Recent Arbitration Developments in the Middle East

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Arbitration News Blog by Herbert Smith

There have been three recent developments in the sphere of arbitration in the GCC. The first two relate to the validity of arbitration agreements as ruled on by the highest courts in Dubai and Kuwait. The third development relates to the long running concern over the recognition of the choice of international arbitration by the DIFC courts.

1. Arbitration clauses – are yours valid in Kuwait?

A recent Kuwaiti Court of Cassation case has put the approval process for agreements which contain an arbitration clause under the spotlight. The decision has implications for agreements with an arbitration clause to which a Kuwaiti company is a party and where any arbitral award may need to be enforced in Kuwait.

The question before the court was: is a general manager of a Kuwaiti incorporated LLC, or the chairman of a Kuwaiti joint stock company, entitled to execute an agreement containing an arbitration clause and bind the company by his signature. If not, what approvals are required?

The case turns on the interpretation of Article 702 of the Kuwaiti Civil Code which provides as follows:

A special agency must be made for each disposition which is not an act of management [an administrative act], particularly contributions, sales, conciliations, mortgages, admissions and arbitration, and also in directing the oath and pleading before the court [emphasis added].

The relationship between this Article and the provisions of the Kuwaiti Companies Law is relevant.

Under the Kuwaiti Companies Law, in relation to a joint stock company, the board of directors is vested with the power to manage the company in accordance with its objectives set out in its constitution. This general power of management may only be limited by the Companies Law, the company’s constitutional documents and the general assembly of shareholders. In addition, it is the chairman who is empowered to sign documents on behalf of the board of directors which must be executed in compliance with the recommendations of the board. In a limited liability company (a LLC, also known as a WLL), the general manager(s) has the general power to manage the company “on behalf of the partners” unless the constitutional document of the company sets out the specific authorities of the manager(s).

One argument is that entering into an agreement containing an arbitration provision is generally an act of management. Unless the liabilities of the shareholders are being increased, or the terms of the agreement represent a departure from the company’s objects, or it encompasses any other matter specifically reserved to shareholders under the Companies Law, there is no requirement for the approval of the shareholders to be sought. The only exception to this is if additional limits on management powers are contained in the memorandum.

However, on another interpretation, a special agency may be needed for all arbitration agreements because it is specifically referred to in the Article in the Civil Code. The Civil Code underpins all legal relationships in Kuwait (and in other Middle East countries) and, therefore, the provisions of the Companies Law in relation to the authority to bind the company do not override the requirement to seek a special agency.

The Court of Cassation – Kuwait’s highest court – decided that a special approval must be sought, which should take the form of a special power of attorney or a resolution of the company’s shareholders for whom the company is managed. A board approval is not sufficient in the case of a joint stock company.

The effect of this ruling is to invalidate any arbitration agreement entered into by a Kuwaiti company where a special approval for submission to arbitration was not sought. The Court of Cassation has stated that this rule is a matter of public policy and, therefore, if an international arbitral award is made which needs to be enforced in Kuwait, the Kuwaiti execution courts may reject the enforcement (using an exception to the New York Convention to which Kuwait is a signatory) on public policy grounds.

This decision gives sudden clarity to an area of Kuwaiti law; and clarifies it in a way which is unlikely to be welcomed by many companies dealing with Kuwaiti counterparties. For now, the safest course for parties to arbitration agreements, to which a Kuwaiti company is also a party, is to ensure that the Kuwaiti company has obtained a special approval from the shareholders or a power of attorney which refers specifically to the arbitration agreement. Notarised powers of attorney are commonly used to give express power to sign significant documents in the Middle East, but the timing for obtaining one must be factored into the completion mechanics.

The ICC arbitral award made in favour of Dow Chemicals against Petrochemical Industries Company (PIC) (a wholly owned subsidiary of Kuwait Petroleum Company) is yet to be enforced in Kuwait against the state owned company. Dow Chemicals successfully claimed for PIC’s withdrawal from an agreed plastics joint venture and was awarded US$2.1 billion in compensation. This may be the first high profile test as to the effect of this ruling on high value, international contracts, with a submission to international arbitration.

