The following draft clause has been inserted into a
capital construction contract (the Agreement), to be signed between your
company (based in Dubai) and company based in Sana’a (Yemen). Being the
contract manager and the arbitration specialist, you are requested by the
C.E.O. to comment this proposed draft and, if needed, recommend the necessary
amendments.
“Any dispute or whatever
nature arising out of or in any way relating to the Agreement or to its
construction or fulfilments can be referred to arbitration. Such arbitration
shall take place in Dubai or Sana’a, or any other place as the parties may
agree, and shall proceed in accordance with the Rules of Arbitration of the
LCIA-DIFC in Dubai. Both parties hereby agree that, at least, one arbitrator
should be Dr Karim Akram.”
Introduction
Arbitration is by definition a form of
alternative dispute resolution that is generally carried outside the court system.
Typically the involved parties involved in a dispute will refer it to a number
of people who are known as the arbitrators. The decision of the arbitrators
involving the dispute is taken to be final and all parties involved in the
dispute are bound by such decisions. The basic contention in employing
arbitration is to utilise a third party to scrutinise the available evidence to
reach an acceptable decision that is legally binding on the disputing parties.
In addition the decisions reached at through arbitration are taken generally as
enforceable[1]. In
addition to arbitration, the road to mediation can also be pursued as a means
of alternative dispute resolution but such a discussion is beyond the scope of the
current issue at hand. However, it must be taken to note that the outcomes of
mediation are typically non binding on the involved disputing parties.
Arbitration has traditionally been in use
for the settlement of commercial disputes between parties. More specifically,
the practice of arbitration has been applied to international commercial
disputes since the issue of court jurisdiction is bound to arise in
international commercial disputes. The general rules applicable to arbitration
are often encased in the commercial contract that is created between the
involved parties.
Another aspect of the arbitration process
is the role of the arbitrator. As opposed to mediation, the arbitrator will not
have to find common ground between the disputing parties. Instead, the
arbitrator is only bound by tradition to examine the presented evidence and to
reach a final verdict without any requirement to find common ground. The
arbitrator can and generally does provide a determination of the incurred
liability and also might subscribe the quantified damages.
Applications of Arbitration to the Current Scenario
The current arbitration clause that is
being inserted into the commercial agreement will serve to simplify the
alternative dispute resolution mechanism. It must be taken into account that
the current commercial agreement is not limited to one geographical domain but
instead, it is composed of a company in Dubai and a company in Yemen. Any
arbitration carried out in these circumstances will amount to arbitration for
international commercial transactions. To be more specific, the current
arbitration mechanisms will encompass the domain of arbitration systems in
place in the Middle East. In historical terms, dispute resolution has always
been a problematic aspect of commercial transactions in the Middle East.
It was not until recently that arbitration
mechanisms of a regional nature were created in the Middle East. A number of
arbitration centres of international application are available in the Middle
East including the Dubai International Arbitration Centre (DIAC). In recent
years several Middle Eastern nations have subscribed to the New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards (also known
simply as the New York Convention). In light of these developments, it could be
said that the Middle Eastern region is showing a progressive shift for a proper
arbitration culture. The more typical approach in the application and
implementation of these arbitration awards has been a focus on foreign
investors. The massive transformations in the arbitration culture in the region
are being undertaken to provide foreign investors with cover. The basic
contention here is to create arbitration provisions that are progressive,
transparent, accessible and identifiable for foreign businesses.
However, it must be kept in mind here that
the current arbitration clause being inserted into the commercial contract will
serve not foreign businesses but two business entities based in the Middle
East. This has significant implications for the current arbitration clause
since the nature of arbitration is deemed to differ as will be discussed later.
UAE’s move to Arbitration Progression
In the early years of the twenty first
century, UAE did not possess a robust or applicable framework for arbitration. It
was only in 2006 that the UAE adopted the New York Convention as its 138th
member. Keeping in line with this progressive transformation further changes
were introduced in 2008. For the first time, the UAE government has created an
arbitration law that has been released for commentary. Furthermore, the Dubai
International Financial Centre (DIFC) put in place a wide-ranging arbitration
law that provides a framework for arbitration though certain shortcomings still
exist. Lastly, the DIFC and the LCIA teamed together to fashion the new
DIFC-LCIA Arbitration Centre that is located in Dubai. These moves tend to
signify that the move towards arbitration frameworks is strong in Dubai and the
subject arbitration clause can be taken aid of if a need arises. However, the
state of affairs in Yemen must also be looked into in order to comprehend if
arbitration is permissible under Yemeni law or if a framework of the kind
exists.
