Common Commercial Disputes Queries, May 2024 - UAE Special

Questions Answered in this Month’s CCDQ:

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1.???? What is the Constitutional Framework and Governance Structure of the UAE?

2.???? Why is the Legal System in the UAE so unique, and What makes it Attractive?

3.???? How did Arbitration originate in the UAE?

4.???? How did UAE regain Trust in Arbitration after the Early 1950s heavy losses and adverse rulings of International Arbitrators?

5.???? What was the reason for the initial distrust in UAE as the seat of arbitration?

6.???? What was the role of Financial Centres and Arbitration Centres in Shaping the UAE Arbitration Landscape?

7.???? How did the Passing of UAE’s New 2018 Arbitration Law Affect the Evolution of Arbitration in UAE?

8.???? What are the Unique Advantages which UAE has, to becoming a preferred Seat of Arbitration?

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What is the Constitutional Framework and Governance Structure of the UAE?

1.???? The United Arab Emirates (UAE) came into existence on 2 December 1971 through an agreement among the rulers of six Emirates: Abu Dhabi, Dubai, Sharjah, Umm al Quwain, Fujairah, and Ajman. Subsequently, on 10 February 1972, Ras al-Khaimah joined the federation.

2.???? Each Emirate is governed by a Ruler, collectively forming the Federal Supreme Council.

3.???? Among the council members, one monarch serves as the President of the UAE, while another is appointed as the Prime Minister. It is noteworthy that Abu Dhabi and Dubai hold exclusive veto power over critical matters of national importance within the Federal Supreme Council.

4.???? Islam is the official religion of the UAE, and Arabic is its official language. However, English plays a prominent role as the language of choice for business and education, particularly in Abu Dhabi and Dubai.

5.???? The UAE's legal system is based on civil law principles, with elements of Islamic Sharia law integrated into it.

6.???? While the Federal Government has jurisdiction over specific matters such as foreign affairs and health, each Emirate has the authority to establish its own legislature. Consequently, there is a federal law applicable throughout the UAE, alongside individual local laws for each Emirate. In case of any conflict between federal and local laws, the federal law takes precedence.

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Why is the Legal System of UAE so Unique and What makes it Attractive?

1.???? The legal system in the UAE is a blend of civil law and Sharia law, with Islamic law (Shari’a) serving as a primary source.

2.???? The local court system includes civil courts and Islamic courts within each Emirate. Civil courts handle matters such as civil, commercial, property, labor, insurance, banking, and maritime issues, while Sharia courts focus on family and personal law matters. Together, these courts are known as the "??????????????" ????????????.

3.???? In addition to these, there are independent common law systems in two free zones: the Dubai International Financial Centre (DIFC) Courts and the Abu Dhabi Global Market (ADGM) Courts. These courts operate under common law principles to resolve civil and commercial disputes and are referred to as the "????????????????" ????????????.

4.???? In the UAE, there are three distinct arbitration laws to choose from:

(a)?? The UAE Federal Law No. 6 of 2018 on Arbitration (The New UAE Arbitration Law);

(b)? The DIFC's Arbitration Law (DIFC Law No. 1 of 2008);

(c)?? and the ADGM Arbitration Regulations, 2015.

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How did Arbitration originate in the UAE??

1.???? Arbitration has a long history in the UAE, dating back to ancient times in the Middle East. Both the Holy Quran and Sunnah support the concept of arbitration, albeit in a slightly different form from modern arbitration practices.

2.???? The discovery of oil in the 1950s led to a significant increase in commerce in the UAE.

3.???? In 1952, one of the first notable disputes arose in the case of Petroleum Development Ltd v. Sheikh of Abu Dhabi [1952]. This dispute stemmed from a 75-year oil concession agreement between the parties.

4.???? This case marked the UAE's first international arbitration.

5.???? Lord Asquith, an English arbitrator, determined that while the contract was made and to be performed in Abu Dhabi, the "proper law" of the contract would be the "general principles of law" rather than Abu Dhabi law.

6.???? Lord Asquith's decision was based on his view that Abu Dhabi lacked a formal legal system, as justice was administered at the Sheikh's discretion with the assistance of the Quran.

7.???? Consequently, the arbitrator ruled that English law would be the proper law in this case.

8.???? Subsequent petroleum cases in the UAE saw similar rulings.

9.???? The period from the 1950s to the 1970s was challenging for the UAE, with significant losses in the petroleum industry and ICC arbitrations related to the construction industry.

10.? This led to a sense of suspicion towards arbitration among the #UAE business community, as the disregard for local UAE law by arbitrators was seen as an attempt to impose colonialism and Western dominance on the commercial population of the UAE.

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How did UAE regain Trust in Arbitration after the Early 1950s heavy losses and adverse rulings of International Arbitrators?

1.???? After the UAE population began to look at arbitration with suspicion, in 1955 the Bandung Conference took place, where delegations of Asian and African countries condemned colonialism in all its manifestations.

