The pivotal Judgment sets out the Abu Dhabi onshore courts’ position concerning arbitration agreements that reference the defunct DIFC-LCIA, and may have wider significance with respect to arbitration in the UAE.

Background

The case involved a substantial claim for unpaid money in a contract for medical equipment supply where the parties had opted for arbitration under the DIFC-LCIA rules, seated in the DIFC, and governed by UAE law. Despite the arbitration agreement, the claimant commenced proceedings in the Abu Dhabi court.

The defendant argued the court lacked jurisdiction because of the existence of the DIFC-LCIA arbitration agreement. On the other hand, the claimant argued the impossibility of performing the arbitration agreement following the abolishment of the DIFC-LCIA and, pursuant to article 54(4) of the UAE’s Federal Arbitration Law No 6 of 2018 (the Federal Arbitration Law), the arbitration agreement was invalid because it is incapable of being performed.

Upon considering the Decree, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the NY Convention), the Federal Arbitration Law, as well as certain foreign judgments, the court dismissed the claim on the basis that it lacked jurisdiction due to the existence of a valid and binding arbitration agreement.

The Judgment also considered other arguments, including the claimant’s assertion that the arbitration agreement was invalid because the defendant had changed its legal structure following its entry into the underlying contract. The court rejected this and other attempts to usurp the arbitral tribunal’s jurisdiction.

Court's rationale

Abolishment of the DIFC-LCIA does not invalidate the arbitration clause

The court acknowledged that the Decree places DIAC as the legal successor to all the rights and obligations of the DIFC-LCIA. It then considered whether the Decree has thereby made the arbitration agreement in question impossible to perform. Rejecting the claimant’s assertion, the court concluded that the arbitration agreement was valid and binding.

The court reasoned that the NY Convention travaux préparatoires (i.e., the discussions about the drafting of the NY Convention) did not contemplate that the abolishment of an arbitration institution should be among the criteria for determining whether an arbitration agreement is void or incapable of performance.

In addressing one of the claimant’s arguments, the Judgment considered that arbitration rules effective at the time of parties’ arbitration agreements may later be amended, since arbitration institutions have the autonomy to update their rules (and routinely do so). The court considered that such updates do not automatically invalidate arbitration agreements. The court also noted that the DIFC-LCIA rules had in fact been amended since the parties entered into their arbitration agreement; and that the claimant had not argued that any substantial differences in the rules would harm it.

The significance of verifying the parties’ intent

The court considered that it is permissible to interpret arbitration agreements by reference to the subject matter, as long as the interpretation does not depart from or exceed the meaning of the contractual terms. With this in mind, the court analysed the arbitration agreement by considering four pillars – or essential elements – in verifying the parties’ intent to arbitrate:

• The explicit agreement not to resort to the courts.
• The exclusive agreement to arbitrate by appointing a tribunal to decide the dispute.
• The scope of the tribunal’s authority pursuant to the arbitration agreement and disputes governed by it.
• The procedural aspects of the arbitration, including the seat, the tribunal’s appointment process, the language, and the institution that will administer the arbitration.

The court concluded that, provided the parties intended to refer a matter to arbitration, the absence of one of the elements due to reasons beyond the parties’ control (for example, the abolishment of an arbitral institution), does not necessarily invalidate the arbitration agreement. It held that in the current matter, the arbitration agreement remained valid and binding. As part of its reasoning, the court considered by analogy that the absence of a procedure to appoint arbitrators does not invalidate an arbitration agreement given the Federal Arbitration Law foresees that the arbitration agreement remains binding while allowing the parties to resort to the competent court to request the imposition of appropriate appointment procedures.

As part of its reasoning, the court relied on the severability clause in the underlying contract. This type of clause typically provides that the remainder of an agreement will stay valid even if a particular clause, or part thereof, is found to be inoperable or unenforceable. The court found that it could use the severability clause in the underlying contract to support its conclusion that, even if a part of the arbitration agreement was inoperable (because the DIFC-LCIA no longer existed), the arbitration agreement as a whole was still capable of performance by ‘severing’ the references to the DIFC-LCIA. The reliance on a severability clause to modify arbitration agreements highlights potential issues with the autonomy of arbitration agreements (which are considered independent contracts to the underlying contract in which they are contained).

The Judgment further rationalised that the court does not force parties to resort to arbitration before a specific institution, such as DIAC; however, it guarantees that no party will violate its obligations to arbitrate by resorting to the courts. It considered that parties are free to agree on another arbitration institution should they so wish. In this case, the court took into account that the claimant had not requested the defendant to resort to another arbitration centre.