Arbitration Framework for Yemen
Yemen has only recently put together an
arbitration framework with other regional players such as Jordan and Kuwait. A
chief difference between the Yemeni arbitration framework and the UAE
arbitration framework is the basis on which they are construed. The UAE
arbitration framework is composed largely on Shariah law but the Yemeni
arbitration framework is composed of a looser system that allows the
application of non-Shariah law[2].
This move has been taken in order to allow arbitrators to apply any set of laws
that the disputing parties may choose for application. These sets of laws may
be composed of non Shariah compliant laws as well. The Yemeni framework has
been created with the contention of luring foreign investors no matter what
sets of laws need to be applied for arbitration.
Implications for the Current Scenario
In turn this means that the Yemeni
framework may allow arbitration for matters such as speculative contracts or
for example matters relating to the award of interest[3].
When arbitration clauses are construed in states that apply Shariah law, the
arbitration awards must account for[4]:
-
description
of the subject dispute;
-
findings
in light of the Shariah as applicable to the dispute;
-
award
reasoning in the light of the principles of the Shariah;
-
the final
decision.
Another contentious issue in the Middle
East is the application of arbitration as approved by a court. Most Middle
Eastern countries mandate that an arbitration award cannot have res judicata unless it has been
sanctioned by a court of law. This principle stands true without any
consideration for whatever sets of laws have been chosen for the arbitration.
Interestingly enough, the Yemeni
arbitration framework provides that an arbitration is binding on the disputing
parties but the UAE framework does not. Instead, the bereaved party may
approach a court of law and invalidate the arbitration on the grounds that it
was not sanctioned by a court. In the current arbitration clause, it has been
mutually agreed that the arbitration rules shall be the Rules of Arbitration of
the LCIA-DIFC in Dubai. This would tend to indicate that nowhere the
arbitration takes place, the arbitration could still be brought to court
because there is such a shortcoming in the UAE arbitration framework. Hence, if
our company and the Yemeni company were to fall into a dispute, the arbitration
carried out could be challenged in a UAE court. This would also mean that if
the Yemeni company does not like the arbitration award provided, they have
legal recourse available in the UAE. Alternatively, it could also be argued
that our company would have legal recourse available in Yemen and if required a
Yemeni court could be prodded to judge the binding effect of the arbitration.
However, in both cases, the essential advantage of arbitration would be lost
altogether.
In either case if the arbitration award is
taken to court for either its legal binding effect or its enforceability, there
are significant chances that legal entanglement may occur. This would tend to
delay the final judgement over the issue and the dispute would tend to assume a
longer form than wanted. This would essentially jeopardize the business
interests of our company since the applicable law would be left to problems of
jurisdiction. Also, in this case the enforceability of the final arbitration
award would be endangered as the enforceability in either jurisdiction would
come into doubt.
Other than the problem mentioned above,
there are also significant chances that the Yemeni company may choose legal
recourse in case that the arbitration award chooses to use non Shariah law. In
such a case, the position of our company would tend to be very weak since the
UAW law does not provide for application of non Shariah law. Such circumstances
would ensure that our company would lose the case and may have to compensate
the Yemeni company. There are also chances that the judge may choose to fine
our company based on our choice of the applicable laws.
In addition to the above, the current
system of court review in place in UAE means that the arbitration award may not
be the final word on the dispute. The court review procedures generally have enough
room to allow for unwanted judicial management. This in turn tends to promote
judicial meddling that could well easily result in procrastination and unwanted
delays as to the final outcome[5].
The enforceability of the arbitration award is at risk in the UAE based arbitration
system but using the Yemeni arbitration system exposes our company to greater
risks.
In these circumstances, another notable
issue is that Yemen is not as yet a part of the New York Convention while UAE
is already a part of it. On the one hand, the New York Convention poses
stringent limitations to why a country’s courts could reject a foreign
arbitration award[6].
However, on the other hand, the New York Convention makes it abundantly clear
that a country’s courts may choose to reject a foreign arbitration award that
is opposed to the public policy of the country in question[7].
Again, as mentioned before, if non Shariah laws are chosen for use in the
arbitration award, there are chances that the Yemeni company may use the
grounds described above to revert the arbitration award.
The current understanding in the
arbitration clause looks towards the arbitration rules shall be the Rules of
Arbitration of the LCIA-DIFC in Dubai. However a look into these rules will
make one realise that the framework provided for arbitration is loose ended and
tends to promote vagueness. One chief criticism of the current arbitration
system in UAE has been the fact that its rules can be moved ostensibly from one
direction to the other. In case that arbitration is required, the Yemeni
company may choose to meddle up the UAE arbitration laws so that delays are
created in choosing the right arbitration laws. This would again promote
inefficacy of the entire arbitration system and would tend to reduce its
overall worth.
