Drafting arbitration and jurisdiction clauses—the devil is in the detail

Drafting arbitration and jurisdiction clauses—the devil is in the detail

36230849_xlInternational arbitration lawyers will have to approach the drafting of UAE, Dubai International Financial Centre (DIFC) or Dubai arbitration clauses with caution in the light of a decision by a DIFC court in Gavin v Gaynor, says Dr Gordon Blanke, partner of international commercial and investment arbitration with DWF (Middle East) LLP.

In Gavin v Gaynor the Court of First Instance of the DIFC stayed proceedings brought by the claimant company, Gavin, asking the court to appoint an arbitrator to decide a dispute with the defendant company, Gaynor. The proceedings were stayed pending the decision of the US Court of Appeal for the Ninth Circuit on whether to proceed with Californian arbitration proceedings between the parties. The dispute had arisen in relation to a commercial agreement between the parties. A US affiliate of Gaynor seized the US courts under the same agreement in a related subject-matter and Gavin subsequently brought the instant proceedings seeking an order from the DIFC court to appoint an arbitrator. The US court referred the dispute to arbitration and Gavin appealed.

In the instant proceedings, Gaynor contested the jurisdiction of the DIFC court. The DIFC court held that while neither the agreement nor DIFC law precluded its jurisdiction, to exercise that jurisdiction would be an abuse of process in view of the reference to arbitration in the US. It accordingly stayed proceedings until the appeal court in the US proceedings confirmed the lower court’s reference to arbitration.

What was the background to the decision?

In 2007, Gavin, a financial business established in the UAE, and Gaynor, a California-based company that develops and operates technology platforms internationally, entered into an agreement whereby Gaynor was to provide stored value card services to Gavin for use by customers in the UAE. The agreement contained a number of governing law and dispute resolution provisions that formed the focal point of the parties’ arguments before the DIFC court. Specifically, clause 13.2 stipulated that the validity, construction and interpretation of the agreement and the rights and duties of the parties thereto should be governed by the ‘internal laws of the UAE’. Pursuant to clause 13.3, the parties were to ‘submit to the jurisdiction of the courts in Dubai, the UAE’. Finally, in the terms of clause 13.5, any controversy arising out of, or relating to the agreement, or the breach thereof, was to be submitted to arbitration ‘per the law of the UAE’. On the basis of these provisions, Gavin sought to convince the DIFC courts that they were the proper forum for hearing an application for appointment of a DIFC-seated arbitration tribunal that would hear the merits of the parties’ dispute, or in the alternative to refer the application for appointment to the onshore Dubai courts.

Gaynor objected to the DIFC courts’ proper competence in this matter on the basis that:

  • the underlying arbitration agreement was invalid
  • the DIFC courts did not have proper subject matter jurisdiction
  • the application was an abuse of process

An affiliated company of Gaynor incorporated in the US, Gaynor Inc, had, already prior to the application, initiated various court proceedings in California against Gavin in relation to its claims under the agreement, which in turn prompted an order from the Californian courts to refer the parties’ dispute to arbitration in the US, subject to a presently pending appeal.

What issue arose for consideration?

The main issue that arose for consideration was the question as to whether the DIFC courts had proper curial competence under art 17(3)(b) of DIFC Law No 1 of 2008 (the Arbitration Law) to appoint an arbitrator in the presently prevailing circumstances. Ancillary issues were:

  • the validity of the underlying arbitration agreement (which did not expressly provide for a seat of the arbitration), and
  • the question as to whether Gavin’s pursuit of DIFC-seated arbitration proceedings in parallel with already pending arbitral proceedings in California may constitute an abuse of process

What did the court decide?

HE Justice Ali Al Madhani, rendering the ruling of the DIFC Court of First Instance, found in favour of the DIFC court’s proper curial competence in the present circumstances on a combined reading of the Arbitration Law, arts 7 and 17(3)(b) and the jurisdictional gateways of the DIFC court under article 5 of DIFC Law No 12 of 2004 (the Judicial Authority Law), as amended by DIFC Law No 16 of 2011. Pursuant to the Arbitration Law, art 7, the DIFC court’s power to appoint a tribunal under the Arbitration Law, art 17(3)(b) was only to be engaged if the seat of the arbitration was the DIFC. In reliance on the Judicial Authority Law, art 5(A)(1)(e), pursuant to which the DIFC courts have jurisdiction ‘in accordance with the DIFC Laws and DIFC Regulations as prescribed by the DIFC Arbitration Law’, the Justice found that the arbitration clause alone did not clearly nominate the DIFC to be the seat of arbitration and that nothing in the agreement referred specifically to the DIFC and that therefore the Arbitration Law was not sufficient to confer jurisdictions to the DIFC courts in this case.