Reference to foreign judgements

It is unusual for UAE courts to refer to or consider international jurisprudence in their decisions. In the Judgment, the claimant made submissions on the basis of a United States decision dated 6 November 2023 to argue the invalidity and impossibility of performing the arbitration agreement. In turn, the court considered other judgments issued by foreign courts, including French, Swiss, German, Hong Kong, and U.S. courts. It found that those precedents upheld the principle of party autonomy and validity of arbitration agreements, even where an arbitration institution ceased to exist or never existed.

One of the precedents to which the court referred was the Paris Court of Appeal judgment in case no. 10/23578. That case considered similar circumstances where an arbitral award debtor sought to retract the enforcement order of an award on the basis that the arbitration clause in the underlying agreement designated an arbitral institution that no longer existed and had since been succeeded by another institution. The French courts affirmed the validity of the arbitration clause despite the designation of a defunct arbitration institution, stating that its successor institution could validly handle the dispute.

The court’s comparative approach, considering a wide range of international decisions, underlines the evolution and growing sophistication of the UAE judiciary.

The UAE legal framework supports arbitration as the "prevailing norm"

Finally, the Judgment notes that arbitration has become the “prevailing norm” in settling commercial disputes in the UAE, and that the Federal Arbitration Law mandates that arbitration agreements should be interpreted by state courts “from a broad perspective”. This is positive: historically, UAE courts have not always endorsed such a pro-arbitration approach.

Brief comparative view: Handling of DIFC-LCIA arbitration agreements in Louisiana and Singapore courts

The disagreement in judicial approaches across different jurisdictions regarding the enforceability of arbitration agreements following the abolition of the DIFC-LCIA shows varying levels of adherence to original contractual terms versus practical adaptations to institutional changes.

Louisiana court's approach¹

In November 2023, in civil action no. 2:23-cv-1396, a Louisiana court exhibited a strict adherence to the parties’ choice of the DIFC-LCIA as the arbitral institution. It appears that the claimant in the Abu Dhabi Judgment relied upon this case. The Louisiana court rejected a motion to compel arbitration where the parties had agreed DIFC-LCIA arbitration, following the DIFC-LCIA’s abolition. The core of the Louisiana decision relied on the principle that arbitration is a matter of consent, and that altering the agreed forum constituted a significant deviation from the contractual agreement. The court decided that given the selected arbitration institution no longer existed, the arbitration agreement was unenforceable and that neither the court nor the Dubai government had the authority to alter the parties’ agreement and change the institution to DIAC. The court relied on U.S. precedents that stressed the importance of the parties' contractual choice of institution, thus rejecting a pragmatic approach that would uphold the arbitration agreement by referring to a “successor” institution.

Singapore court's ruling²

In March 2024, in deciding application no. 882 of 2022, the Singapore High Court enforced a DIAC provisional award rendered under a DIFC-LCIA arbitration agreement. Significantly, it only did so because the respondent had actively participated in the arbitration without raising jurisdictional objections on the basis of the Decree. The court agreed with the respondent that DIAC arbitration was not in accordance with the parties' agreement to arbitrate under the DIFC-LCIA rules, because there were key differences between the rules and procedures of the two institutions such that it could not be said that the parties agreed DIAC arbitration.

Conclusions

The Abu Dhabi Court of First Instance and Court of Appeal judgments demonstrate a flexible, pro-arbitration approach, focusing on the parties’ broad intent to arbitrate disputes. The courts’ affirmation of the transition from DIFC-LCIA to DIAC stabilises the arbitration landscape in the UAE.

It is unclear whether the Judgment has been further appealed before the Abu Dhabi Court of Cassation, and if so, whether the Court of Cassation will affirm the Judgment. If the Court of Cassation agrees and upholds the conclusions of the Judgment, it is possible that the Judgment will set the tone for future cases in UAE courts involving DIFC-LCIA arbitration agreements. More broadly, given the Judgment is steering the UAE legal system towards a more arbitration-friendly approach, it may impact other, unrelated contested jurisdictional issues concerning arbitral awards before the UAE courts.

However, the Louisiana and Singapore decisions serve as a reminder that uncertainty with respect to DIFC-LCIA arbitration agreements remains depending on where enforcement of such agreements is sought.

Parties should consider revisiting any existing DIFC-LCIA arbitration agreements to limit the potential risk of future jurisdiction objections.

For further detailed advice on how this judgment might affect your specific contractual relationships and for assistance in drafting arbitration clauses that align with the latest legal developments, please reach out to Reed Smith.

1. Baker Hughes Saudi Arabia Co. v. Dynamic Indus.
2. [2024] SGHC 71 (revised)

In-depth 2024-122