DIFC Court declines to stay proceedings in favour of LCIA arbitration

Practical Law UK Legal Update 3-519-6991 (Approx. 5 pages)

DIFC Court declines to stay proceedings in favour of LCIA arbitration

by PLC Arbitration

Facts

Injazat Technology Fund BSC (ITF) had entered into a Share Purchase Subscription (SSA) with Broadlink Research FZ LLC (Broadlink) in 2006, pursuant to which ITF subscribed for 35% of the shares in Broadlink in consideration of funding of US$3 million. The two other shareholders in Broadlink (the "Guarantors") were also parties to the SSA and gave certain warranties in favour of ITF in the agreement.

ITF subsequently considered that Broadlink was in breach and therefore did not make the final tranche payment under the SSA. ITF then commenced ICC arbitration proceedings against the Guarantors for recovery of the sums paid and obtained an award in the amount of US$3.5 million, representing recovery of the initial payments together with interest and costs.

However, ITF considered that their legal advisors, Denton Wilde Sapte & Co (DWS), had failed to advise them that it had also been open to ITF to exercise an option under the SSA requiring the Guarantors to purchase ITF's shares for the original purchase price plus a premium of 25% per annum. ITF's view was that this course of action should have avoided the need to pursue any arbitration against the Guarantors.

They therefore commenced proceedings in the DIFC Courts, seeking damages for loss of the right to exercise the option, plus the unrecovered costs of the ICC arbitration.

ITF's engagement letter with DWS was said to incorporate terms and conditions which included the following jurisdiction clause:

"The laws of Dubai and the federal laws of the UAE govern all the agreements and arrangements between you and [DWS] relating to our services. If any claim, dispute or difference of any kind whatsoever (for example, any question regarding their existence, validity or termination) arises out of or in connection with those agreements or arrangements, you and we each agree to submit to the exclusive jurisdiction of the Dubai courts. However, we may, at our sole option, refer the claim, dispute or difference to arbitration in London before a single arbitrator."

The clause went on to provide details relating to any arbitration, should DWS exercise their option which, in short, provided for LCIA arbitration seated in London.

DWS exercised this option and commenced LCIA arbitration in London, before they were served with ITF's DIFC Court proceedings.

DWS made an application to the DIFC Court, seeking an order dismissing or staying ITF's proceedings pursuant to:

Article 13(1) of the DIFC Arbitration Law No.1 of 2008 (DIFC Arbitration Law).
Article 2 of the New York Convention.
The court's residual discretion.

DWS also argued that, on its proper construction, the governing law and jurisdiction clause provided for non-DIFC Dubai law and non-DIFC Dubai courts.

In response, ITF argued that:

Nothing in the DIFC law provided for a stay in favour of foreign arbitral proceedings.
As a result, the court was not required to stay the proceedings, and should not exercise its discretion to stay.
If (contrary to ITF's position) non-DIFC Dubai law was applicable, the arbitration clause in the standard terms and conditions was invalid since it had not been signed by the parties, which is a requirement of Dubai law.

Decision

Justice David Steel rejected the application for a stay of proceedings.

DIFC Arbitration Law

The DIFC Arbitration Law is very closely based on the UNCITRAL Model Law. Article 13(1) states:

"If an action is brought before the DIFC Court in a matter which is the subject of an Arbitration Agreement, the DIFC Court shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, dismiss or stay such action unless it finds that the Arbitration Agreement is null and void, inoperative or incapable of being performed."

Ordinarily, Model Law legislation provides that this clause shall apply irrespective of whether the seat of the arbitration is in the jurisdiction or in another jurisdiction. However, there is presently a glitch in the DIFC legislation, such that there was no provision for the application of this clause where the arbitration was seated outside the DIFC.

Justice Sir David Steel commented:

"It is fair to say that this constitutes on the face of it a failure to implement the terms of the New York Convention to which the Emirates are a party."

By way of comparison, the judge pointed to section 2(2) of the English Arbitration Act 1996, which expressly provides that section 9 (providing for a stay in favour of arbitration) applies even if the seat of arbitration is outside England.

While accepting that there is a presumption that legislation is drafted in a manner consistent with that jurisdiction's treaty obligations, the judge concluded that the DIFC Arbitration Law was clear that Article 13(1) had no application in the present case. Consequently, he concluded that there was no basis for ordering a stay in the present DIFC legislation.

Residual discretion to stay

Given the non-application of Article 13(1), the judge considered whether he could exercise his residual discretion to stay proceedings in favour of arbitration, given that this course of action would be consistent with the New York Convention and would hold the parties to their bargain.

Justice Steel commented:

"Can it really be said that the court is not entitled to exercise its residual discretion in the face of the terms of [the DIFC Arbitration Law]? I confess a reluctance so to conclude because of its implications for perfectly straightforward arbitration clauses with a seat outside the DIFC. Indeed it could be said that there is some good sense in imposing a mandatory stay for DIFC arbitrations and allowing a discretionary stay for non-DIFC arbitrations."

However, the judge concluded, again, that he was faced with "detailed and precise" legislation which precluded the exercise of any residual discretion. He therefore dismissed DWS's stay application.

He then went on to comment that, if he were wrong on that point and such residual discretion existed, he would have exercised that discretion to grant a stay of proceedings in favour of arbitration, given that an arbitration agreement had been "duly concluded" between the parties.

Validity of the arbitration clause

In relation to governing law and jurisdiction, the judge concluded that, given the background circumstances in which the contract had been entered into, the parties had intended that DIFC law would apply, and that the DIFC Court would have jurisdiction.

However, he went on to consider whether, if Dubai law were the governing law of the contract, the arbitration clause would be valid. He concluded that, as a matter of Dubai law, if an arbitration clause is contained in standard terms and conditions, the page on which the clause appears must itself be signed by both parties in order to be valid. As a result, if Dubai law had been applicable, the clause would have been "manifestly invalid and thus no stay could be legitimate."

Comment

While undoubtedly technically correct, this decision is an unfortunate one for the DIFC courts, and may (for the time being at least) raise questions about whether the DIFC is a jurisdiction that is fully supportive of arbitration.

It is certainly the case that the DIFC Arbitration Law as presently drafted is in contravention of the UAE's treaty obligations under the New York Convention. That Law must now be amended as a matter of urgency to rectify the present glitch in its drafting to ensure that Article 13(1) applies where the seat of arbitration is outside the DIFC. In particular, this must occur before other parties seek to seise the DIFC Court's jurisdiction despite the existence of a valid arbitration clause in their contracts which provide for arbitration outside the DIFC.

This decision also brings into focus the importance of complying with all formal requirements when entering into contracts containing arbitration clauses in onshore UAE. However, this part of the judge's decision is questionable given the existence of UAE and Dubai Court of Cassation decisions which have upheld the validity of arbitration clauses in standard terms and conditions which are incorporated by reference (see, for example, UAE Court of Cassation decision No. 462 of 2002 dated 2 March 2004 and Dubai Court of Cassation Case No. 49 and 96 of 2003). However the judge's claim may be regarded as per incuriam, as the only evidence before him was an article by a UAE firm. In particular, any use of standard terms and conditions containing arbitration clauses should be reviewed, as the validity of such clauses is a matter for serious doubt.

DIFC Court declines to stay proceedings in favour of LCIA arbitration | Practical Law