11 Oct 2012

International arbitration in the UAE - Dubai, a two-seater city

by Nigel Duffield

If you are entering into contracts in the UAE, the Dubai International Financial Centre is becoming a viable alternative to Dubai or Abu Dhabi as a seat for arbitration, but comes with its own complications and teething problems.

Famous for constructing the tallest building in the world (the Burj Khalifa) and the largest shopping mall (the Dubai Mall), Dubai is an oddity in legal circles in that it has two distinct seats and legal frameworks for arbitration: Dubai itself and an "offshore" free zone within Dubai, the Dubai International Financial Centre.

The seat of arbitration (also referred to as the place of arbitration) is an important part of any arbitration agreement. In the absence of a clear statement by the parties otherwise, the seat will dictate the procedural law under which the arbitration will be run. For example a seat of London will dictate that an arbitration will be governed by English law, being the Arbitration Act 1996.

The Dubai International Financial Centre is currently gaining popularity as the nominated seat of arbitration for contracts entered into in the United Arab Emirates. So why is this and how is a seat in the Dubai International Financial Centre different to a seat in Dubai?

According to the Department of Trade and Foreign Affairs, the United Arab Emirates (UAE) is a major trading partner of Australia. This is evident when you visit the UAE where over 100 large Australian service firms have offices, a significant number of these being in the construction sector. Indeed, the firm responsible for installing the Dubai Mall aquarium, which set a new Guinness World Record for the largest ever acrylic panel, was Australian.

Dispute resolution in the UAE

Arbitration is the most popular form of dispute resolution for commercial transactions in the UAE. According to a document published by the Dubai International Arbitration Centre (DIAC), in the first half of 2010, 182 new arbitrations were commenced in the DIAC with a value in dispute of around $626m.

A key reason for this popularity is the difficulty, particularly for non-Arabic parties, of conducting disputes in the local UAE courts. Litigation is conducted entirely in Arabic. While Arabic is the legal language of the UAE, ie. all official communications are in Arabic, English is predominantly the business language. All English documents must be translated if they are to be entered into evidence in litigation and all non-Arabic speaking witnesses must give oral evidence through a translator. This makes the local courts a particularly difficult environment to operate in if you do not speak and read Arabic.

The legal framework for arbitration in the UAE

Similar to Australia there are both Federal and State (Emirate) laws in the UAE. UAE Civil Procedure Code, Federal Law No. (11) of 1992, a Federal Law, provides the legal framework under which arbitrations with a seat in Dubai, Abu Dhabi or indeed any of the other five emirates are run.

However, within Dubai there is also the Dubai International Financial Centre (DIFC) which has its own arbitration law, DIFC Arbitration Law 2008. The DIFC is one of a number of "offshore" free zones established to encourage international investment and trade. The DIFC also has an arbitration centre and rules established in conjunction with the LCIA (the London Centre of International Arbitration).

Dubai as a Seat under UAE Federal Law

The UAE has a civil law system whereby its laws are codified within statutes. Not surprisingly UAE Law is drafted in Arabic and while English translations exist, none are official. Furthermore, many of the commentaries useful for interpreting and understanding the law are written in Arabic and few are translated.

As discussed above, the legal framework under which arbitrations with a seat of Dubai are run can be found within the UAE Civil Procedure Code, Federal Law No. (11) of 1992. However, the focus of the Civil Procedure Code is court litigation and the articles relating to arbitration are somewhat brief (15 in total) and often difficult to interpret.

An advantage of UAE arbitration law is that it is tried, tested, reasonably robust and internationally recognised. Plus there are a number of judgments from the highest court in the UAE, the Court of Cassation, which while having no precedent value, do provide useful guiding principles for practitioners.

A new separate comprehensive arbitration law has been on the table in the UAE for a number of years but has yet to be agreed and enacted.

The DIFC as a seat under DIFC Law

The DIFC has its own distinct legal system based on common law principles. It has its own court system with proceedings conducted in English and its own laws drafted in English. Being a common law based system it has a certain familiarity to Australian businesses and their lawyers.

Arbitration in the DIFC is not governed by the UAE Federal Law but by the DIFC's own arbitration law, DIFC Arbitration Law 2008. This is a comprehensive law based on the UNCITRAL Model Law on International Commercial Arbitration. It will be familiar to Australian arbitration lawyers, having the same basis as the new Australian arbitration laws.

A disadvantage of DIFC as a seat of arbitration is its relative newness. Few arbitrations have been conducted under DIFC law and it has been found to be not without its teething problems. As an example, a recent judgment handed down by the DIFC courts refused an application to stay a DIFC court proceeding where an arbitration had been legitimately commenced with a seat outside of the DIFC (Injazat Capital Limited and Injazat Technology Fund BSC v Denton Wilde Sapte).

The decision by Justice Sir David Steel was based on a glitch in DIFC law rendering such orders impossible to make. Both the UAE and the DIFC are bound by the terms of the New York Convention and as Justice Steel commented "It is fair to say that this constitutes on the face of it a failure to implement the terms of the New York Convention to which the Emirates are a party."

Another issue to be aware of is the two-step enforcement process necessary before a DIFC arbitral award can be enforced in the UAE outside of the DIFC free zone. Firstly, it has to be recognised by the DIFC courts and then ratified by the Dubai courts under UAE law.

In theory a DIFC seated arbitration award is directly enforceable in another jurisdiction under the New York Convention. However, a recent DIFC court white paper suggested it might be a safer route to get the award ratified first by a Dubai court.

Conclusion

If you are entering into contracts in the UAE, the Dubai International Financial Centre is becoming a viable alternative to Dubai or Abu Dhabi as a seat for arbitration. However, caution should be exercised given the DIFC legal system is relatively new and not without its complications and teething problems.

Consideration should also be given to nominating an Australian seat of arbitration, particularly given the recent alliance between the Australian Centre for International Commercial Arbitration and the Abu Dhabi Chamber of Commerce and Industry.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.