Does the Non-arbitrable become Arbitrable in the light of Article 6 (2) of the new Arbitration Law No. 6 of 2018?

Does the Non-arbitrable become Arbitrable in the light of Article 6 (2) of the new Arbitration Law No. 6 of 2018?

By Firas Al Choufi – firas.alshoufi@binsevanadvocates.com

Managing Partner at Binsevan Advocates & Legal Consultancy

Despite the fact that the new Arbitration Law number 6 of 2018 was a big leap in the arbitration field in the UAE. However, it was not fully up to the hopes and expectations. The new Law did not clear entirely the ambiguity and uncertainty that blemished the UAE arbitration system for the last three decades. Article 6 (2) is one example of the few imperfectly drafted provisions in the new Law. Article 6 (2) of the new Law provides:

A plea that a contract containing an arbitration clause is “null” or has been rescinded or terminated shall not stay the arbitration proceedings and the Arbitral Tribunal may rule on the “validity” of such contract.

On one hand, Article 6 (2) seems to grant the Tribunal the power to rule on the validity of the contract even in respect of pleadings concerning its nullity. On the other hand, the deeply-rooted dictum in the practice of the UAE Courts is to consider disputes related to the nullity of contracts that is resulted from the none-adherence to the mandatory provisions of the State laws, as matters of public order and Non-arbitrable.

We will shed some light below on the thorny issue of Arbitrability and Non-arbitrability of certain type of disputes in order to understand and realize the anticipated controversy that we are going to face in the light of the ambiguous stipulation of Article 6 (2).

Hitherto, the general Practice of Dubai Courts is to consider the mandatory provisions of the law as matters of Public Order. Hence, it is for the exclusive jurisdiction of the State Courts to hear the disputes that are related to the non-compliance with the mandatory provisions of the law. The general practice of Dubai Courts was to perceive and examine the nature and type of the decided dispute or disputes in an arbitral award and consider those in which the claim was grounded on a breach to mandatory provision in the law as Non-arbitrable and to recognize the disputes where the claim or claims were grounded on breach or breaches of the commercial terms of the contract as Arbitrable, even though, if the main contract in the later disputes was null and void. ([1]).

The doctrine established by the Dubai Court of Cassation, which was crystalized  in Contestation Case number 282/2012, was that not every dispute resulting from a contract of sale of property is Non-arbitrable. The Arbitrability of such dispute will be determined in the light of the type of breach or breaches that the claim in the dispute was grounded on. If the claim was grounded on violating the mandatory provisions of the law, the dispute will be Non-arbitrable and the award deciding on the compliance or non-compliance with the mandatory provisions of the law will be null and void.  By contrast, if the claim of a party to a contract was grounded on breach or breaches to the commercial terms of the contract by the other party, the dispute will be Arbitrable and the award deciding on such dispute might be enforceable.

In the said Contestation Case number 282/2012, The Dubai Court of Cassation concluded the following:

“…..Such plead is rejected, that is the arbitration clause in a contract of a sale of property will be null and void if the Claimant in the Arbitration requested the nullity of the contract and grounded his claim on the basis of  non-registration of the contract in the Interim Register, as such matter (the nullity) is a matter related to the Public Order that cannot be subject of arbitration. However, if the Claimant in the arbitration case did not request the nullity of the contract due to non-registration, instead the Claimant claimed only the recession (NOT THE NULLITY) of the contract based on the breach of the developer in fulfilling its obligation in constructing and delivering the property, the arbitration clause will remain valid, as such the Award will be valid and enforceable. The Award reaching to terminate the contract, to the contrary of the Award annulling the contract, will be valid. ……”

In the aforesaid Contestation the Court discussed two scenarios of a dispute between a purchaser of a property and the seller or the developer of the same. In scenario “A” the purchaser is claiming the contract void because it is not registered in the Interim Register as per the mandatory provision of Article 3 of Law number 13 of 2008. While in scenario “B” the contract is still not registered in the Interim Register as per Article 3 of Law number 13 of 2008; however, the purchaser is not claiming the contract to be void, rather he is claiming the termination of the contract because of the default of the developer in not constructing the purchased property as per the terms of the contract.

The Court concluded that in scenario “A” the arbitration is NOT permissible because matters related to the Annulment of a contract, as a result of its non-compliance with a mandatory provision, are matters of Public Order; hence, it is for the exclusive jurisdiction of the State courts. By contrast, in scenario “B” the arbitration is admissible and the award to terminate the contract may be valid because the submitted dispute was not for declaring the nullity of the contract due to its non-adherence to the mandatory rules, rather in scenario “B” the “recession” of the contract NOT its nullity, was demanded.

In other words, the Dubai Court of Cassation distinguished between the disputes over the same contract between the same parties and considered the dispute Arbitrable or Non-arbitrable depending on which sort of breach that the claim is grounded on.