Despite the apparent clarity with which the parties stayed clear of the DIFC as a jurisdictional venue or indeed a seat of arbitration in drafting the terms of the agreement, Justice Al Madhani read a measure of ambiguity and uncertainty into the arbitration agreement that he thought justified him to look for the DIFC courts’ jurisdiction to appoint a tribunal in the present circumstances into the remaining jurisdictional gateways under the Judicial Authority Law, art 5(A)(1). As he stated:

‘It must be determined whether the parties intended to refer their disputes to the DIFC courts or to the non-DIFC Dubai courts. Thus, both clauses 13.3 and 13.5 should be interpreted with this inquiry in mind. That leaves the question of whether, under the provisions of the Judicial Authority Law, art 5(A)(1), this court has jurisdiction over the substantive dispute in this case in the absence of an arbitration clause.’

As regards the validity of the arbitration agreement, there can be little doubt—as indeed confirmed by the DIFC court—that the arbitration agreement is prima facie valid. The absence of an express choice of seat does not render an arbitration agreement invalid (whether under UAE or DIFC law). The DIFC court further confirmed that in the light of the potentially conflicting outcomes between any future arbitration proceedings in California and the arbitration proceedings in the UAE, Gavin’s application should be dismissed for abuse of process. However, in the light of pending appeal before the Californian courts, the DIFC court decided instead to stay the application.

What are the implications of the decision in the UAE?

It is clear from the wording of the judgment that in his determination of the DIFC court’s proper jurisdiction to appoint a tribunal in the present circumstances, the Justice failed to distinguish between the curial and substantive jurisdictions of the DIFC court, two jurisdictional notions that must be treated separately. Taking account of the doctrine of separability and the clear wording of the DIFC Arbitration Law, art 7, this goes a step too far and ultimately results in an inflation of the DIFC court’s proper curial jurisdiction. In other words, it is the choice of the DIFC as the seat of the arbitration that triggers the curial competence of the DIFC court to exert supervisory and supportive functions in the arbitration, including the power to default appoint arbitrators, not the DIFC court’s (potential) substantive jurisdiction over the merits of a dispute under the agreement.

In addition, the findings of the DIFC court run counter to a distinction it had previously drawn between the use of the terms ‘Dubai’ and ‘DIFC’ for the designation of the seat of an arbitration in dispute resolution provisions providing for UAE arbitration. In at least two DIFC Court of First Instance decisions (Amarjeet Singh Dhir v Waterfront Property Investment Limited and Linarus FZE (CFI 011/2009) (8 July 2009) and Five River Properties LLC and Renaissance Holdings and Developers FZE v Waterfront Property Investment Limited and Linarus FZE (CFI 012/2009) (8 July 2009)), the court found that a wish to resort to DIFC arbitration required express wording to that effect, a reference to ‘Dubai’ only was to be understood as a reference to arbitration onshore, not arbitration seated in the DIFC. This distinction, no doubt, will find application by analogy to other wording in relation to the designation of law or dispute resolution fora between Dubai and the DIFC—a reference, as in the present contractual framework, to the Dubai courts in combination with UAE internal laws as the governing laws of the dispute should be taken literally as meaning the courts of Dubai (and not those of the DIFC) and the laws of the UAE (and not those of the DIFC). Had the parties wished to opt into the jurisdiction and into the substantive laws of the DIFC in one form or another, they should have expressly stated so. The requirement of express reference is not in any way mitigated by DIFC law being a form of UAE law and the DIFC courts forming part of the judicial system of Dubai and the UAE more generally. In other words, given the availability in Dubai of the civil law Dubai courts and the common law DIFC courts, each benefiting from a self-contained body of procedural and substantive laws, disputing parties are required to make a conscious choice (subject to a number of mandatory considerations) between the onshore and offshore jurisdictions.

What are the implications for international arbitration lawyers?

International arbitration lawyers should approach the drafting arbitration and jurisdiction clauses with caution. Provided the DIFC court’s ruling stands confirmed on appeal, no reliance can be placed any more on the conscious choice of the terms ‘DIFC’ and ‘Dubai’ in an arbitration or exclusive jurisdiction provision in order to seat an arbitration or the litigious forum of a dispute offshore or onshore. In order to safeguard against arbitration in the DIFC in favour of onshore Dubai or the choice of the offshore DIFC courts over the onshore Dubai courts, an arbitration or exclusive jurisdiction clause might expressly have to negate the DIFC as a seat of the arbitration or the chosen litigious forum, or include wording that implies some such negation, eg ‘the seat of the arbitration is Dubai, not the DIFC’ or ‘the seat of the arbitration is onshore Dubai’.

Interviewed by Robert Matthews. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Related Articles:
Latest Articles:
About the author: