Landmark Dubai Court Verdict Clarifies Enforceability of Arbitration Clause Assignments in Commercial Disputes

In a groundbreaking ruling that has sent ripples through the legal landscape of arbitration law and practice, the Dubai Court of Cassation has shed light on the enforceability of assignments of arbitration clauses. Rendered on March 30, 2023, the verdict in Dubai Court of Cassation 1603/2022 (Commercial) has provided much-needed clarity on the interpretation of arbitration clause assignments within the context of underlying transactions and broader contractual agreements.

Arbitration agreements, the cornerstone of the arbitral process, form the bedrock of every arbitration, ensuring parties’ consent to resolve disputes through this alternative dispute resolution mechanism. Without a valid agreement to arbitrate, there are no legal grounds to compel parties to arbitration or enforce arbitral awards. As underscored by the United States Supreme Court in Howsam v. Dean Witter Reynolds, Inc., arbitration is a matter of contract, and parties cannot be compelled to submit to arbitration without their explicit consent.

In the United Arab Emirates (UAE), the enactment of Federal Law No.6 of 2018 (the “New Law”) specifically governs arbitration proceedings. Under Article 5.1 of the New Law, parties to a contract can agree to refer disputes to arbitration either through a separate arbitration agreement or an arbitration clause within the main contract. UAE case law, such as Case No.873/JY3 from the Federal Court of Cassation and Case No.33/2009 from the Dubai Court of Cassation, has upheld the validity of arbitration clauses in contracts.

Arbitration agreements can take various forms, often as provisions within commercial contracts that mandate arbitration for future disputes arising from the contract. These provisions can range from standardized and concise to tailor-made for specific transactions. Additionally, parties involved in an existing dispute, not initially subject to arbitration, may agree to submit their dispute to arbitration through a standalone arbitration agreement known as a “submission agreement” or “compromis.”

The recent Dubai Court of Cassation verdict, Appeal No. 1603 of 2022, brings attention to essential factors affecting the enforceability of arbitration agreements. It clarifies the allocation of authority between arbitrators and national courts in deciding disputes over the interpretation, validity, and enforceability of arbitration agreements, including the application of the “competence-competence” doctrine. The law governing the formation, validity, and interpretation of an arbitration agreement may differ from the laws governing the underlying contract and the arbitral procedure itself. This concept of separability of international arbitration agreements underscores that an arbitration agreement, despite being closely related to an underlying contract, is considered a separate and independent agreement.

One significant aspect related to the validity of an arbitration agreement is the involvement of non-signatory parties, such as in the case of assignments. While arbitration is fundamentally consensual, there are circumstances where non-signatories may be held bound by an arbitration agreement, invoking the contract’s arbitration clause. These circumstances include alter-ego, agency (actual and apparent), group of companies, estoppel, legal succession, third-party beneficiaries, implied consent, guarantor, ratification, assignment, and assumption theories.

The issue of assigning an arbitration clause draws attention to the theory of separability. An arbitration clause is presumed to be “separable” from the contract within which it is found, meaning it can be treated as a distinct and independent agreement. This presumption allows an arbitration agreement to survive the assignment or transfer of the underlying contract.

Incorporating an arbitration clause by reference is another relevant concept. An arbitration clause can be incorporated by explicitly referring to a document containing the arbitration clause. In such cases, the arbitration clause is deemed to be incorporated into the contract, provided the reference

is clear and specifically mentions the arbitration clause in the referenced document. This type of arbitration agreement is commonly seen in construction contracts, where parties refer to the FIDIC General Conditions of Contract.

The recent Dubai Court of Cassation’s verdict in Appeal No. 1603 of 2022 sheds light on the assignment of arbitration clauses and the distinction between assignments of agreements containing arbitration clauses and arbitration clauses incorporated by reference. The verdict addressed the appellant’s insistence on dismissing a claim based on an arbitration clause in a Sales and Purchase agreement executed between the buyer and the seller. The Court observed that the transfer of rights in the agreements related to the invoices issued by two supplier companies effectively transferred the assigned right, including the arbitration clause, to the aggrieved company, making it a party to the arbitration agreement. The Court emphasized the distinction between assignment and incorporation by reference, stating that the latter only applies when the arbitration clause is not explicitly mentioned in the original contract but is referred to in another document. The Court ruled in favor of the arbitration clause, underscoring the importance of explicit references to arbitration clauses in the relevant documents.

This verdict reinforces the principle that the assignment of a contract carries with it the arbitration clause associated with the underlying contract, unless expressly repudiated. The separability presumption allows the arbitration agreement to be treated independently from the main contract in the context of a contractual assignment.

The Dubai Court of Cassation’s verdict in Appeal No. 1603 of 2022 provides crucial clarity on the treatment of assignments of contracts containing arbitration clauses, distinct from arbitration clauses incorporated by reference. By demarcating the two concepts, the ruling serves as a significant milestone in the UAE’s legal landscape, bringing further certainty to the enforceability of arbitration agreements and their assignments in commercial disputes.

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