Are DIFC-LCIA Arbitration Agreements Valid?

From 11 - 15 November 2024, arbitration practitioners from across the world gathered in the United Arab Emirates for Dubai Arbitration Week. It was an opportunity for practitioners to connect, learn more about the changes in arbitration over the past few years, and for Dubai to promote itself as an attractive option for a party's seat of arbitration.

A law that has brought about significant changes to arbitration in Dubai is Decree No.34 of 2021 (the Decree), which was issued on 14 September 2021 by His Highness, the Ruler of Dubai. With effect from 20 September 2021, the Decree abolished the Emirates Maritime Arbitration Centre (EMAC) and the Dubai International Financial Centre Arbitration Institute (which partly comprised the Dubai International Financial Centre-London Court International Arbitration (DIFC-LCIA) Centre). The aim of the Decree was to consolidate the position of Dubai as a reliable global hub for resolving disputes and to consolidate these arbitration centres into one institution - the Dubai International Arbitration Centre (DIAC).

The Decree made it clear that:

• All arbitration agreements referring to EMAC or DIFC-LCIA entered into before 20 September 2021 remain valid. However, DIAC would replace the DIFC-LCIA arbitration centre as the administering body of DIFC-LCIA arbitrations, unless otherwise agreed by the parties.
• The Dubai Courts and the DIFC Courts continued to have jurisdiction for any matters where the seat of arbitration was "onshore" Dubai or "offshore" DIFC respectively.

The Decree continues to attract significant debate regarding the validity of DIFC-LCIA arbitration agreements and the way in which parties should proceed with such agreements, resulting in divergent approaches being adopted regarding this issue.

Recent court decisions from the Abu Dhabi Courts and the DIFC Court seek to alleviate any concerns parties may have as to the validity of such agreements by determining that the abolishment of the DIFC-LCIA arbitration centre does not mean that an arbitration agreement is incapable of performance as parties are still able to refer their disputes to arbitration.

However, recent decisions from the Singapore Courts note that where the parties have selected the DIFC-LCIA Rules, any substitution of these rules with the DIAC Rules, without agreement of both parties, is at odds with the parties' intentions when they executed the arbitration agreement.

We examine some of the key points arising out of these decisions below.

Abu Dhabi Court Cases: Case No. 1046/2023 and Case No. 449/2024

This case concerned a claim for payment of sums under a contract for the supply of medical equipment. The contract provided that all disputes arising out of the contract were to be referred to arbitration in accordance with the DIFC-LCIA rules, that the seat of arbitration was the DIFC, and the governing law was UAE law. Despite this agreement, the claimant commenced proceedings in the Abu Dhabi courts to recover the unpaid sums.

In response, the defendant argued that considering the parties' arbitration agreement, the Abu Dhabi courts lacked jurisdiction, and the arbitration agreement was capable of performance even though the DIFC-LCIA no longer existed.

The Abu Dhabi Court of First Instance (CFI) decided that it lacked jurisdiction over a dispute arising out of a contract which contained an agreement to arbitrate. Following the CFI's decision, the claimant appealed the decision to the Abu Dhabi Court of Appeal in Case No. 449/2024. In affirming the validity of the arbitration agreement, the Abu Dhabi Court of Appeal considered that:

• The Decree and the abolishment of the DIFC-LCIA arbitration centre did not mean the arbitration agreement was incapable of performance, and it did not invalidate the parties' agreement to arbitrate.
• The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 does not acknowledge the abolishment of an arbitral institution as a ground for regarding an arbitration agreement as ineffective.
• Many arbitral institutions amend their rules from time to time, and in doing so, this does not impact the validity of an arbitration agreement.
• Even if the arbitration agreement was inoperable because it referred to the DIFC-LCIA, this would not invalidate the arbitration agreement in its entirety - it just meant that an inference would need to be made as to the institution administering the arbitration.

DIFC Court Case: Narciso v Nash (ARB 009/2024)

In a recent case before the DIFC Court of First Instance, Narciso as main contractor executed a subcontract with Nash for various engineering and construction related activities concerning a residential project in Sharjah. The subcontract provided for DIFC-LCIA arbitration, the seat of the arbitration was DIFC, and the governing law was UAE law. Disputes arose between the parties which resulted in Narciso terminating the subcontract.

Nash applied to DIAC requesting that it appoint an arbitrator pursuant to article 12.3 of the DIAC Rules 2022. Article 12.3 provided that "in the absence of [a] joint nomination by the parties, the Arbitration Court [of DIAC] shall appoint the sole arbitrator". However, Nash did not refer to its application as being the Request for Arbitration, nor had it paid the required registration fee. As such, DIAC did not treat the application as a valid Request for Arbitration and treated the application instead as a request for DIAC to act as appointing authority. For DIAC to act as appointing authority, consent of both parties was required, which Narciso objected to - arguing that the request was premature. In agreement with Narciso, DIAC closed the file.

Subsequently, Nash commenced proceedings in the Sharjah Court against Narciso for damages for breach of contract and wrongful termination. Narcisco applied to the DIFC Court for an interim anti-suit injunction to prevent Nash from pursuing the Sharjah Court proceedings in breach of the arbitration agreement. On 20 May 2024, the DIFC Court granted the interim anti-suit injunction. It was ordered that Nash should not: (i) pursue or take any further steps in pursuit of the Sharjah proceedings; (ii) procure or assist the pursuit of the Sharjah Court proceedings; and (iii) commence or pursue any proceedings relating to the contract other than by way of arbitration.