2. UAE – arbitral rulings based on breach of real estate registration requirements unenforceable as a matter of public policy

In another regional judgment on the unenforceability of arbitral awards on the grounds of public policy, the Dubai Court of Cassation has applied a wide interpretation of public policy.

A failure to register with the Dubai Lands Department a transfer of a property makes the transfer void under Dubai Law. In the case before the Court of Cassation, an off-plan property transfer was at the heart of the dispute: the land owner had not registered the transfer of the property to the developer to construct the building, for which the developer had paid the land owner. The arbitral panel at the Dubai International Arbitration Centre (DIAC) found that the developer had not, as a matter of law, acquired the property due to non-registration and ruled that it be reimbursed its purchase price.

The award had to be enforced in Dubai. After the first instance and appeal court hearings, the enforcement proceedings came before the Court of Cassation. The Court ruled that it would not enforce the award on the grounds of public policy. In doing so, the Court of Cassation looked at the scope of public policy under the UAE Civil Code which states:

Public order shall be deemed to include matters relating to personal status such as marriage, inheritance, and lineage, and matters relating to systems of government, freedom of trade, the circulation of wealth, rules of individual ownership and the other rules and foundations upon which society is based, in such a manner as not to conflict with the definitive provisions and fundamental principles of the Islamic Shari’ah [emphasis added].

The Court of Cassation held that the circulation of wealth and the rules of individual ownership included the nature and scope of rights and their acquisition and termination, including the method by which they are acquired or terminated. This stretched to the obligation to register such rights and adjudicating on a failure to do so. As such, these matters fall to the courts’ jurisdiction and are not a matter for arbitration. It has been pointed out by other commentators that the Court did not refuse enforcement on the grounds of public policy, but instead ruled that matters of public policy may not be the subject of an arbitration.

This interpretation of the provision is potentially wide and may have implications for claims on real estate in a broader sense than a registration failure. It may also be extended to other failures to register transfers, such as with the transfer of shares in a UAE company for example. This could have a significant impact on the use of arbitration agreements more generally in relation to commercial transactions where a UAE court may otherwise assume jurisdiction, including where the transaction takes effect in the UAE or one of the parties is a UAE national or company.

3. DIFC court refuses to follow the Injazat decision

While the position for arbitration in Kuwait and Dubai has been set back by the decisions above, the position within Dubai International Financial Centre (a separate jurisdiction to Dubai) has seen a significant boost.

In the recent decision International Electromechanical Services vs. Al Fattan Engineering and Al Fattan Properties, the DIFC Court held that the DIFC Courts do have inherent jurisdiction to stay a court case for non-DIFC seated arbitration. In deciding this, the court declined to follow the decision in the Injazat case. What this means is simple – if the DIFC court would have jurisdiction to hear a case it will refuse to hear it if there is a valid arbitration agreement providing for the case to be arbitrated anywhere.

In the Injazat case, the defendant sought to stay a DIFC Court case on the grounds that the parties agreed to arbitration (with a London seat). The court refused defendant’s application holding that the mandatory stay provision in Article 13 of DIFC Law (1) of 2008 (the Arbitration Law) only applied to DIFC seated arbitration. The court further held that because the Arbitration Law was a precise and detailed piece of legislation, the court was deprived of any residual inherent jurisdiction to stay the case in favour of non-DIFC seated arbitration.

In the International Electromechanical Services case, defendant sought to stay a DIFC Court case for arbitration (this time with a Dubai seat). The court refused to follow the Injazat decision, holding that the Arbitration Law does not demonstrate a legislative intent to eliminate the DIFC courts of inherent jurisdiction to stay proceedings for non-DIFC seated arbitration. The court reasoned that interpreting the Arbitration Law as preventing the DIFC Courts from granting a stay for non-DIFC seated arbitration would weaken the image of the DIFC as an arbitration friendly jurisdiction and put the United Arab Emirates in breach of the New York Convention. The court then exercised its inherent jurisdiction to stay the case.

This decision is a welcome development as it reinforces the DIFC’s reputation as an arbitration friendly jurisdiction.