02 Jul 2017

Hadef in the Courts - A New Approach on Authority to Bind Companies to Arbitration in the UAE?

Authored by: Omar Al Shaikh and Khalid El Derderi

Hadef in the Courts - A New Approach on Authority to Bind Companies to Arbitration in the UAE?

In brief:

  • We look at the traditional view of the Courts towards arbitration clauses
  • We consider in depth a recent judgment of the Dubai Court of Cassation that Hadef & Partners was involved in, in connection with the application of the overarching principles of good faith and apparent authority
  • We look at the potential implications of this judgment on the choice of dispute resolution method parties might now be willing to consider

Background

Historically, the determination of authority, particularly when dealing with an individual’s right to bind a company to arbitration, has been seen as a major point of contention.

Article 203(4) of Federal Law No. 11 of 1992 (the “Civil Procedure Law”) states that “[a]n agreement to arbitrate shall not be valid unless made by persons having the legal capacity to make a disposition over the subject matter of the dispute.”

In addition, Article 58(2) of the Civil Procedures Law goes on state that “[n]o admission or waiver of a right alleged or settlement or submission to arbitration . . . or any other disposition in respect of which the law requires special authorisation may be made without special authority” (emphasis added).

However, the Civil Procedure Law does not set out what is meant by “legal capacity”, or what constitutes “special authority.”

Traditionally, the UAE Courts viewed arbitration as a type of waiver. The Courts view arbitration as a waiver of a party’s fundamental right to access the Courts. With this in mind, the Courts would often require explicit and specific authority before binding a Company to arbitrate.

Given the Court’s stringent interpretation, clients were often advised to have specific safeguards in place when dealing with arbitration clauses. We often advise clients to ensure that the signatory of the counter party has been granted either a specific power of attorney to bind his or her company to arbitration, or is named as the general manager on the trade licence. Over the course of many years, the UAE Courts have issued a number of decisions that suggest that failing to take such safeguards would render the arbitration clause void and invalid.

However, the Dubai Court of Cassation has recently issued a number of decisions that suggest the Courts have adopted a new view on determining an individual’s ability to bind his or her Company to arbitration.

We at Hadef & Partners have recently been involved in a case that we believe finally sheds some light on this grey area.

Case details

In this case, a large regional developer filed a claim against our client seeking over AED 150 million damages before the Dubai local courts despite the fact the agreement between them contained an arbitration clause.

The large developer argued that “It is well established in the law, pursuant to Article 203/4 of the Civil Procedures Law that agreement on arbitration shall be valid only if made by the person who has the capacity to dispose of the right in issue. Further, it is established in the case law of this honorable court that agreement on arbitration shall be valid only if made in writing and signed by the party who has the capacity to agree on arbitration.”

We argued that the court should not be limited to the rigid and illogical restrictions put forward by the opposing counsel. We argued that the Court should apply the overarching principles of good faith and apparent authority. We further argued that if the Court failed to apply these principles, it would be rewarding the developer for its own violations of the law.

The Dubai Court of Cassation agreed with our position and found that the arbitration clause in the agreement between the parties was valid and binding. In its final judgment the Court of Cassation found:

“ … as [the relevant] contract contained the name of the legal entity alone without reference to the name and position of the legal representative and the contract was signed by other signature, and the contract contains the arbitration clause, then in this case it shall constitute an explicit evidence that the person who signed this contract has the capacity to act, and the capacity to agree on the arbitration.”

Conclusion

Having a specific power of attorney or being named on the trade licence are both ways to evidence authority and to bind a company to arbitration. And in order to be on the safe side, these are two measures that we strongly urge our clients to take.

However, contrary to what was pleaded by opposing counsel in this matter, the Dubai Court of Cassation has found that these are not the only way a company can be bound to arbitration.

This once-grey area has prevented many from pursuing arbitration proceedings. Many viewed the risk of having an arbitral award annulled for lack of authority of the opposing side to be too great a risk.

However, with this recent decision by the Dubai Courts, such parties who once may have felt discouraged may now have more confidence in their choice of dispute resolution method.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.