Recent UAE Court judgments: Asymmetric arbitration agreements - a UAE perspective
Dispute Resolution / UAE
Naief YahiaPartner, Head of Litigation - Dubai
Mosaab Th. AlySenior Counsel,Dispute Resolution
Zane AnaniSenior PSL (Consultant),Dispute Resolution
The validity of arbitration agreements is a developing area in the UAE and a crucial issue for legal arbitration practitioners to consider in view of their use in financial agreements. There is much uncertainty with respect to asymmetrical arbitration clauses and their validity because courts and legal scholars have adopted different approaches and criteria to assess their compatibility with the principles of party autonomy, equal treatment, reciprocity, foreseeability and public policy. Asymmetric agreements typically allow one party, but not the other, to choose the method of resolving disputes between the parties.
Therefore, a party whose will is limited may argue that an asymmetric clause provides unequal treatment and ought to be regarded as invalid.
In this article we give an overview of asymmetric arbitration agreements and consider recent Dubai and Abu Dhabi Court of Cassation judgments which assessed the validity of asymmetric arbitration clauses and their enforceability in the UAE. We will also briefly compare the UAE approach with other jurisdictions.
In summary, an asymmetrical arbitration clause is a type of dispute resolution clause that grants different options to the parties regarding the choice of arbitration or litigation (or, indeed, litigation in a different jurisdiction from the default choice of a national court) as a forum for settling their disputes. Such a clause, for example, may give one party the exclusive right to refer a dispute to arbitration or to a specific court, while the other party is bound by one choice. Alternatively, such a clause may provide that both parties agree to arbitrate their disputes, but one party has the additional right to initiate litigation for certain claims or in certain jurisdictions.
The enforceability of asymmetric arbitration clauses depends on the jurisdiction where the clause is challenged or where the arbitral award is sought to be enforced. Parties should therefore seek local advice in the relevant jurisdiction where the clause may be relied upon. The position in France, for example, was considered in Ms X v Banque Privée Edmond de Rothschild where the French Supreme Court considered the validity of an asymmetric clause. This clause allowed the parties to submit their claims to the exclusive jurisdiction of the Luxembourg courts, while one party had the right to initiate proceedings in any other competent court. In this case, the French Supreme Court found that the asymmetric clause was invalid and in violation of Article 23 of the Brussels Regulation which deals with jurisdiction agreements. In general, the French courts have ruled that unilateral arbitration clauses are valid and enforceable, unless they are contrary to public policy or the principle of good faith.
The enforceability of such clauses in the UK has been a matter of some debate, but the general trend of the case law is to uphold them, unless they are unconscionable or contrary to public policy. (see Mauritius Commercial Bank Ltd v Hestia Holdings Ltd and another [2013] EWHC 1328) and Singapore (see Wilson Taylor Asia Pacific Pte Ltd v Dyna-Jet Pte Ltd [2017] SGCA 32).
The UAE’s approach to asymmetric arbitration clauses is based on various legal doctrines and principles, such as mutual intent, negative obligation and interpretation of contracts.
In Dubai Court of Cassation Judgment dated 21 March 2021, the Court of Cassation ruled that the arbitration clause in a Murabaha contract between a UAE bank and the defendants was only binding on one of the parties and did not preclude the bank from bringing an action before the Dubai Courts. The Court of Cassation upheld the Court of Appeal's finding that the clause gave the bank the option, in case of a dispute, to either submit to IICRA arbitration in Dubai or litigate before any competent court, without any restriction or waiver of its right to pursue litigation.
In Abu Dhabi Court of Cassation judgment dated 19 August 2021, the Court of Cassation addressed the enforceability of an asymmetric arbitration clause. The court decided that despite the existence of an arbitration clause, the parties had agreed to give the claimants the choice to opt for litigation in courts, which they did, and therefore the court upheld the litigation process over arbitration in this case. The court disregarded the arbitration clause in the agreement because the parties had agreed to allow the claimants to choose the method of dispute resolution, and they chose to litigate.
In a more recent judgment, the Court of Cassation ruled on 4 January 2024 that an arbitration agreement cannot be presumed but rather its wording must reveal the obligatory nature of the arbitration and the parties’ will to use arbitration as the exclusive recourse for the resolution of any dispute that may arise in relation to the parties' legal relationship. That said, the Court of Cassation found that an arbitration clause in a personal guarantee executed between the guarantor and the bank was not a binding agreement to arbitrate as it was only conferring the right, but not the obligation, to arbitrate on the bank according to its absolute discretion. Therefore, the Court of Cassation upheld the Court of Appeal's finding that the bank was entitled to file its claim before Dubai Courts as the arbitration clause was asymmetric and this gave the bank the option to choose between litigation and arbitration to resolve a dispute.
In view of the foregoing, the judgments demonstrate that the UAE courts will generally respect and give effect to the parties’ agreed mechanism of dispute resolution even if such process would favour a party over the other where the parties have agreed to an asymmetric arbitration clause. It is also clear that the UAE courts generally respect the contractual choice of the party that has the option to choose between arbitration and litigation and will not likely allow the other party to object to it on the ground of lack of mutuality.
The judgments demonstrate that any arbitration clause that is juxtaposed with the jurisdiction of the national courts or offers a choice between arbitration and litigation is not a binding agreement to arbitrate and therefore does not preclude the national courts from hearing the dispute.
In summary, the UAE Courts’ approach provides more certainty for parties to formulate their dispute resolution mechanism in a way that suits the nature of the contractual arrangement. However, there are circumstances where an asymmetric arbitration clause may invoke sensitive questions of UAE law and therefore raise doubts on its validity. Legal practitioners therefore need to carefully consider the risks and benefits of such clauses, and draft them clearly and precisely, taking into account the UAE laws that may be involved in their interpretation and enforcement.
For further information,please contact Naief Yahia, Mosaab Aly and Zane Anani.
Published in June - July 2024
