Legal analysis of enforceability of assignment of arbitration clause in the light of Dubai Court of Cassation 1603/ 2022 (Commercial) verdict dated 30 March 2023.
Dubai Court of Cassation 1603/ 2022 (Commercial) verdict dated 30 March 2023 is a noteworthy verdict in the domestic legal landscape of Arbitration law and practice.
In a nutshell, this judgement illustrates how Arbitration clause assignment is interpreted in the backdrop of the underlying transactions and wider contract between the parties in an enforceability perspective clearly demarcating between assignment of agreement that contains arbitration clause (assignment of arbitration clause) and Arbitration Clause Incorporated by Reference.
Features of Arbitration agreements
Let us have a quick look at the salient features of arbitration prior to dissecting assignment of Arbitration clause that is at the core of the aforementioned verdict.
As we all know, the very foundation of every arbitration and of the international arbitral process itself is an arbitration agreement. Absent a valid agreement to arbitrate, there are absolutely no legal grounds for requiring a party to arbitrate a dispute or for enforcing an arbitral award against a party. “Arbitration is a matter of contract, and a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit” (Howsam v. Dean Witter Reynolds, Inc., 537 U.S 79,83 (U.S S.Ct.2002).
As all may be aware, the UAE enacted a separate arbitration law to govern arbitration proceedings: Federal Law No.6 of 2018 (the “New Law”). Under Article 5.1 of the New Law and according to UAE Case Law, the parties to contract may agree to refer to any or all disputes to arbitration by either concluding a separate arbitration agreement or may agree upon an arbitration clause in the main contract (Case No.873/JY3, Federal Court of Cassation, 22October 2009; and Case No.33/2009, Dubai Court of Cassation 22 March 2009.
Arbitration agreements can be drafted in numerous different ways. Typically, an arbitration agreement is a provision in an underlying commercial contract, requiring arbitration of any future disputes relating to the contract. Such a provision can be either short and standardized or even customized for a particular transaction. (It is also possible for parties to an existing dispute, not otherwise subject to arbitration, to agree to submit that dispute to arbitration. The agreement doing so is typically a standalone arbitration agreement often called a “submission agreement” or “compromis”. A compromis is made after a dispute has already arisen rather than before.)
When we look at the factual details of the Appeal No. 1603 of 2022, a commercial appeal, before the Court of Cassation in UAE we are reminded of the basic issues affecting the enforceability of arbitration agreements like the allocation of authority between arbitrators and national courts to decide disputes over the interpretation, validity and enforceability of arbitration agreements including the “competence-competence” doctrine. The law applicable to the formation, validity and interpretation of an arbitration agreement may be different from both the law applicable to the substance of the parties’ underlying contract and the law applicable to the arbitral procedure. Given the separability presumption, a separate choice-of -law analysis is required to determine the law governing the substantive validity of the arbitration agreement itself as distinguished from the underlying contract.
An important aspect relating to validity of the arbitration agreement is non signatory issues like assignment. It is common knowledge that arbitration is fundamentally consensual. Therefore, it is argued that an arbitration agreement obligates only the parties to the agreement and not others. Presumptively and in most instances the parties to an arbitration agreement are its formal signatories. However, there are circumstances in which non-signatories may be held to be parties to and consequently bound by an arbitration agreement. These include alter-ego, agency (actual and apparent), group of companies, estoppel, legal succession, 3rd party beneficiary, implied consent, guarantor, ratification, assignment and assumption theories. It is important to note that in each instance non-signatories of a contract can be bound by and may invoke the contract’s arbitration clause.
When we analyze the topic of assignment of Arbitration clause, it further draws our attention to the contextually relevant theory of separability of international arbitration agreements. Separability Presumption is a striking feature of arbitration clause. Arbitration clauses are presumptively “separable or “severable” from the contract (main or underlying contract) within which they are found. The separability presumption provides that an arbitration agreement, even though included in and related closely to an underlying commercial contract is presumptively a separate and autonomous agreement.
How assignment or transfer impacts an arbitration clause or agreement is very relevant in the context of aforementioned latest verdict. Contracts are frequently transferred from one party to another by way of assignment, novation or assumption.
Arbitration Clause Incorporated by Reference: An arbitration clause may be incorporated by an express reference to a document which contains an arbitration clause. In such a case, the arbitration clause will be deemed to have been incorporated into the contract provided such reference is made clear, i.e., with specific mention of the arbitration clause contained in the referenced document. This form of arbitration agreement is common in construction contracts where parties refer to the FIDIC General Conditions of Contract.
The Arbitration clause widely used in UAE is that stipulated in FIDIC Edition 1999 Clause 20.6. It states that:
“Unless settled amicably, any dispute in respect of which the DAB’s decision (if any) has not become final and binding shall be finally settled by international arbitration. Unless otherwise agreed by both Parties: (a) the dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce, (b) the dispute shall be settled by three arbitrators appointed in accordance with these Rules, and (c) the arbitration shall be conducted in the language for communications defined in Sub-Clause 1.4 [Law and Language]. The arbitrator(s) shall have full power to open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer, and any decision of the DAB, relevant to the dispute.”
