
Notwithstanding the fact that the Director is not a signatory to the arbitration agreement, he is a “direct adversary” in the dispute.
Thus, the Dubai Court of Cassation concluded that the dispute does not fall within the jurisdiction of the Dubai Courts, and overturned the lower courts’ decisions.
Finally, the Dubai Court of Cassation referred to Article 187 of the Civil Procedure Law No. 42 of 2022 and confirmed that overturning the lower courts’ judgment results in the cancellation of all the decisions therein. Thus, the court held that any decision in respect to the appeal on the merits under Case No. 146 of 2024 is moot.
This important judgment confirms, amongst other things, the following legal principles:
Arbitration agreements may bind non-signatories to the arbitration agreement if they are “direct adversaries” to the dispute; and
Submitting a defence that the dispute is subject to the arbitration agreement before the courts is deemed as the defendant’s agreement to arbitrate, even in circumstances where the defendant is not a signatory to the arbitration clause.
This decision provides welcome certainty that arbitration agreements will be upheld and may extend to non-signatories, as long as certain conditions are met. This decision underlines the pro-arbitration stance of the UAE courts, particularly in cases such as the present where there exists a valid and binding arbitration agreement. The Dubai Court of Cassation’s decision is a testament to the UAE’s positive approach towards upholding the integrity of arbitration agreements and ensuring that disputes are resolved in the correct forum.
* Al Tamimi & Company represented the defendants before the Dubai Courts and successfully obtained a judgment in their favour. The dispute resolution team of Al Tamimi & Company regularly represent government entities, private companies and individuals in arbitration matters across different sector groups. If you are facing an arbitration, or are intending to initiate an arbitration, our team of experts can assist you navigate this process.
For further information,please contact Mohamed Al Marzouqi and Malak Nasreddine.
Published in June - July 2024