On 3 June 2024, Nash made an application challenging the DIFC Court's jurisdiction, requesting that the interim anti-suit injunction be discharged. In raising its jurisdictional challenges, Nash argued that:

• The DIFC Court did not have jurisdiction because neither of the parties were established in the DIFC.
• The arbitration agreement was invalid because the DIFC-LCIA no longer existed, and the Decree conflicted with the principle of party autonomy.
• The interim anti-suit injunction was not justified as there was no apparent injustice in allowing the Sharjah Court proceedings to continue.
  On 20 June 2024, the DIFC Court of First Instance dismissed Nash's application and continued the interim anti-suit injunction. The Court held that:
• The DIFC Court had jurisdiction over the claim as the parties agreed that the seat of arbitration was the DIFC. This carries with it an implicit choice of the DIFC Courts as the supervisory courts of the arbitration.
• The arbitration agreement was valid and enforceable, and the arbitration agreement was governed by DIFC law.
• In adopting the reasoning of the Abu Dhabi Courts, the Decree does not render an arbitration agreement subject to DIFC law unenforceable on the ground of violating the principle of party autonomy. In fact, the Decree preserved the parties' bargain, allowing them to select DIAC or any other arbitration centre of their choosing to administer an arbitration.
• The interim anti-suit injunction was justified as there was no good reason not to enforce the arbitration agreement and Nash should be prevented from pursuing the Sharjah Court proceedings as in doing so, there would be a breach of the arbitration agreement.

Singapore Court Cases: DFL v DFM and DFM v DFL

This case¹ concerned a dispute between the parties regarding a settlement agreement for the purchase of shares in a company. The settlement agreement contained an arbitration agreement governed by English law, and provided that disputes were to be referred to arbitration under the DIFC-LCIA Rules.

The case before the Singapore High Court concerned the respondent's application to set aside an Enforcement Order which granted the applicant permission to enforce a Provisional Award on Interim Relief. The Provisional Award was issued in an arbitration that was commenced and conducted under the DIAC Rules, which was contrary to the parties' arbitration agreement. Therefore, the respondent argued that the DIAC arbitration did not comply with the arbitration agreement.

The Singapore High Court was asked to consider: (i) whether the respondent had submitted to arbitration under the DIAC Rules despite the parties' arbitration agreement; (ii) whether the provision for arbitration under the DIFC-LCIA Rules could be severed and replaced with a provision for arbitration under the DIAC Rules in accordance with a specific provision of the contract; and (iii) whether the Provisional Award should be denied enforcement in Singapore due to a jurisdictional issue pending determination in the main arbitration proceedings.

The Singapore High Court agreed with the respondent that the DIAC arbitration was not in accordance with the parties' agreement to arbitrate under the DIFC-LCIA Rules. Notwithstanding it decided that the Provisional Award should be enforced since the respondent had submitted to the tribunal's jurisdiction and had waived its right to challenge the tribunal's jurisdiction by its conduct (i.e. participating in the interim relief application). The Singapore High Court, in dismissing the respondent's application to set aside the Enforcement Order, noted that:

• A party's submission to arbitration is contractual and that it could not be compelled to submit to arbitration under a set of rules it did not agree to.
• A contractual provision that allows for any provision that is illegal, invalid or unenforceable to be replaced with lawful provisions to give effect to the parties' agreement did not create an intention to arbitrate under different arbitral rules to those agreed by the parties.
• By contesting the application for interim relief and without raising any jurisdictional objections in its submissions, this was a clear and unequivocal intention to submit to the tribunal's jurisdiction and so, the award should be enforced.

The matter was later referred to the Singapore Court of Appeal in DFM v DFL², where the Court of Appeal upheld the decision of the lower court by agreeing that the respondent had submitted to the tribunal's jurisdiction for the purposes of the interim relief application. The Court of Appeal acknowledged that the respondent had raised his jurisdictional objections in the Statement of Defence but allowed the hearing on merits of the interim relief application to proceed without his jurisdictional objections being raised before the Tribunal.

Practical considerations

The decisions of the Abu Dhabi and DIFC Courts provide some much-needed clarity on the practical implications of the Decree by confirming that the Abu Dhabi and DIFC Courts will uphold the parties' agreement to refer their disputes to arbitration and that existing arbitration agreements that refer to DIFC-LCIA arbitration remain valid and enforceable. However, the Singapore Court decisions described above raise questions as to whether the parties can be compelled to submit to DIAC arbitration where the arbitration agreement specifies the DIFC-LCIA Rules. It remains to be seen how the DIFC Courts and UAE Courts will address this issue.

In the meantime, parties may wish to take pre-emptive steps to avoid any uncertainty by:

• Reviewing existing DIFC-LCIA arbitration agreements and consider agreeing a revised arbitration agreement with its counterparty to specify the preferred arbitral institution such as the ICC, LCIA, or other arbitral institution - noting that where there has been no agreement, DIAC will be the administering body of such arbitrations.
• Ensuring that all future arbitration agreements that are executed do not refer to DIFC-LCIA.
• Ensuring that jurisdictional objections are raised as early as possible, during the proceedings to avoid any arguments as to whether a party has submitted to the jurisdiction of the tribunal constituted under rules which differ to those stated in the arbitration agreement.

Footnotes

1. DFL v DFM [2024] SGHC 71

2. [2024] SGCA 41

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.