To further illustrate the dictum established by the Court of Cassation in the above quoted Contestation and the similar ones in differentiating between the Arbitrable and the Non-arbitrable disputes resulting from a contract of sale of a property in Dubai, I will summarize the conclusions reached by the Court of Cassation in the below two tables:

  Scenario “A”    Scenario “B”          Remarks 
  • The contract of sale was not registered in the Interim Register as per the mandatory provision of Article 3 of Law number 13 for 2008;
  • The developer defaulted and did not build finish the construction of the purchased property by the date that was agreed on in the contract;
  • There was an arbitration clause; and
  • The purchaser is claiming the contract to be “void” due non-compliance by the developer with the mandatory provision of Article 3 of the Law number 13 of 2008 that dictates to register every sale of a property in the Interim Register.
  • The exact same situation;
  • The exact same situation;
  • The exact same situation;
  • The purchaser is claiming the contract to be “terminated or rescinded” due the default of the developer in constructing the purchased property as was agreed in the contract.
  •  The difference is that The type of the breach that the claim was grounded on was different:  

in Scenario “A” the sort of breach that the purchaser grounded his claim on was the non-compliance by the developer with a mandatory provision in the law; thus, the claim was to “annul” the contract and have it declared “void”.

While, in Scenario “B” the sort of breach that the purchaser grounded his claim on was the default of the developer to construct the purchased property in accordance with the terms agreed on in the contract; thus, the claim was to “terminate” the contract and have it rescinded.

The Court’s conclusion

Scenario Admissibility of arbitration agreement and/or the award Reasoning
“A” NOT ADMISSIBLE The mandatory provisions of the law are matters of Public Order. Thus, it is for the exclusive jurisdiction of the State Courts to hear the disputes that are related to the non-compliance with the mandatory provisions of the law.
“B” ADMISSIBLE Breaches related to the commercial terms of a contract are not matters of Public Order. Therefore, the disputes related to such sort of breaches are reconcilable and consequently can be Arbitrable

Now, after having elucidated the subtle difference between Arbitrability and Non-arbitrability of certain types of disputes in the light of the practice of Dubai Courts, the dilemma of the Arbitrability and Non-arbitrability of such type of disputes, will be inevitably resurrected in the light of Article 6 (2) of the new Law. Under Article 6 (2) of the new Law it is plausible to see in practice a party in an arbitration pleading the “nullity” of the contract due to its non-compliance with the mandatory provisions of the State laws, and under the said Article, the arbitral tribunal might find that it has the power to decide on such plead and rule on the validity of the contract. Such inevitable scenario begs the following question:

Would the Court, in the light of Article 6 (2) and to the contrary to its explained practice recognize the award of an arbitral tribunal that decided a contract null and void? 

Or to rephrase:

Are the disputes related to nullity of a contract that is due to its non-adherence to the mandatory provisions of the State laws became Arbitrable by the virtue of Article 6 (2)?

The answer is really difficult as the drafting of the said Article did not consider the above elaborated practice of the UAE Courts. Article 6 (2) does not explicitly provide, nor explicitly exclude from the jurisdiction of an arbitral tribunal the disputes relating to nullity of a contract when the contract is not compatible with the mandatory provisions of the State laws. The Article was imperfectly drafted and fails to address boldly and decisively the issue of the arbitrability of disputes pertain to nullity of a contract when it does not comply with mandatory provisions of the State law.

Thus, is the question: Would the Court, in the light of perplexed stipulation of Article 6 (2), upend its long and strongly-rooted practice in considering disputes related to the nullity of contracts-that is resulted from the none-adherence to the mandatory provisions in the State laws-as matters of public order-and-Non-arbitrable?

In the writer’s opinion, it is doubtful, yet it is conceivable, that the Dubai Courts will topple and its practice in the light of such undecisive stipulation of Article 6 (2).

Therefore, until the Court’s practice under the new Law is settled, or the Law is amended, or an explanatory petition to address clearly the jurisdiction of arbitral tribunals under Article 6(2) of the new Law, is issued, parties must be careful in choosing what type of disputes to submit to arbitration and what to submit to the State courts.

In the writer’s opinion the provision of Article 6 (2) does not suffice to safely and confidently arbitrate disputes related to the nullity of the contract that is resulted from the contract being incompatible with the mandatory provisions of the laws of the Country. Though, it might be thinkable.

Last but not least, it is unfortunate that the complexity of the issue of the Arbitrability of subject-matter in certain disputes, was amplified by Article 6 (2) instead of having it simplified. However, we hope that such ambiguous provisions in the new Law will be amended or an explanatory regulation is issued sooner than later to achieve the purpose of the new Law in establishing solid and unambiguous arbitration system in the UAE.

For further information please contact Firas Alchoufi (firas.alshoufi@binsevanadvocates.com)

([1]) There were some controversial judgments such as the Contestation Case number 14/2012 in which the Dubai Court of Cassation adopted very broad interpretation of Article 3 of the UAE Civil Code, when it decided that every dispute resulting from a contract pertains to a circulation of wealth or private ownership is a matter of Public Order; thus, Non-arbitrable. However, the controversy was somewhat elaborated in later judgments such as the judgment in Contestation Case 282/2012 which is being extensively analyzed in this Article. The Dubai Court of Cassation in the said contestation 282/2012, narrowed the interpretation of the matters relating to the circulation of wealth and individual ownership provided for in Article 3 of the Civil Code. And concluded that the disputes resulting from commercial transactions over wealth and individual ownership are not in toto Non-arbitrable. Rather, only those disputes that are related to the non-compliance with the mandatory provisions that regulate the transfer of ownership are the Non-arbitrable disputes. While disputes related to the breach of the commercial terms in contract concerning transfer of ownership are not matters of Public Order; hence, they are Arbitrable.

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