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The European, Middle Eastern and African Arbitration Review 2016

Middle East

Arbitration in the Middle East has a long, if complicated, heritage. Historically a favoured means of resolving disputes, its image was tainted and development stunted for decades following a string of decisions against states and state-owned entities throughout the 1950s and 1960s, epitomised by the infamous decision in Petroleum Development (Trucial Coast) Ltd vs Ruler of Abu Dhabi.1

The Middle East has moved on. Recent years have seen significant developments in arbitration legislation, jurisprudence and practice across the Middle East, particularly in countries in the Gulf region. The positive by-product of these developments is a greater degree of certainty and predictability for users and an increase in trust in the region’s ability to deliver world-class arbitration services. Even where the developments have been inconsistent or too recent to judge, they are nonetheless encouraging. From the modernisation of arbitration legislation to the decreasing intervention of local courts, the future appears bright for arbitration in the Middle East.

This article considers some of the most noteworthy recent developments and what they mean for arbitration in the Middle East.

United Arab Emirates

The UAE has for decades sought to position itself as a hub for global business, trade and finance. Instrumental to that ambition has been a gradual development of sophisticated mechanisms for international dispute resolution, be it via the establishment and promotion of international arbitration, the promulgation of new procedural rules or the creation of novel avenues for enforcement.

At the same time, the continued delay of the new Federal Arbitration Law – under discussion since 2008 – has stunted the attractiveness and growth potential of Dubai and other Emirates as international arbitration centres. However, the winds are favourable and the determination of practitioners, arbitrators and policymakers to transform the UAE into a truly global arbitration centre on a par with the likes of London and Paris makes the adoption of a modern arbitration regime a question of when and not if.

Arbitration in the UAE

Onshore (ie, outside the DIFC)

Arbitration in the UAE is governed by articles 203 to 218 of the Civil Procedures Code of 1992 (CPC).2 Other than these articles, there is currently no dedicated arbitration law in the UAE, whether based on the UNCITRAL Model Law or otherwise. However, various drafts of a Federal Arbitration Law have been under discussion since 2008.

A weakness of the current arbitration regime lies in the hostility of some domestic judges towards arbitration, which is treated as an exception to the natural jurisdiction of the courts. Coupled with an outdated and non-prescriptive arbitration regime in the CPC, this has led courts to nullify arbitral awards on procedural technicalities such as a failure of arbitrators to sign each page of an award, narrow interpretations of the question of capacity to bind a company to an arbitration agreement and broad interpretations of public policy.

The latter has been a particularly uncertain and unpredictable area in UAE arbitration jurisprudence of late. In the 2012 decision in Baiti Real Estate Development v Dynasty Zarooni Inc, the Dubai Court of Cassation nullified a DIAC award on the basis that registration of off-plan property units in the Real Estate Register involved ‘rules of private ownership and the circulation of wealth’, and therefore violated public policy as defined in article 3 of the UAE Civil Transactions Code.3 The decision and the reasoning of the Court of Cassation was met with dismay by arbitration practitioners concerned with its potentially broad scope of application. Subsequent decisions in this area, however, have adopted a narrower interpretation of public policy, limiting the Baiti decision to the issue of registration of off-plan property units and explicitly confirming that disputes over breaches of private contracts and recovery of damages, even where real property is involved, do not encroach upon matters of public policy.4

Despite the inherent challenges and uncertainties, the domestic arbitration scene in the UAE remains buoyant, and seasoned practitioners have learned to navigate the potential procedural pitfalls.

DIFC

The Dubai International Financial Centre (DIFC) is an economic free zone created in 2004 as part of Dubai’s long-standing effort to establish itself as a global financial capital. The DIFC boasts a modern, bespoke legal and regulatory framework governing activities within its territory and its own autonomous courts modelled on the systems of several common law countries, a marked contrast with the civil law system that applies outside the DIFC’s half a square kilometre geographical borders. The DIFC also benefits from a modern arbitration law based on the UNCITRAL Model Law and its own arbitration centre, the DIFC-LCIA Arbitration Centre, and offers itself as a credible modern alternative to a seat located in ‘onshore’ UAE.

