Arbitration in Light of Recent Legal Amendments in the UAE
Definition and Nature of Arbitration:
Arbitration is an alternative way for resolving disputes, allowing parties to agree to settle their conflicts through neutral individuals rather than through courts. The agreement on arbitration shall be documented in writing within a contract or a separate agreement. This clause is typically included in the terms of commercial contracts. One common phrase used to draft an arbitration clause is “The parties agree that any dispute concerning the interpretation, construction, or execution of this agreement shall be resolved through arbitration”.
The United Arab Emirates has taken significant steps in enacting a law encompassing all necessary regulations for arbitration through Decree No. 15 of 2023.
Key differences between Arbitration and Ordinary Courts:
Official Authority: Judicial institutions are official bodies within the state, while arbitration is managed by private or unofficial entities, sometimes even foreign institutions not located within the state.
Choice of Arbitrator: Litigants cannot choose a specific judge for their case in the court system. In contrast, arbitration allows parties to select arbitrators to resolve their dispute.
Jurisdiction and Scope: Courts have general jurisdiction over all disputes in the society. Natural and legal persons in society are obligated to appear before courts if a lawsuit is filed against them. Arbitration, however, is not a universal right; it requires prior agreement between the parties and cannot be used to resolve all types of disputes. Some conflicts are not amenable to arbitration.
Enforcement of Judgments: Court judgments can be executed immediately after the Judgement is final and being stamped with the executive formula. Arbitration awards, however, shall be ratified by the state’s judiciary before they can be enforced.
Challenging the Arbitrator: Parties in arbitration can agree to replace an arbitrator at the beginning of the arbitration process, whereas challenging a judge in court is only possible under specific conditions.
Confidentiality: Court hearings are generally public, whereas arbitration proceedings are typically private, with only designated individuals allowed to attend.
People may wonder why parties would opt for arbitration instead of Regular Courts.
Characteristics and Advantages of Arbitration System:
Arbitration offers several unique advantages, making it a preferable choice in certain situations:
Speed: Arbitration is generally a faster method for resolving disputes compared to traditional litigation, as it does not follow court schedules or governmental working hours. It allows the parties to choose suitable times to expedite the resolution of their disputes.
Flexibility to choose Arbitrators: Arbitration provides parties with the freedom to select their arbitrator or arbitration panel.
Flexibility to choose the applicable laws: Arbitration offers greater flexibility in choosing the applicable laws and rules. Parties can agree on the law of any country other than the one where the arbitration takes place, provided it does not conflict with the public policy of the arbitration state.
Drawbacks of Arbitration:
While we have previously outlined the advantages and characteristics of arbitration, it also has certain drawbacks that might make it less suitable for resolving some disputes. The most notable of these drawbacks include:
Cost: Arbitration is often considered a costly method for resolving disputes due to high fees and procedural expenses associated with arbitration centers and arbitrators’ fees. This contrasts with state courts, which typically have fees more manageable for all parties. In the UAE, the legislator may exempt some cases from fees or defer them if there are valid reasons, and some types of cases may be heard without any fees.
Higher Credibility of Courts and Impartiality: Courts are perceived as more credible, with a greater assurance of impartiality and the proper application of the law, while arbitration may sometimes involve biased arbitrators.
Lack of Legal Expertise among some Arbitrators: Some arbitrators may lack the necessary legal knowledge or competence to resolve disputes effectively, which can negatively affect the awards.
Given these drawbacks, parties may sometimes prefer to resolve disputes in court to ensure their rights are fully protected.
Common Mistakes in Arbitration:
Several common mistakes can occur when drafting an arbitration clause or agreement, which may include the following:
Drafting vague and general Arbitration Clauses: Parties may draft the Arbitration Clause poorly in contracts, such as “Any dispute arising from the execution of this contract will be referred to Arbitration”, without specifying the laws to apply or the entity responsible for Arbitration, which weakens the Arbitration process.
Adding Arbitration Clauses in Contract Appendices without singing these Appendices: Parties may sometimes include the arbitration clause in contract appendices without signing these appendices, assuming they are part of the contract. This can invalidate the arbitration clause if contested by one of the parties.