2.???? In 1971 a new sheikh secured Abu Dhabi’s independence as part of the UAE. Post this large scale building projects picked up in Arab nations. In the 1970s and 1980s there were a series of positive arbitration rulings in favour of the UAE. It was due to this that Arab nations began to regain trust in arbitration as a suitable method for resolving cross-border conflicts.

3.???? Substantial petrochemical and construction arbitrations served as the cornerstone for the global recognition of #arbitration as a valid mechanism for resolving cross-border commercial conflicts.

4.???? Thereafter, the arbitration process has been shaped by a confluence of events in the political, economic, and legal domains, including decolonisation, the oil crisis,?the expansion of international trade, and the influence wielded by Anglo-American #arbitrators and counsels.

5.???? In fact in 1992, when the #UAE Civil Procedures Code was introduced, Articles 203 to 218 of the UAE Civil Procedure provided for and controlled #arbitration.

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What was the reason for the initial distrust in UAE as the seat of arbitration?

1. During the 1990s, when arbitration legislation was undergoing significant changes worldwide, the UAE was slow to adapt. In 1992, the UAE Civil Procedures Code was introduced, which included Articles 203 to 218 governing arbitration.
2. While the Civil Procedures Code provided a legal framework for arbitration, its provisions had limitations in addressing the nuances and complexities of modern arbitration practices. The application of arbitration procedures was unclear and inconsistent due to the lack of specific legislation.
3. Compared to other Arab countries, the UAE's accession to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards in 2006 was relatively late.
4. However, the New York Convention is crucial as it provides a ground for setting aside foreign awards based on public policy. In the Middle East, religious considerations often played a role in interpreting public policy, such as in calculating limitation periods or determining interest awards.
5. Consequently, very few non-domestic arbitral awards were being enforced in the UAE.
6. This lack of enforcement contributed to initial distrust of the UAE as a seat of arbitration, leading foreign investors to be hesitant about conducting arbitrations in the UAE.

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What was the role of Financial Centres and Arbitration Centres in Shaping the UAE Arbitration Landscape?

1. The development of arbitration in the UAE gained momentum with the establishment of financial centers such as the Dubai International Financial Centre (DIFC) in 2006 and the Abu Dhabi Global Market (ADGM) in 2013. Courts in these zones operate under common law, rather than civil or Sharia law.
2. These financial centers also introduced their own arbitration laws based on the UNCITRAL Model Law, enhancing their credibility globally for resolving international commercial disputes.
3. The establishment and growth of world-class arbitration centers further reshaped the perception of the UAE as a favorable arbitration seat. For example, the Dubai International Arbitration Centre (DIAC) was initially formed in 1994 as a part of the Dubai Chamber of Commerce and transformed into its current form in 2007. Presently, each emirate in the UAE has at least one arbitration center, totaling at least twelve such centers. The prominent ones include DIAC and the Abu Dhabi Chamber of Commerce & Industry (ADCCAC), established in 1993.
4. Until 2021, the DIFC-LCIA (a partnership between DIFC and LCIA) was a significant institution. However, this changed in September 2021 with the dissolution of the old DIAC, the Emirates Maritime Arbitration Centre (EMAC), the DIFC Arbitration Institute (DAI), and the DIFC-LCIA, and the establishment of DIAC, which now combines all these entities. DIAC is now entirely independent from the Dubai Chamber of Commerce.
5. According to the new DIAC Rules 2022, if the arbitration agreement does not specify the seat, the default seat will be DIFC.
6. Therefore, in such cases, common law (rather than civil law) and the arbitration law of DIFC would apply.
7. The decree also specifies that for DIAC arbitration cases where the seat is explicitly mentioned as "Dubai," the law of the local 'onshore courts,' i.e., Arabic-speaking civil-law courts, will apply, and not the common law DIFC courts (Offshore courts).

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How did the Passing of UAE’s New 2018 Arbitration Law Affect the Evolution of Arbitration in UAE??

1. A significant milestone in the development of arbitration in the UAE was the enactment of UAE Federal Law No. 6 of 2018 on Arbitration ("2018 Arbitration Law"). This law was enacted to address the need for a more comprehensive legislative framework for arbitration.
2. The 2018 Arbitration Law is based on the UNCITRAL Model Law and aimed to rectify the deficiencies of the previous legal framework, bringing the UAE's arbitration procedures in line with international standards. It recognizes all three arbitration frameworks as Model Law-based, a recognition also affirmed by UNCITRAL in its note dated 1 April 2020.
3. This law emphasizes party autonomy, granting disputing parties the freedom to tailor their arbitration processes. This flexibility enhances the effectiveness and adaptability of arbitration by accommodating the diverse needs of companies engaged in local or international commerce.
4. The provisions of the 2018 Arbitration Law concerning the recognition and enforcement of arbitral awards demonstrate the UAE's commitment to international arbitration standards. The legislation simplifies the procedures for recognizing and enforcing arbitral awards, enhancing the reliability and predictability of the UAE's arbitration regime.
5. Currently, there are three distinct arbitration laws in the UAE. The first is the UAE Federal Arbitration Law, which applies to onshore arbitrations across all seven emirates. The second is the DIFC Arbitration Law, applicable to arbitrations seated in the DIFC. The third is the ADGM Arbitration Regulations, which apply to arbitrations seated in the ADGM. The latter two laws govern offshore arbitrations.
6. This legal framework in the UAE reflects a balance between local sensitivities and international norms. The existence of specialized arbitration zones like the DIFC, with its unique arbitration rules and judicial system supporting a flexible and tailored approach to dispute resolution, exemplifies this balance.