Although of recent vintage, the DIFC promotes itself as a leading arbitration hub and its courts have not shied away from adopting a strongly pro-arbitration stance. Indeed, as further explored below, over the past year alone, the DIFC has confirmed jurisdiction over the ratification of foreign and domestic arbitral awards whether or not the DIFC has a nexus to the dispute, thus agreeing to act as a conduit for jurisdiction for enforcement in on-shore Dubai,5 and developed a novel (if somewhat unusual) mechanism by which its court judgments may be converted into arbitral awards that would, in theory at least, render them readily enforceable under the New York Convention.6

Enforcement of arbitral awards in the UAE

The New York Convention, procedure and public policy

The UAE ratified the New York Convention in 2006 without making any reservations. However, UAE courts continued for several years to apply the outdated (and, more importantly, irrelevant) conditions for enforcement listed in the CPC to enforcement actions, disregarding the pro-enforcement bias enshrined in the New York Convention. All that changed through a series of decisions commencing in 2010 and culminating in the Court of Cassation’s decision No. 132/2012 in Airmech Dubai LLC v Macsteel International LLC, which affirmed the primacy of the New York Convention to enforcement of foreign awards and lack of relevance of the CPC.

There was something of a setback in 2013 following the Dubai Court of Cassation’s decision in Construction Company International (CCI) v Republic of Sudan in which it upheld a decision refusing jurisdiction of an action to enforce three ICC arbitral awards against the Republic of Sudan on the basis that neither party was domiciled in or connected with the UAE, a requirement contained in the UAE CPC.7 Nevertheless, the decision was perceived to be an outlier, decided on its own facts, with a somewhat clumsy application of the forum non conveniens doctrine by the court.

Since then, however, the primacy of the New York Convention has been reaffirmed by all levels of the Dubai judiciary, up to the Court of Cassation, in the case of Al Reyami Group LLC v BTI Befestigungstechnik GmbH & Co KG, which concerned the enforcement of an ICC award seated in Stuttgart.8 The Dubai Court of Cassation endorsed the view of the Court of Appeal that the New York Convention was embedded in UAE domestic law by Federal Decree No. 43 of 2006 and article 125 of the UAE Constitution, and rejected any grounds for challenge that fell outside the scope of article V of the New York Convention.

The UAE judiciary has come a long way in its willingness to embrace and uphold the UAE’s treaty obligations under the New York Convention. While exceptions may arise, Dubai (and probably other Emirates as well) can now be considered a relatively safe jurisdiction in which to enforce a foreign arbitral award. The irony remains that the greatest enforcement risk lies with domestic awards, a risk that innovative practitioners have recently tried to address using the DIFC courts.

DIFC as a ‘host’ for onshore enforcement

Two recent significant judgments by the DIFC courts have potentially created a new route for award creditors seeking to circumvent a lengthy enforcement battle before the ‘onshore’ Dubai courts, by confirming the DIFC courts’ willingness to act as a ‘host’ or ‘conduit’ jurisdiction for the enforcement of arbitral awards.

The first decision, (1) X1 (2) X2 v (1) Y1 (2) Y2, concerned efforts by two award creditors incorporated outside Dubai to enforce a foreign arbitral award against two award debtors incorporated in onshore Dubai through the DIFC courts.9 The award debtors objected to the DIFC court’s jurisdiction to recognise and grant leave to enforce the foreign award, there being no nexus between the dispute or the parties and the DIFC, including no assets within the DIFC.

The DIFC Court of First Instance upheld its jurisdiction, relying principally on article 42 of the DIFC Arbitration Law, which provides that:

[an] arbitral award, irrespective of the State or jurisdiction in which it was made, shall be recognised as binding within the DIFC and, upon application in writing to the DIFC Court, shall be enforced subject to the provisions of this Article and of Articles 43 and 44.

However, the court drew a line between recognition and enforcement where there were no assets located in the DIFC. In such cases, the DIFC court’s jurisdiction extended only to recognition of the award, with enforcement in ‘onshore’ Dubai being within the gift of the Dubai enforcement judge who, pursuant to article 7(3) of the Judicial Authority Law,10 is required to enforce the recognition order without reconsidering ‘the merits of the judgment, decision or order’. A party looking to enforce a DIFC Court award in onshore Dubai may also rely on the 2009 Protocol of Enforcement between the Dubai Courts and the DIFC Courts, which clarifies certain requirements for enforcement.

