As a commercial dispute resolution practitioner, I have come across a number of badly drafted arbitration clauses in commercial contracts. The commercial terms of most of these contracts are well defined and the intention of the parties are easily discernible from them. However, in these contracts, parties appear to make the mistake of assuming that their relationship will always be on good terms and do not pay due attention to the dispute resolution clause. A badly drafted dispute resolution clause may lead to unintended consequences that are particularly exacting on a party that seeks to initiate dispute resolution proceedings. In this post, I will briefly set out the requirements for a valid arbitration agreement under the Federal Arbitration Law No 6 of 2018 (Federal Arbitration Law)[1], what, in my view, should be contained in a good arbitration agreement and look at an example of an unintended consequence of a badly drafted arbitration clause. Let me begin by providing a brief overview of the Federal Arbitration Law.
The Federal Arbitration Law stipulates that arbitration is a procedure regulated by law in which a dispute between one or more parties is submitted by their agreement to an arbitral tribunal for a binding decision on the dispute[2]. An arbitration agreement is an agreement between parties to submit their disputes to arbitration. The arbitration agreement may be entered into before or after a dispute has arisen[3]. Unless otherwise agreed by the parties, the Federal Arbitration Law will apply to any arbitration conducted in the UAE[4]. An arbitration agreement may be concluded by a natural person having the legal capacity to dispose of his rights or on behalf of a corporate entity by a representative with specific authority to arbitrate. If the arbitration agreement is executed by a person without legal capacity, it could be declared a nullity[5]. It is important therefore to ensure that the person signing an arbitration agreement on behalf of a corporate entity has specific authorisation to execute arbitration agreements . The general manager of a limited liability company incorporated in the UAE usually has full powers to represent the company and his acts performed in the discharge of his functions are, subject to specific restrictions in the memorandum and articles of the company or the contract appointing the general manager, binding on company[6]. It would be prudent to ensure, either by reviewing the memorandum and articles of the company or other document conferring specific authority, that the signatory to the contract has the specific authority to enter into a valid arbitration agreement on behalf of the corporate entity.
The Federal Arbitration Law mandates that an arbitration agreement must be in writing[7]. If the parties make a reference in any written contract to any other document containing an arbitration clause with the intention to make that clause part of their contract, the parties will be deemed to have executed an arbitration agreement in writing[8]. This usually happens where parties to a contract agree on the commercial terms and make a reference to any model contract or to the general terms and conditions of a corporate party which contains an arbitration clause. If parties do not expressly record their intention not to be governed by the arbitration clause in the other document they have incorporated into their contract, they will be deemed to have entered into a valid arbitration agreement.
The consequences of parties entering into an arbitration agreement under the Federal Arbitration Law is that if any dispute containing an arbitration agreement is brought before a court, the court, unless it is satisfied that the arbitration agreement is void or incapable of being performed, is required to decline to entertain the action if the defendant pleads, before submitting any request or plea on merits, that the dispute in question is governed by an arbitration agreement[9]. The arbitration clause may be in relation to all or certain types of disputes that may arise between the parties[10]. For instance, an arbitration agreement may stipulate that only disputes arising out of breaches of a defined nature listed in the contract may be subject to arbitration. It is important to pay attention to the subject matter of the disputes that the parties have agreed to submit to arbitration as an award that contains decisions on matters not falling within the terms of submission to arbitration or are beyond its scope may be set aside at the request of the party challenging the award[11].
As arbitration practitioners are aware, there are a few basic factors that will need to be taken into consideration whilst drafting an arbitration clause in a contract. The agreement of the parties to refer disputes to arbitration should be drafted in clear and unambiguous terms. In my view, a good arbitration clause in a commercial contract governed by the Federal Arbitration Law should contain, at the bare minimum, the following:
- A clear and unambiguous agreement of the parties to refer a dispute that may arise under their contract to arbitration
- The type of disputes that will be referred to arbitration- whether it is all disputes or only certain types of disputes arising out of the contract.
- Composition of the Tribunal- sole arbitrator or three arbitrators are the most common in commercial disputes. The numbers of arbitrators composing the tribunal should be an odd number[12].
- The seat and venue of the arbitration.
