Recent Dubai Court of Cassation judgments- is arbitration an exceptional means of resolving disputes?
Dispute Resolution / UAE
In the United Arab Emirates (UAE), the courts have traditionally held that arbitration is an exceptional means of resolving disputes.
Law Update: Issue 365 - Financial Services Focus
Dr Hassan ArabPartner, Regional Head of Dispute Resolution
Hend Al MehairiAssociate,Private Client Services
In the United Arab Emirates (UAE), the courts have traditionally held that arbitration is an exceptional means of resolving disputes. However, in recent years, there has been a significant shift in the courts’ approach with court decisions confirming that arbitration is not merely an exceptional route, but an equal alternative to litigation for resolving disputes.
In this article, we examine this shift in the court’s perception of arbitration by reference to two judgments of Dubai Court of Cassation, namely, judgment 993 of 2017, in which it held that arbitration is a legitimate and equally valid method for resolving disputes as litigation for resolving and judgment 1444 of 2022, in which the court underlined the importance of respecting the autonomy of the parties in upholding their agreement to submit their dispute to arbitration.
In this case the Appellant, a distributor, initiated legal action against the Respondent, a foreign supplier, before the Dubai Court of First Instance for damages for the wrongful termination of their distribution agreement, in the amount of AED 183,439,129, in addition to 12% interest from the date of the claim until payment.
The Appellant and the Respondent had entered into a distribution agreement on 27 February 2010. This agreement covered the distribution of a specific range of sports products and goods in various territories. Some territories, including the UAE, KSA, Kuwait, Bahrain, Oman, Qatar, and Pakistan, were designated as exclusive distribution areas, while others, including Egypt, Syria, and Jordan, were non-exclusive.
The distribution agreement included specific clauses that required the Appellant to purchase a minimum quantity of products and undertake marketing and sales activities for the first ten years of the contract. The Appellant claimed that they fulfilled all their obligations and even exceeded the minimum target requirements, leading to significant costs and expenses incurred in promoting the products.
However, in 2015, the Respondent requested the distributor to conduct a market feasibility study for the territories. After complying with this request, the Appellant was informed by the Respondent that they would oversee wholesale operations themselves, while the Appellant would continue to manage product distribution for other buyers in the territories. Subsequently, the Respondent served a notice on the Appellant notifying it of its intention not to renew and to terminate the exclusive distribution agreement. The Appellant contested this termination, alleging that it was invalid and caused material and moral damages.
In the proceedings before the Court of First Instance, the Respondent raised a jurisdictional challenge on the basis that the action should be dismissed due to the existence of an arbitration clause. The Court of First Instance ruled that the action was inadmissible based on the arbitration clause, effectively dismissing the case for lack of jurisdiction.
The Appellant subsequently appealed this decision to the Court of Appeal. The Court of Appeal upheld the decision of the Court of First Instance, affirming that the action was inadmissible due to the arbitration clause.
Not satisfied with the outcome, the Appellant unsuccessfully appealed to the Dubai Court of Cassation, seeking a reversal of the lower courts’ decisions based on three main grounds.
Authority to arbitrate First, the Appellant challenged the authority of the Respondent’s signatory to the arbitration clause. It argued that the person who granted the power of attorney to the attorneys representing the Respondent did not possess express authority to arbitrate. This assertion was based on the fact that the individual who provided the power of attorney was not the person with the authority and capacity to act on behalf of the Respondent in legal matters. The Appellant contended that this lack of authority also extended to the attorneys appointed by the Respondent.
The Court of Cassation upheld the findings of the Court of Appeal in this matter, emphasising the established legal principle that the capacity and authority of the signatory to an arbitration clause are within the purview of the trial court. The Court concluded that the trial court’s determinations were made based on valid grounds and supporting documents, holding that the person who signed the arbitration clause (the Respondent's CEO) held the necessary authority to agree to arbitration by virtue of his position as an officer of the company. The Court reiterated that attorneys representing a client did not require specific authorisation to challenge the court's jurisdiction based on an arbitration clause, as this falls within the scope of their power of attorney.
Functional jurisdiction of the competent court Second, the Appellant challenge also concerned the interpretation and application of Article 226 of the UAE Commercial Transactions Law. This article provides, “As an exception to the rules of jurisdiction set out in the UAE Civil Procedures Law, the court in whose jurisdiction a contractual agency agreement was executed shall have jurisdiction to adjudicate all disputes arising out of such agreement.” It argued that the Court of Appeal had misapplied this provision and failed to recognise its broader scope. According to the Appellant, Article 226 should encompass not only territorial jurisdiction but also functional jurisdiction, including disputes arising from agency agreements that are subject to arbitration. They contended that the legislator had intentionally excluded all rules of jurisdiction, whether related to territorial or functional matters, under the Civil Procedure Law.[1]
The Court of Cassation held that Article 226 primarily addresses territorial (or geographical) jurisdiction. Article 226's primary objective is to determine the competent court to hear disputes arising from contractual agency agreements. The Court reiterated that Article 226 does not delve into the allocation of functional jurisdiction between courts and arbitral tribunals. Functional jurisdiction in arbitration thus is derived from the parties' agreement to arbitrate, not from the default recourse to the competent courts.