The DIFC Court of Appeal reaffirmed and expanded the approach taken in (1) X1 (2) X2 v (1) Y1 (2) Y2 in the case of Meydan Group LLC v Banyan Tree Corporate PTE LTD,11 which involved a DIAC award rendered in Dubai. The tribunal decided in favour of Banyan, which then applied to the DIFC Court of First Instance for recognition and enforcement of the award. Meydan objected on the basis that the court lacked jurisdiction. The court (here presided over by H E Justice Omar Al Muhairi, a UAE national resident judge of the DIFC Courts) found that it had jurisdiction on similar grounds as the court had decided upon in the X1 case. Meydan appealed and lost. The DIFC Court of Appeal found unequivocally that there was no subject matter or in personam jurisdictional requirement for a DIFC court to hear an application for recognition and enforcement of an onshore Dubai award. To the contrary, the court found that article 42 of the DIFC Arbitration Law imposed an outright obligation upon the DIFC courts ‘to recognise and enforce an award irrespective of the state or jurisdiction in which it was made’. While Meydan argued that this interpretation of article 42, coupled with article 7(2) of the Judicial Authority Law, should not be permitted as it would allow Banyan to circumvent a merits review by the onshore Dubai court, the DIFC Court of Appeal was unconvinced.

Following the decision of the DIFC Court of Appeal, Meydan shifted its efforts from the DIFC courts to the onshore Dubai courts, where thus far it has been unsuccessful. In nullification proceedings, it challenged the validity of the recognition and enforcement application on the grounds of forum non conveniens and a conflict between the CPC and article 42 of the DIFC Arbitration Law. The onshore courts have reportedly ruled against Meydan,12 though an appeal is pending before the Court of Cassation. Meanwhile, within the DIFC, the Court of First Instance confirmed the validity of the DIAC tribunal’s award and entered an order of recognition.13

Similarly, while the X1 case was not appealed in the DIFC courts, the award debtor launched a collateral challenge in the DIFC Court of First Instance when it applied, in a new proceeding, for an order referring a ‘conflict’ between the Judicial Authority Law and Arbitration Law of the DIFC and the CPC to the Union Supreme Court of the United Arab Emirates.14 The court dismissed the application, finding that the CPC did not apply to the DIFC, pursuant to article 3 of Federal Law No. 8 of 2004, that it was public policy in the UAE not to apply the CPC to the DIFC and that, as there cannot be a conflict between applicable law and inapplicable law, there was no constitutional conflict to refer to the Union Supreme Court.

It remains to be seen precisely how UAE courts will respond to award creditors’ attempts to circumvent the recognition and enforcement difficulties faced by domestic award creditors by using the DIFC courts as a ‘host’ or ‘conduit’ jurisdiction. Nevertheless, even before the Meydan saga has reached its climax, practitioners are advising clients to route their enforcement actions through the DIFC. This is a reflection of the fact that, despite clear progress in relation to the enforcement of New York Convention awards, the onshore judiciary’s approach to domestic arbitration remains inconsistent.

Bahrain

This year saw substantial revisions to Bahrain’s International Commercial Arbitration Act (ICAL) of 1994, including full incorporation of the UNCITRAL Model Law.15 Additional provisions designate Bahrain’s High Civil Court as the forum for all arbitration disputes, including enforcement;16 immunise arbitrators for acts carried out in the course of their official duties unless in bad faith or as the result of serious error;17 and permit foreign qualified lawyers to represent parties to an international arbitration in Bahrain.18 The 2015 law reflects Bahrain’s trend of modern legislative responses to the needs of the international arbitration community and signals a commitment to establishing itself as a major arbitration centre.

Indeed, Bahrain has long been among the Middle East and North Africa jurisdictions friendliest to arbitration, having acceded to the New York Convention in 1988 and adopted much of the UNCITRAL Model Law in the original ICAL of 1994. In 2009, through an initiative of the Bahrain Chamber for Dispute Resolution and the American Arbitration Association (BCDR-AAA), launched under a 2009 revision to ICAL,19 Bahrain designated a specialist tribunal comprising two judges from Bahrain’s highest jurisdiction and a third member chosen from the BCDR-AAA’s roster of neutrals, rather than trial by its local courts, as the primary dispute resolution mechanism in large cases (valued above 500,000 Bahraini dinar) involving licensed financial institutions or international commercial disputes involving either foreign parties or a significant foreign nexus.

While Bahrain has lost some ground to its regional neighbours in seeking to establish itself as a regional arbitration centre, it in fact boasts one of the most innovative and arbitration friendly legislative regimes in the Middle East, supported by a modern, well-run institution in the form of the BCDR-AAA. Its proximity and close relationship with Saudi Arabia also means that it is perceived to be a safe alternative to arbitration in the Kingdom and a means of increasing the prospects of enforcement there. As economic and political troubles dissipate in years to come, Bahrain’s increasing role as a regional arbitration centre may well surprise its competitors in the Gulf.