At this point in time, the UAE does not
have a common arbitration law. The UAE instead has chosen to include the
arbitration clauses in the UAE Civil Procedure Code. Consider for example the
following excerpt from the UAE Civil Procedure Code regarding arbitration[8]:
“It is important to note that disputes
arising out of commercial contracts to which the Dubai Government or any of its
subsidiary departments are a party are not governed by the UAE Code. Such
disputes, if submitted to arbitration, fall under other specific laws.”
In this case, it has been made abundantly
clear that arbitration laws for government departments and their subsidiaries are
not subject to UAE laws. This may be seen as another indication of the overall
weakness of the arbitration framework in Dubai since the government fails to
support it for its own purposes.
Another problem with the current
arbitration clause is its non conformance to Dubai’s arbitration clauses in the
UAE Civil Code. Article 205 of the UAE Civil Code makes it abundantly clear
that arbitrators can only take action if they were specifically named in the
commercial contract. In our case, only one arbitrator has been chosen while the
others remain unidentified which is against current UAE law. If brought to court,
this may serve as a strong grounds to annul the arbitration award leaving our
company vulnerable. In addition, Article 206 of the UAE Civil Code stipulate
certain conditions for the arbitrator that may be put to question by the
opposing party if the arbitration award is taken to court. Being a question of
fact, it may take a long time to settle such an issue which would again lead to
unwanted delays.
Even with these shortcomings being present
in the current arbitration framework, there is an overwhelming move to favour
arbitration in UAE over the past few years. Firstly the UAE courts have made it
abundantly clear that the contracting parties must fulfil the “conditions
precedent” before referrals for arbitration can occur[9].
Failure to do so is considered as pact
sunt servanda and arbitration can thus be rejected for an in court
settlement. In addition, the UAE courts have made it clear that public order
cannot be used as a ground to set aside an arbitration award[10]
though domestic public order could be used as a valid cause. This serves to
indicate that arbitration awards are on the rise and that the courts in UAE are
actually providing greater independence and leverage to such arbitration
awards. Hence, arbitration awards are being preferred as the means to decide on
disputes in commercial transactions rather than the courts as previously.
Recommendations
Courts in UAE have tended not to recognise
or enforce any arbitration awards that had minor shortcomings in their
proceedings or in their content[11].
A pertinent case is International Bechtel
Co. Ltd. v Department of Civil Aviation of the Government of Dubai where
the award was rendered void because the arbitrator had chosen a different
method than the UAE courts to swear witnesses[12].
A number of legal practitioners have expressed the fear that arbitration awards
are essentially at the mercy of the courts[13].
This can be avoided in the current case by ensuring that procedural
shortcomings are removed. For one thing, the number of arbitrators has to be
odd and has to be decided before hand as per the UAE Civil Code. Hence, the
arbitration clause should list the names of the arbitrators or should remove
the “at least” phrase with respect to the current arbitrator. Therefore, the
arbitrator in this case would be Dr. Karim Akram alone or if other arbitrators
are needed, there names should be listed as well.
Along with problems related to arbitration
awards in foreign countries being recognised in UAE, there is also the problem
of their enforcement. Practitioners have claimed that the enforcement of
arbitration awards under the UAE Civil Code are lengthy and often unpredictable
leading to their loss of reliability as a form of alternative dispute
resolution[14]. This
situation can be dealt with by assigning Dubai as the preferred location of
arbitration so that if any dispute arises, the arbitration is carried out at
LCIA-DIFC without having to decide where to arbitrate after the dispute arises.
This would tend to reduce the time required for arbitration and would also
avoid length delays.
Based on the arguments presented above, it
is obvious that the current arbitration framework in UAE needs careful usage in
order to guarantee success. It is therefore proposed that the arbitration
clause be modified as shown below to extract better results:
“Any
dispute or whatever nature arising out of or in any way relating to the
Agreement or to its construction or fulfilments can be referred to arbitration.
Such arbitration shall take place in Dubai, and shall proceed in accordance
with the Rules of Arbitration of the LCIA-DIFC in Dubai. Both parties hereby
agree that there should be one arbitrator who should be Dr Karim Akram.”
Conclusion
The UAE Civil Code is limited in its
application related to arbitration at this point in time. One problem is the
limited coverage provided by the Code and another problem is the determination
of how the provisions of the Code are to be applied[15].
Additionally it has been felt that the role of courts in arbitration is
overwhelming. The courts may choose to intervene and supervise the arbitration
process. This in itself tends to undermine the authority available to the
arbitrator(s). Under Article 209 of the UAE Civil Code, the arbitrator does not
have any power to impose fines and neither can he enforce his judgment on the
disputing parties. In order for an arbitrator to go for enforcement, the
arbitrator has to go to a court of law again. However, these aspects of arbitration
in the UAE are changing and are giving way to arbitration awards that are held
up in most circumstances. Where one approach could be to relinquish the current
arbitration clause, another could be to strengthen the arbitration clause to
reflect contemporary legal realities.