- Language of the arbitration- if parties do not specify the language of the arbitration, arbitral proceedings shall be conducted in Arabic[13]. This is a departure from the provisions of the UNCITRAL model law[14] which permits the arbitral tribunal to determine the language of the arbitration in the absence of an agreement between the parties. Thus, for an arbitration seated in the UAE, unless the parties have specifically agreed on the language of the arbitration, the default language is Arabic. I have come across agreements where a party drafting the arbitration agreement made the mistake of assuming that if language of the arbitration is not specified, the arbitral proceedings will be conducted in the language of the contract. The Federal Arbitration Law makes it clear that this is not the case.
- Method of appointment of the tribunal and determining the rules of procedure- If the parties agree on institutional arbitration such as under DIAC or LCIA-DIFC arbitration rules, the rules lay down the method of appointment of the tribunal and rules of procedure for the arbitral proceedings. Parties may agree that the tribunal may be appointed, and arbitral proceedings conducted in accordance with the rules of the institution. Once a dispute arises, it is not unusual for parties to disagree on the composition of the tribunal. A nomination made by a party is frequently viewed with distrust by the other. The scope for disagreement is higher where the arbitration agreement provides for appointment of a sole arbitrator mutually acceptable to the parties. In many cases, there is no such person in existence. In such cases and in the absence of any alternative method agreed by the parties, the court in whose jurisdiction the arbitration is conducted takes over as the appointing authority[15] and will appoint the tribunal.
Though the costs of arbitration are on the higher side, arbitration affords significant benefits to parties that chose it as the dispute resolution mechanism over litigation before UAE Courts. A well drafted arbitration clause will enable parties to enjoy significant autonomy over the conduct of arbitration proceedings. They are able to determine the law governing the dispute, the seat and venue of arbitration, the language of the proceedings, the method of appointment and composition of the tribunal and the conduct of the arbitration proceedings. Prominent arbitration instructions[16] in the UAE as well as the Federal Arbitration Law[17] provide that arbitral proceedings and the final award will be confidential and not published without the consent of the parties. An award made by an arbitral tribunal in accordance with the Federal Arbitration Law is binding on the parties and constitutes res judicata between them[18] and may be enforced after obtaining a decision from the court confirming the award. The award may be challenged only on limited grounds set out under the Federal Arbitration Law[19].
Let us now consider the consequences of not paying attention to the dispute resolution clause. I represented a client in a dispute that arose out a contract that contained an arbitration clause. The parties to the contract were foreign companies with branch offices in the UAE, the contract was drafted in English language, all correspondence between the parties were in English, all relevant documents to the arbitration were in English and witnesses were English speakers. However, the arbitration clause did not specify the language of the arbitration. This would not have mattered if the parties agreed after the dispute arose that the language of the arbitration will be English. However, one of the parties did not cooperate with the arbitration proceedings and at the request of the claimant to appoint an arbitrator, the appointing body concluded that as the parties had not specified the language of the arbitration, the arbitration proceedings will be held in Arabic language and appointed an Arabic speaking arbitrator. I have made reference to this specific example to show that despite all other circumstances pointing to English being the appropriate language of the arbitration, the drafting error resulted in the claimant incurring avoidable costs for translation and conducting the arbitration in a language it wasn’t comfortable with.
There are several unfilled or partially fulfilled commercial contracts worldwide directly or indirectly attributable to the impact of the Covid 19 pandemic. Parties are likely to have significant differences of opinion on the impact of Covid 19 on their respective obligations entered into under various commercial contracts. Parties with poorly drafted dispute resolution clauses may find it harder to obtain expeditious relief to enforce their rights under the commercial contract when they need it the most.
The moral of the story is – don’t be complacent whilst drafting your dispute resolution clause.
[1] Federal laws and decrees of the UAE Arab Emirates are issued in Arabic language. The authentic text of the laws is in Arabic and I have relied on an unofficial English translation of the law in preparing this article. The original Arabic text will prevail in the event of any discrepancy with the unofficial English translation. Unless otherwise mentioned, all references to Articles in the footnotes are references to Articles of the Federal Arbitration Law
[2] Article 1(definitions)
[3] supra
[4] Article 2(1)
[5] Article 4(1)
[6] Article 83(2) of UAE Federal Law No 2 of 2015 (Commercial Companies Law)
[7] Article 7(1)
[8] Article 7(2)(b)
[9] Article 8(1)
[10] Article 5(1)
[11] Article 53(1)(h)
[12] Article 9(3)
[13] Article 29(1)
[14] Article 22(1) of the UNCITRAL Model law on International Commercial Arbitration
[15] Article 13
[16] For instance, see Article 30 of DIFC-LCIA rules, Article 41 DIAC rules
[17] Article 48
[18] Article 52
[19] Article 53
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