Qatar

Over the past 15 years, Qatar has opened significantly to international arbitration. In 2002, Qatar acceded to the New York Convention without declarations or notifications. In 2005, it established the Qatar Financial Centre (QFC),20 a separate jurisdiction along the lines of the DIFC, and in 2006 it launched the International Centre for Conciliation and Arbitration (QICCA).21 Both the QFC and the QICCA have adopted rules based upon the UNCITRAL Model Law, and Qatar is considering a new arbitration law that would closely follow it. As of July 2015, however, proposed legislation remains in committee.

For the moment, both domestic and international arbitrations are subject to the Civil and Commercial Procedure Code, which provides for appellate review of arbitral awards on the merits22 and nullification on procedural grounds.23 This has proved challenging for parties seeking enforcement of their awards in Qatar, whether domestic or foreign.

For example, in the well known decision in International Trading and Industrial Investment v DynCorp Aerospace Technology, the Qatari Court of Cassation set aside a Paris-seated ICC award on the merits as if sitting in direct appeal from the arbitral tribunal rather than as an enforcement proceeding.24

More recently, in 2012, the Qatari Court of Cassation held that arbitral awards are null unless issued in the name of His Highness the Emir of Qatar, thus treating arbitral awards as indistinguishable from, and so subject to the same procedural requirements as, national court judgments.25 However, in 2014, the Court of Cassation reversed several lower court decisions in which similar findings had been made, on the ground that they had improperly applied Qatari law.26 Of particular interest are Qatar Court of Cassation – Appeals Nos. 45 and 49/2014, which found that, while Qatari law would normally require a domestic arbitral award to be issued in the name of His Highness the Emir of Qatar, the Doha-seated award in that case should be treated as foreign and thus subject to the New York Convention owing to the parties’ choice of the ICC rules.

It is unclear whether these decisions mark a decisive shift in the approach of the Qatari courts to enforcement issues or a specific solution to a particular problem. Given the overall trend in favour of international arbitration, and particularly the drive towards adoption of a modern arbitration law, there is reason to hope the Qatari courts will henceforth adopt a more pro-­arbitration stance.

Elsewhere, Qatar continues to develop a robust alternative dispute resolution framework through the promulgation of such innovative mechanisms as the Qatar International Court and Dispute Resolution Centre’s ‘Q-Construct’ scheme, which aims to reduce the time and expense associated with adjudication of construction disputes via application of tailored, fast-track procedures designed to account for the particular needs of the construction industry. Parties opting to avail themselves of the Q-Construct mechanism will receive a binding award, but are not precluded from seeking additional relief before a full arbitral tribunal or national court.

Saudi Arabia

Saudi Arabia has been slower to warm to arbitration. Most famously, in 1958, after the tribunal in Saudi Arabia v Arabian American Oil Co refused to apply shariah to a dispute over Aramco’s exclusive oil concession in Saudi Arabia and decided in Aramco’s favour, the Saudi government prohibited its ministries and agencies from agreeing to arbitration without the prior approval of the president of the Council of Ministers or permission by a legal enactment. Eventually, Saudi Arabia adopted an arbitration law in 1983 and acceded to the New York Convention in 1994, but for decades its arbitration law permitted Saudi courts wide oversight authority over merits, procedure and enforcement, including a requirement that arbitration agreements be judicially approved prior to the commencement of arbitral proceedings.27 It further imposed strict requirements, founded in Islamic law, for the appointment of arbitrators, including that they be Saudi citizens or non-Saudi Muslims, conversant with Saudi rules and traditions and, at least in domestic arbitrations, male.

In 2012, however, the Saudi government appeared to shift its policy, enacting a new arbitration law based in part upon the UNCITRAL Model Law.28 Among other developments, the new law eliminates the requirement of judicial pre-approval, offers guidance for determining the validity of an arbitration agreement (ie, it must be in writing, but may be created via correspondence or reference to other documents), loosens the arbitrator qualifications and permits parties to choose procedures, substantive law and seat, provided they do not violate the public policy of Saudi Arabia or shariah. Perhaps most critically, the new law circumscribes the supervisory powers of the Saudi courts over enforcement of arbitral awards. Where previously a court could, and frequently did, reconsider the merits during enforcement proceedings, the new law prohibits inspection of the facts and subject matter of the dispute.

The Council of Ministers issued a resolution in April 2014 establishing Saudi Arabia’s first centre for commercial arbitration, the Saudi Centre for Commercial Arbitration (SCCA), however it remains to be seen what form the SCCA will take or what the scope of its activities will be. Similarly, it will take time for both the government and the courts to signal how broadly the public policy and shariah exceptions in the new law will be applied. Nevertheless, these developments indicate that Saudi Arabia has taken serious interest in international arbitration, a positive sign for the international companies doing business within its borders.