In this sense the arbitration clause should
be modified as shown in the recommendations section above so that the company
receives due coverage under existing arbitration laws in the UAE.
References
Books
Arthur Sullivan and Steven S Sheffrin, Economics: Principles in Action, (Upper
Saddle, New Jersey: Pearson Prentice Hall 2003)
Case Law
Dubai Court of Cassation, 124/2008
Dubai Court of Cassation, 146/2008
Journal Articles
Arthur J. Gemmell, Commercial
Arbitration in the Islamic Middle East, 5 Santa Clara J. Int’l L.
169, 170 (2006)
Mark Wakim, Public
Policy Concerns Regarding Enforcement of Foreign International Arbitral Awards
in the Middle East, 21 N.Y. Int’l L. Rev. 1, 41
Patrick Bourke &
Dominic Hennessy, Brighter times – developments in arbitration in the United Arab
Emirates, IBA Legal Practice Div. Arbitration Committee Newsletter,
September 2008, at p. 42 (Int’l Bar Assoc. 2008) (2008)
Statutory Law
Convention on the
Recognition and enforcement of Foreign Arbitral Awards, Art. V, June 10, 1958,
21 U.S.T. 2517, I.I.A.S. No. 6997, 330 U.N.T.S. 38, available at
http://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/XXII_1_e.pdf
The UAE Civil Procedure
Code, Federal Law No. (11) of 1992
Website
Abdullay Kh. Al-Ayoub, International
Commercial Arbitration in the Middle East, American Bar Association
Section on International Law, at p. 6 (Spring Meeting, 2006), available at http://www.abanet.org/intlaw/calendar/spring2006materials.html
Antonios
Dimitracopoulos, Arbitration; Light at the end of the tunnel,
Construction Week Online, May 3, 2008, available at,
http://www.constructionweekonline.com/article-2862-arbitration_light_at_the_end_of_the_tunnel/1
Raid Abu-Manneh, Dubai:
A Regional Arbitration Centre?, Mayer Brown International, LLP,
August 10, 2009, available at http://www.martindale.com/international-law/article_Mayer-Brown-International-LLP_783158.htm
Sona Nambiar, Common
law needed as UAE sees spurt in arbitration, Emirates Business
24/7, September 9, 2009, available at
http://www.zawya.com/story.cfm/sidZAWYA20090909041615/Rise%20In%20Arbitration
[1] Arthur Sullivan and
Steven S Sheffrin, Economics: Principles
in Action, (Upper Saddle, New Jersey: Pearson Prentice Hall 2003) 324
[2] Arthur J. Gemmell, Commercial Arbitration in the Islamic Middle
East, 5 Santa Clara J. Int’l L. 169, 170 (2006)
[3] Mark Wakim, Public Policy Concerns Regarding Enforcement of
Foreign International Arbitral Awards in the Middle East, 21 N.Y.
Int’l L. Rev. 1, 41 (2008)
[4] Arthur J. Gemmell, Commercial Arbitration in the Islamic Middle
East, 5 Santa Clara J. Int’l L. 169, 170 (2006)
[5] Abdullay Kh. Al-Ayoub, International Commercial Arbitration in the
Middle East, American Bar Association Section on International Law,
at p. 6 (Spring Meeting, 2006), available at
http://www.abanet.org/intlaw/calendar/spring2006materials.html
[6] Convention on the Recognition and enforcement of Foreign Arbitral
Awards, Art. V, June 10, 1958, 21 U.S.T. 2517, I.I.A.S. No. 6997, 330 U.N.T.S.
38, available at
http://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/XXII_1_e.pdf
[11] Patrick Bourke & Dominic Hennessy, Brighter times –
developments in arbitration in the United Arab Emirates, IBA Legal
Practice Div. Arbitration Committee Newsletter, September 2008, at p. 42 (Int’l
Bar Assoc. 2008)
[13] Sona Nambiar, Common law needed as UAE sees spurt in
arbitration, Emirates Business 24/7, September 9, 2009, available at
http://www.zawya.com/story.cfm/sidZAWYA20090909041615/Rise%20In%20Arbitration
[14] Antonios Dimitracopoulos, Arbitration; Light at the end of the tunnel,
Construction Week Online, May 3, 2008, available at,
http://www.constructionweekonline.com/article-2862-arbitration_light_at_the_end_of_the_tunnel/1
[15] Raid Abu-Manneh, Dubai: A Regional Arbitration Centre?,
Mayer Brown International, LLP, August 10, 2009, available at
http://www.martindale.com/international-law/article_Mayer-Brown-International-LLP_783158.htm
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