An arbitration agreement shall be valid only if it is in writing irrespective of whether an arbitration agreement is contained within a contract or as a separate document. The UAE courts have established that an arbitration agreement in writing also refers to any instrument signed by the two parties or any correspondences, letters, or any other means of written communication exchanged between the parties (Art.35(2) UNICITRAL Model Law).
If there are annexes and schedules to the contract between the parties, it is not essential that the parties sign the annexes and schedules, but it is sufficient if the schedules are referred to in the contract as being an integral part of it. Nonetheless, if a schedule contains an exceptional clause which is an arbitration clause, this condition shall not be binding upon the two parties unless they have signed such schedule. (Case No.22/JY 22, Abu Dhabi Court of Cassation, 3 March 2002, and the Case No.51/19992, Dubai Court of Cassation.
In Dubai Court of Cassation case in 2012 (Real Estate appeal 153 of 2011 issued on 19 February 2012) the Court explained on what conditions arbitration clause might be incorporated by reference. In the light of this ruling, it is crucial that parties should explicitly state their agreement to arbitrate.
It is in this backdrop that Dubai Court of Cassation 1603 – 2022 (Commercial) dated 30 March 2023 is significant as it clearly demarcates between assignment of agreement that contains arbitration clause (assignment of arbitration clause) and Arbitration Clause Incorporated by Reference.
The relevant portion of the verdict is as follows:
“Whereas one of the reasons the appellant mourns is the inadequacy of causation and errors in the application of the law in the challenged judgement. The appellant states that she insisted at all stages of the lawsuit, even before delving into the subject, on dismissing the claim due to the existence of an arbitration clause based on September 1st, 2019, Sales and Purchase agreement that was executed between the plaintiff as the buyer and the seller.
Verdict observes that the transfer of fixed rights in those agreements related to the invoices issued by the two supplier companies is capable of transferring the assigned right to the aggrieved company in all its elements, characteristics, payments, and consequences, making it an authentic party to the arbitration agreement stipulated in the purchase agreements concluded between the two supplier companies and the aggrieved party, Clause 13 of that agreement included that all disputes or disagreements arising from these agreements between the parties shall be governed by English law and interpreted accordingly, and any dispute arising from or related to this agreement shall be referred to arbitration in London in accordance with the Arbitration Act 1996, and arbitration shall be conducted in accordance with the terms of the London Maritime Arbitrators Association in force at the time of commencing arbitration proceedings. Unless it is proven that the agreement on the transfer has included indications to the contrary, the assigned company shall have the right.
It should adhere, in the face of the company being sued against it, to argue against accepting the lawsuit due to the existence of an arbitration clause. This is because the contested judgment contradicted this perspective and confused the transfer of the arbitration clause through contract assignment or assignment with the incorporation by reference, which does not exist at all in the circumstances of the present lawsuit. This condition is only met when the arbitration clause is not explicitly mentioned in the original contract between the parties and is solely referred to in another document that includes this clause. The confusion led to the claim that the company being sued against is not a party to those agreements and that the documents lacked any letters, telegrams, or other written means of communication between the parties, indicating a clear and explicit reference to the adoption of the arbitration clause for resolving disputes that arise between them. Therefore, the court erred in applying the law, as this error led it to refrain from examining the provisions of the sales and purchase agreements and the purchase orders to verify whether each of them includes the arbitration clause or not, and the validity of the claimant’s insistence on this argument was not investigated……and the court re-ruled by rejecting the law suit due to the existence of an arbitration clause in it….”
Thus, in principle the assignment of a contract should have the effect of conveying the arbitration clause associated with the underlying contract, either absolutely or without its counterparty’s consent unless expressly repudiated.
In the present times it has been accepted that the arbitration clause is separable from the underlying contract to the extent that it helps to ensure and promote the effectiveness of arbitration. In other words, an arbitration agreement need not be treated separately from the main contract for the purpose of a contractual assignment.
Thus, this subject verdict Dubai Court of Cassation 1603/ 2022 (Commercial) verdict dated 30 March 2023 reinforces the above stand. This verdict thus ushers in further clarity as to how the Assignment of Contract with Arbitration Clause is treated demarcating it from Arbitration Clause Incorporated by Reference in UAE.
References & Bibliography
Garnuszek, “The Law Applicable to the Contractual Assignment of an Arbitration Agreement” in Michael O’Reilly (ed), The International Journal of Arbitration, Mediation and Dispute Management, 82(4), p. 349.
Articles of New York convention
court decision No. 70/2012 from 15th of June 2012, the Bulgarian Supreme Court of Cassation
Gary B Born International Arbitration: Law and Practice
International Commercial Arbitration by G. Borne
LexisNexis E journal dated 7 April 2016
LexisNexis E journal dated 25 April 2016
A Guide to Arbitration in the UAE By Hassan Arab, Gordon Blanke, Alain Farhad, Mahmood Hussain, Philip Punwar.
Disclaimer: This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Any reliance you place on such material is therefore strictly at your own risk.
Author: Ahmed Elmahdy & Thara Kumar