The validity of the arbitration agreement Third, the Appellant also challenged the validity of the arbitration clause in the distribution agreement. It contended that this clause amounted to a contract of adhesion with arbitrary terms. Specifically, the Appellant argued that the arbitration clause forced them to irrevocably waive their rights to local courts and provided the Respondent with unilateral termination power. Additionally, the Appellant also relied on certain clauses within the agreement, which it argued granted the Respondent excessive authority to terminate the agreement without facing legal consequences.
The Court of Cassation dismissed this argument, reiterating the principle of "pacta sunt servanda," i.e., that agreements must be upheld. It explained that in typical contract negotiations, parties present their terms, and once accepted, a binding contract is formed. However, in the case of adhesion contracts, one party presents non-negotiable terms, and the other party can either accept all the terms or reject the contract as a whole. Importantly, the Court clarified that an arbitration clause, which allows a supplier to compel a distributor to arbitrate disputes, does not constitute an oppressive term. This is because arbitration serves as an alternative or parallel process to conventional litigation before state courts. Furthermore, the Court highlighted that an agreement to a seat of arbitration outside the state does not transform the contract into a contract of adhesion. It simply involves specific procedures for enforcing foreign arbitral awards, subject to relevant laws and treaties.
In this case, the Appellant commenced legal action against the Respondent, seeking judgment for unpaid invoices in the amount of AED 370,024.171.
The dispute concerned various purchase orders issued by the Respondent to the Appellant for the installation of safety equipment and materials for multiple projects. The Appellant delivered the contracted works and provided invoices, which the Respondent failed to pay. The crux of the dispute revolved around an arbitration clause contained within one of the contracts, which the Respondent argued was subject to an arbitration clause.
The Court of First Instance ruled that the claim in relation to this contract was subject to arbitration due to the presence of the arbitration clause. Additionally, the court appointed an engineering expert to assess the claims in the remaining disputes. And the Court of Appeal upheld this decision.
The Appellant appealed before the Court of Cassation on various legal grounds, including challenges to the authenticity of a photocopy of the contract containing the arbitration clause, the authority of the signatory to agree to arbitration, the validity of the arbitration clause, and the enforceability of the clause for multiple contracts. The Court of Cassation dismissed these grounds of appeal, and in doing so it clarified several key legal principles during the course of its judgment.
Authenticity of contract photocopy The Court clarified that a plea of inauthenticity of contract photocopy did not, in itself, obligate the court to take any action unless coupled with evidence demonstrating the photocopy's inauthenticity. In this case, the appellant had provided no such evidence.
Authority of the signatory to agree to arbitration In this regard, the Court of Cassation reaffirmed that the manager of a limited liability company has the legal capacity to make dispositions over the rights relating to its activities, including agreeing to arbitration in contracts with third parties, as long as no restrictions were present in the company's memorandum of association.
Enforceability of the arbitration clause The Appellant contested the enforceability of the arbitration clause, arguing that it was inapplicable to the dispute which involved seven separate contracts, of which only one contained an arbitration clause. The Court of Cassation rejected this argument, emphasising that each of the seven agreements pertained to distinct and unrelated projects, and the Appellant failed to provide any evidence suggesting otherwise. Furthermore, the Court observed that the parties had willingly chosen arbitration as a dispute resolution method for just one of the contracts, and there was no risk of conflicting judgments considering that the contracts related to distinct and unrelated projects.
The two Dubai Court of Cassation judgments reviewed in this article underline the commitment of UAE courts to upholding and enforcing arbitration clauses in commercial disputes. This has resulted from the transformation of their former view of arbitration as being an exceptional method of dispute resolution to a contemporary perception of arbitration as a mainstream method of dispute resolution in the UAE, particularly in international commercial disputes.
As the UAE legal landscape continues to evolve, these judgments are a reminder that arbitration, as a consensual, legitimate and effective means of resolving disputes within the realm of international commercial contracts, provides parties with a well-defined framework to resolve disputes with utmost confidence that the UAE courts will uphold their agreement, where valid and binding (in the absence of any compelling evidence to the contrary).
The judgments highlight the importance for parties of carefully reviewing and comprehending all relevant contractual provisions before entering into commercial agreements, considering the courts’ respect for the will of the parties and the sanctity of their agreements, including arbitration agreements, which the UAE courts will uphold as an equally valid and alternative means for resolving disputes, especially for resolving international commercial disputes.
[1] Dubai Court of Cassation Judgment 993 of 2017 was issued before the Commercial Agency Law (Federal Law 3 of 2022) was issued. It is important to note that Article 26 of Federal Law 3 of 2022 allows agent and principal to refer any dispute which may arise between them to arbitration.
For further information,please contact Dr. Hassan Arab and Hend Al Mehairi.
Published in February 2024
