In the UAE, arbitration is regarded as an exceptional and
special dispute forum whereby parties agree to resolve their
disputes. Perhaps the most obvious principle, but one which is
often overlooked, is the requirement that parties who wish to
arbitrate their disputes must have a valid arbitration
agreement.
The UAE Civil Code (see Article 203(1)) allows parties to insert an
arbitration clause in the main agreement / contract (arbitration
clause), or to enter into a subsequent agreement to arbitrate.
Other important requirements are that the arbitration agreement
must be in writing and signed by a person capable of binding the
party to arbitration.
Of course, as with any commercial transaction, the thought that the
relationship may deteriorate to the point where a dispute may arise
is often not within the parties' contemplation at the time of
contract formation. The result of this can be the drafting of an
arbitration clause which invalid or impractical (i.e.
pathological).
This article does not intend to cover the main ingredients of an
arbitration clause or how to successfully draft one. It does,
however, intend to cover what happens when one party asserts the
invalidity of either the main contract or the arbitration
agreement.
Validity of the main contract vs validity of the
arbitration agreement
A distinction must be made between whether the issue at hand
relates to the validity of the main contract or the validity of the
arbitration agreement within that main contract, or both.
Main Contract
A determination as to the validity of the main contract (which
contains an arbitration clause) is usually within the jurisdiction
of an arbitral tribunal. This is because of the principle of
separability. The essence of this principle, which is embodied in
the rules of many arbitral institutions, including those of the
DIAC and DIFC-LCIA, is that regardless of the validity of the main
contract, including whether the main agreement has been terminated
or was void from its very beginning, the arbitration clause within
that main agreement is to be treated independently.
For example, Article 23.1 of the DIFC-LCIA Arbitration Centre
Rules provides as follows:
The Arbitral Tribunal shall have the power to rule on its own
jurisdiction, including any objection to the initial or continuing
existence, validity or effectiveness of the Arbitration Agreement.
For that purpose, an arbitration clause which forms or was intended
to form part of another agreement shall be treated as an
arbitration agreement independent of that other agreement. A
decision by the Arbitral Tribunal that such other agreement is
non-existent, invalid or ineffective shall not entail ipso jure the
non-existence, invalidity or ineffectiveness of the arbitration
clause.
Similarly, Articles 6.1 and 6.2 of the DIAC Rules provide:
6.1 Unless otherwise agreed by the parties, an Arbitration
Agreement which forms or was intended to form part of another
agreement shall not be regarded as invalid, non-existence or
ineffective because that other agreement is invalid, or did not
come into existence or has become ineffective, and the Arbitration
Agreement shall for that purpose be treated as a distinct
agreement.
6.2 If any party raises one or more pleas concerning the existence,
validity, scope or applicability of the arbitration agreement, then
the Executive Committee may decide, without prejudice to the
admissibility or merits of the plea or pleas, that the arbitration
shall proceed if it is prima facie satisfied that an arbitration
agreement may exist under the Rules. In such a case, any decision
as to the jurisdiction of the Tribunal shall be taken by the
Tribunal itself.
The effect of the above is perhaps best demonstrated by an
example:
Party A and Party B enter into a main contract, in which they
decide via an arbitration clause to resolve any disputes via
arbitration. This arbitration clause is valid under UAE Law. Party
A terminates the agreement for breach of contract by Party B. There
is, however, a dispute between Party A and Party B over the quantum
of damages owed by Party B to Party A for Party B's breach of
contract. Notwithstanding the fact that the agreement has been
terminated, the arbitration clause survives and the dispute over
damages owed must be resolved by arbitration in accordance with the
clause. Put simply, under the principle of separability the
arbitration clause survives termination and provides the parameters
by disputes are to be resolved.
Arbitration Agreement
Under a very strict interpretation of the competence-competence
theory, even issues as to the validity of an arbitration agreement
can be determined by a Tribunal. A quick example of this is as
follows: Party A and Party B have an arbitration clause in a main
contract. Party A thinks the clause is valid and commences
proceedings against Party B, who thinks the clause is invalid.
Party B launches a jurisdictional challenge on this basis, and the
Tribunal rules accordingly.
The above example does, however, represent a strict application of
the competence-competence principle. In some jurisdictions, it is
possible to apply for relief from the Courts in this type of
situation. This application for relief is sometimes known as an
anti-suit injunction. This type of relief is not available in the
UAE, although it may be possible to attempt to seek an order from
the Court that the arbitration clause was not valid ab
initio.
Another option for a respondent in this position is to boycott the
arbitration proceedings in their entirety, and, once the award is
issued, attempt to have it set aside by the UAE Courts on the
grounds outlined in Article 216 of the Civil Procedure Law.
Jurisdiction Generally
Finally, arbitrators are often faced with a partial challenge to
their jurisdiction. This may arise in a dispute over termination of
the main contract where a party may be making a number of different
claims for relief. Often, arbitration clauses contain
pre-conditions before being able to arbitrate, such as the initial
referral of a dispute to the Engineer for determination (as is
often the case in FIDIC type contracts), or notification in writing
to an opponent of the existence of a dispute. Pre-conditions to
arbitration have been recognised and upheld by the UAE
Courts.
In the above case, it often transpires that the party commencing
arbitration proceedings has adhered to the pre-conditions to
arbitration in the case of six out of 10 claims referred to
arbitration. It may, therefore, be open to the responding party to
argue that the arbitral tribunal has no jurisdiction to hear the
remaining four claims, because the pre-conditions to arbitration
were not satisfied. It is open to the arbitrators to rule on their
own jurisdiction in such circumstances – i.e. to
determine for themselves whether the pre-conditions have been
satisfied, and, if not, whether the failure to satisfy them impacts
adversely on their jurisdiction to determine the dispute relating
to those claims.
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.