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What are the Unique Advantages which UAE has, to becoming a preferred Seat of Arbitration?

?UAE has certain unique factors which work in favour of it becoming a preferred seat in the near future.?

1.???? Geographically, the UAE seems to be a preferred seat of Arbitration in the Middle East and North Africa (MENA) region. The 2020 ICC Dispute Resolution Statistics reflected that Dubai was the sixth most chosen seat in the MENA Region by the parties and by the ICC Court. The World Justice Project Rule of Law Index 2023 points to UAE’s Rank number one in the MENA Region.

2.???? The MENA region is growing commercially due to large scale ongoing projects in the construction industry, as well as other industries such as energy sports and entertainment. The MENA jurisdictions are also parties to various MITs and regional treaties. Therefore the region is very vibrant with respect to international arbitration and with growth of the need for dispute resolution.

3.???? English is the global language of trade and commerce. While English is not the top language, but it is still amongst the top five languages used throughout UAE. At the same time this becomes a unique facet which UAE has to offer to parties looking for various different options and jurisdictions. For instance, for parties do have the options of ADCCAC, or Dubai onshore arbitration with the Arabic language, but they also have the option of choosing a DIFC or ADGM seat which not only provide the advantage of choosing the language as English, but also it is the common law system which applies instead of the Civil or Sharia Law.

4.???? Also, while DIAC’s 2007 rules provided that if parties had not agreed a seat of arbitration, Dubai onshore courts would be chosen as default seat, with the civil law becoming applicable, this position has now changed. Under the DIAC’s 2022 rules, DIFC becomes the default seat, where common law would be applicable and DIFC Courts would have supervisory jurisdiction. In one stroke this step dispels fears not only of language but also the applicability of common law.

5.???? Another step in the right direction was the repeal of Penal Law Article 257 which provided for an arbitrator’s criminal liability. This provision caused serious concern amongst arbitration professionals working in the UAE. The amending law now removes their exposure to criminal liability for a perceived failure to act with “objectivity and integrity” in a UAE seated arbitration.

6.???? UAE’s quick adoption of technology into the arbitration process is a huge positive for it. Article 28(2)(b) of the New UAE Arbitration Law provides that the Arbitral Tribunal may, ‘unless otherwise agreed by the Parties… hold arbitration hearings with the Parties and deliberate by modern means of communication and electronic technology. This is a unique feature in UAE’s arbitration law. Article 28 of the 2018 UAE Arbitration Law also now authorizes parties to agree to conduct arbitration hearings remotely or physically and in absence of such an agreement, it authorizes the arbitral tribunal to make a decision in this respect. Therefore as far as adoption and adaptation of technology is concerned UAE is way ahead of the curve owing to being a relatively newer jurisdiction implementing the model law.

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Conclusion

?1.???? While the UAE's cultural diversity and various forum options provide a unique advantage, practical challenges remain. Due to the cultural mix of civil, Sharia, and common law traditions, the same set of facts can be interpreted differently based on the fact finders’ cultural backgrounds. Such divergent interpretations can lead to flawed conclusions. As a recent adopter of the UNCITRAL Model Law, the UAE sees this as both an opportunity and a challenge, necessitating specialized training for arbitration professionals and the community.

2.???? The 2018 UAE Arbitration Law represents a positive step toward meeting the global standards for preferred arbitration seats. The London Centenary Principles highlight the importance of an arbitration law that provides a robust framework, limits court intervention, and strikes a balance between confidentiality and transparency. Additionally, adherence to treaties for recognizing and enforcing foreign awards and arbitration agreements is crucial. The 2018 UAE Arbitration Law meets these criteria on paper.

3.???? However, significant efforts are required to establish the UAE's reputation as a preferred arbitration seat. The UAE ranks 37th globally in the World Justice Project Rule of Law Index 2023 and 27th in the Corruption Perception Index 2022, dropping two points since 2021.

4.???? Moreover, local courts need to demonstrate a strong pro-enforcement approach, which the UAE has been slow to adopt. There are still grey areas in the law, such as whether UAE courts have discretionary power to scrutinize requests for the appointment of arbitrators. The 2018 Arbitration Law does not address this issue.

5.???? There have also been instances where UAE courts have applied domestic law to foreign arbitration awards, which is a misapplication of the law since there is a clear distinction in the UAE between domestic and foreign awards. Other inconsistencies in law application regarding award enforcement also exist.

6.???? In conclusion, while the New UAE Arbitration Law and recent legal developments represent a paradigm shift in the UAE's arbitration culture, it will be a slow and arduous process to overcome the reputation built over the years.