Unenforceable Terms: Adding clauses in the arbitration agreement that are impossible to enforce, such as appointing an Arbitrator who is legally incapacitated or deprived of civil rights due to bankruptcy.
Conflict with Public Policy: Parties may agree to apply laws that conflict with the public policy of the state where the arbitration award is to be enforced, potentially rendering the arbitration award unenforceable in that state.
Arbitration Procedures:
As previously mentioned, arbitration procedures begin with a written agreement between the parties or through an arbitration agreement. If a dispute arises under such a contract and is brought before state courts, the court should rule on its lack of jurisdiction due to the arbitration clause.
In cases where the arbitration procedures have not been agreed upon, the default procedures outlined in Federal Decree-Law No. 15 of 2023 shall be applied.
In case a party breaches the Arbitration Clause and Resorts to the Regular Courts:
It is crucial to adhere to the arbitration clause before the court prior to raising any defenses or responding to any requests. Otherwise, discussing the case’s merits may be considered a waiver of the right to arbitration, thereby granting ordinary court’s jurisdiction to hear the case.
Enforcement of Arbitration Awards vs. Court Judgments:
To enforce an arbitration award, a party shall submit a petition to the head of the competent court for ratification and shall the submit the following documents with the petition; the original arbitration award, a copy of the arbitration agreement, and a certificates proof that the award is deposited in the court. The court president or their delegate shall approve and enforce the arbitration award within 60 days from the ratification request, unless there are grounds for nullifying the award according to the provisions of Decree No. 15 of 2023.
For enforcing court judgments, it suffices to stamp the judgment with an execution formula and then proceed to the execution court to open an Execution File.
Practical Applications of Adhering to the Arbitration Clause:
Given the importance of Arbitration, and its role as an alternative to state courts, it is considered a significant method for resolving disputes between parties, especially in commercial disputes, where It is common for the parties of a contract to agree on referring any dispute arising from contract execution to Arbitration.
However, when one of the parties to the contract resorts to courts despite the presence of an Arbitration Clause, the other party, the defendant, shall, before making any defense or addressing the case merits insist on the arbitration clause before the chamber reviewing the dispute to prevent the court from hearing the case.
Our Office, Abdullatif Aljassmi Advocates & Legal Consultants, has witnessed several cases in this regard. One notable case involved a litigant when the court appointed an expert to review an ongoing commercial dispute between parties to a commercial contract. The appointed expert scheduled the first meeting with the litigants to address the dispute, which happened to coincide with the defendant’s first appearance in the case after being notified. During this meeting, the defendant expressed objections to the case and its subject matter. However, the defendant did not assert the arbitration clause and lack of the court’s jurisdiction over the case before responding to the case’s merits.
In the subsequent expert meeting, the defendant asserted that the court lacked jurisdiction to hear the case due to the existence of an arbitration clause. Despite this assertion, the court, upon reviewing the case, noted that the defendant had not invoked the arbitration clause before addressing the case’s merits. Consequently, the court ruled that it had jurisdiction and proceeded to adjudicate the matter.
The court justified its judgement by considering the defendant’s discussion of the case in the first meeting of the expert as an implicit waiver of the right to arbitration.
The defendant appealed the judgment, arguing that their comments in the first meeting of the expert were merely observations on the case and requested time to review the plaintiff’s documents. The Court of Appeal ruled the case non-justiciable due to the arbitration clause, given that the defendant’s first attendance at the expert meeting was his first attendance at the case and he did not aware of its subject.
However, the Dubai Court of Cassation quashed the appeal court’s judgment, considering that the defendant’s first response in the expert meeting before asserting the arbitration clause constituted a waiver of the right to arbitration and an acceptance of the court’s jurisdiction.
This example clearly illustrates that the critical factor in determining whether a case is heard in court or through arbitration is the timing of raising the arbitration clause defense, which shall occur before responding to the case’s subject.
In conclusion, Arbitration is a vital and strategic option for resolving disputes, choosing it for settling conflicts may represent a crucial decision for the parties involved. Therefore, it is essential to be thoroughly familiar with all legal aspects of arbitration to prevent any breach of the fundamental principles governing its procedures and legal rules.