Dispute escalation provisions and International Arbitration - a rising threat in France?
This is the second article in Clyde & Co’s latest international arbitration series covering dispute escalation provisions and pre-action ahead of commencing international arbitration across various jurisdictions. In this piece, associate Maria Andraos and trainee Caitlin Coady from our Dubai office provide the legal perspective from the United Arab Emirates.
The United Arab Emirates (the UAE) is a federation of seven emirates and a civil law jurisdiction. Exceptionally, two out of the seven emirates, namely Dubai and Abu Dhabi, have carved out financial free zones consisting of defined territories within each emirate. These are intended to incentivise investment by providing a sophisticated legal framework based largely on international model laws and the common law legal system to secure investments. Dubai’s financial free zone is the Dubai International Financial Centre (commonly referred to as the “DIFC”). Abu Dhabi’s financial free zone is named the Abu Dhabi Global Markets (the “ADGM”). Both the DIFC and the ADGM have their own courts, each broadly speaking having jurisdiction over matters concerning its free zone. These two courts are independent of one another, and are separate to the courts having jurisdiction outside the free zones.
The UAE is therefore “one country with two systems”: on the one hand, the UAE ‘onshore’ legal system, and on the other, the UAE ‘offshore’ legal system consisting of the DIFC and the ADGM free zones. Parties may freely choose the DIFC or ADGM as the seat of arbitration, regardless of whether the contract (or any related dispute) has any nexus to either of those jurisdictions, and regardless of the governing law applicable to the contract. They also have the freedom to choose whatever arbitration rules they prefer - for example, those of the Dubai International Arbitration Centre (the DIAC), the International Chamber of Commerce (the ICC), or the London Court of International Arbitration (the LCIA), to name the most commonly applied rules in the UAE.
The UAE Federal Law on Arbitration (Federal Law No 6 of 2018), which is applicable ‘onshore’, does not include specific provisions that relate to pre-action conduct or provisions that require settlement to be attempted before commencing arbitration.
Nonetheless, the UAE ‘onshore’ courts tend to give effect to contractual clauses including pre-conditions to arbitration. For example, the Dubai Court of Cassation has held that non-compliance with pre-conditions to arbitration provides grounds to dismiss a request referring the dispute to arbitration (Dubai Court of Cassation Commercial Appeal No 124 of 2008). The court further held that the burden of proving that pre-conditions to arbitration have been complied with lies with the party seeking to commence arbitration proceedings.
The Dubai Court of Cassation also declined to ratify an arbitral award on the basis that certain pre-conditions to arbitration, requiring (inter alia) the parties’ executive directors to attempt to amicably settle their dispute before engaging in arbitration, had not been complied with (Dubai Court of Cassation Commercial Appeal No 188 of 2012).
In other cases, the Dubai Court of Cassation ruled in a similar vein that an award is invalid if pre-conditions to commencing arbitration are not complied with. These include recourse to an engineer for a decision under clause 67 of the standard conditions of contracts of the FIDIC (the International Federation of Consulting Engineers) – see, for or example, Dubai Court of Cassation No 140 of 2007, Dubai Court of Cassation Commercial Appeal No 757 of 2016).
The Court of Cassation has dismissed a request to appoint an arbitrator on grounds that the pre-conditions to arbitration agreed by the parties and their dispute to be first heard by an engineer must be complied with before engaging in arbitration (Dubai Court of Cassation Commercial Appeal No 53 of 2011).
Arbitrations seated in the DIFC are subject to the procedural framework set out in DIFC Law No 1 of 2008 (the DIFC Arbitration Law). As in the onshore regime, the DIFC Arbitration Law does not contain provisions requiring parties to attempt settlement or other forms of alternative dispute resolution before commencing arbitration. The DIFC Courts Rules (the RDC) may provide some guidance on the treatment of pre-action protocols in the DIFC. RDC 27.1 states that the DIFC Courts “[encourage] parties to consider the use of alternative dispute resolution (such as, but not confined to, mediation and conciliation)”. While the use of alternative dispute resolution prior to commencing DIFC Courts proceedings is not a mandatory requirement, RDC 27.1 suggests that such pre-action steps may be taken by parties to a potential litigation in the DIFC. By extension, it may be expected that parties to a potential arbitration may also take such steps. Although there is limited case law on this issue, arbitral tribunals in DIFC seated arbitration may be expected to enforce pre-conditions, if those pre-conditions are required and part of a valid and binding agreement.
It is worth noting that there are also provisions in the RDC where particular pre-action protocols mandatorily apply to certain circumstances. For example, RDC 41.19 provides that “a claimant intending to commence proceedings against the Government must serve a notice of such intention at least 15 days before proceedings are served.” In Limsa v Lordon A Trading Platform of Dubai Multi Commodities Centre & Ors  DIFC ARB 008, a failure by the claimant to comply with pre-action protocols, including the one set out in RDC 41.19, resulted in the judge concluding that the claimant should be ordered to pay the defendants’ costs.
Arbitrations seated in the ADGM are subject to the procedural framework set out in the ADGM Arbitration Regulations 2015. These do not contain provisions requiring parties to attempt settlement or other forms of alternative dispute resolution before commencing arbitration. The ADGM is still a developing jurisdiction, and it does not appear that the issue of enforceability of pre-action protocols has yet been considered. However, English common law “as it stands from time to time” has direct application in the ADGM by virtue of the Application of English Law Regulations 2015. Therefore, it may be expected that the English approach to pre-action provisions would be applied in the ADGM, for example in relation to issues of substantive jurisdiction or admissibility.
The main arbitration institution in the UAE is currently the DIAC. The most recent version of the rules (the 2022 DIAC Arbitration Rules) that came into effect on 21 March 2022 includes provisions on conciliation proceedings (Article 3 of Appendix II regarding exceptional procedures). Nonetheless, the 2022 DIAC Arbitration Rules do not require the parties to engage in conciliation before the arbitration begins: the consent of the parties is required. The previous version of the DIAC rules (the 2007 DIAC Arbitration Rules) does not include provisions that require settlement negotiations before commencing arbitration or provisions relating to mediation or conciliation.
Although there are currently no express provisions within UAE law compelling parties to engage in pre-arbitration negotiations to resolve their dispute, the ‘onshore’ and ‘offshore’ systems allow parties to a contract to agree that settlement negotiations, mediation, or other forms of alternative dispute resolution must precede the commencement of arbitration proceedings. Where the parties do agree to a pre-condition before commencement, the UAE courts will generally give effect to such an agreement and require that the parties comply with the mechanism before they move to request arbitration.
This series will continue next week with the German perspective on dispute escalation provisions and pre-action ahead of commencing international arbitration.