Iraq

Iraq has not yet acceded to the New York Convention, and little progress has reportedly been made in advancing draft legislation through the Iraqi parliament. The Iraqi courts, however, have taken the task of fitting international arbitration into Iraqi law upon themselves. In Iraqi Ministry of Finance v Fincantieri-Cantieri Navali Italiani SpA, the Baghdad Commercial Court openly declared that Iraqi law was outdated and vague, and referred to the UNCITRAL Model Law and the New York Convention (despite neither applying in Iraq) in deciding that the Iraqi Civil Procedure Code applied to international arbitrations.29 This permitted the Court to stay its proceedings pending the decision of a French court on the validity of an arbitral award, signalling that the Iraqi courts possess a certain degree of discretion in this arena. The decision was upheld by the Iraqi Court of Cassation.

In March 2014, in keeping with the recent creation of specialised commercial courts, the Iraqi government reportedly began organising workshops for senior judges on arbitration and other private dispute resolution mechanisms.30 However, the climate in Iraq remains uncertain as its government struggles to address other priorities.

Iran

The economic sanctions regime that has crippled the Iranian economy in recent years has meant that there has been little interest in arbitration in Iran. However, following the Joint Comprehensive Plan of Action agreed on 14 July 2015 between Iran and the P5+1 countries, the lifting of sanctions is expected to open Iran to much needed foreign investment in a variety of industry sectors, including the oil and gas and automotive sectors, as well as the civil aviation industry. This will undoubtedly renew interest in arbitration in Iran.

Investors will be pleased to note that Iran, in fact, has a relatively modern arbitration regime already in place. Domestic arbitration is governed by articles 454 to 501 of the Iranian Code of Civil Procedure and international arbitration (defined as arbitration proceedings where at least one of the parties was not Iranian when the arbitration agreement was concluded) is governed by the Law on International Commercial Arbitration of 1997 (LICA), which is based on the UNCITRAL Model Law.

Iran also boasts two arbitration centres, the Tehran Regional Arbitration Centre and the Arbitration Centre of Iran Chamber, whose caseloads will no doubt grow significantly in years to come.

Article 139 of the Iranian Constitution, however, continues to restrict referral to arbitration of disputes involving public and governmental property where one party is foreign, unless prior approval of the Council of Ministers and of Parliament is obtained.

It is still early days, and only time will tell how arbitration in Iran develops. However, with a legislative framework already in place and billions of dollars set to flow into Iran, there is little doubt that Iran will soon feature prominently in the Middle East’s arbitration landscape.

Conclusion

The Middle East is a diverse and complex region, which is evolving rapidly, albeit not always at the same pace. This is reflected in the evolution of arbitration legislation and jurisprudence across the region. Middle Eastern governments have understood that a modern arbitration regime is a critical component in sending the message to investors that their country is open for business. This is of particular importance in the Gulf States, whose governments are intent on diversifying their economies and ending their dependence on oil and gas revenues, a policy only reinforced by the current low oil price environment.

There is little doubt that the Middle East has a long road ahead of it to establish one or more truly global arbitration centres. Yet, it is all too easy for practitioners to highlight and criticise unhelpful decisions that occasionally emanate from the region, while forgetting their home state’s approaches to arbitration a mere one or two decades ago (recall the English Arbitration Act, before 1996). Arbitration in the Middle East is evolving rapidly as part of a wider social, political and cultural revolution. There will undoubtedly be setbacks and mistakes during the journey, but one thing is clear: arbitration in the Middle East has a bright future.

Notes

  1. The 1952 Petroleum Development case involved a 75-year oil drilling concession between the Sheikh of Abu Dhabi and Petroleum Development (Trucial Coast) Limited, a member of the Iraq Petroleum Company group.  In considering the law applicable to the contract, Lord Asquith of Bishopstone held: ***‘This is a contract made in Abu Dhabi and wholly to be performed in that country. If any municipal system of law were applicable, it would prima facie be that of Abu Dhabi. But no such law can reasonably be said to exist. The Sheikh administers a purely discretionary justice with the assistance of the Koran; and it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments.’ ***He applied, instead, English law.
  2. UAE Law No. 11/1992, Chapter III.
  3. Dubai Court of Cassation – Appeal Case No. 14/2012.
  4. See, eg, Dubai Court of Cassation – Case No. 282/2012, 3 February 2013; Abu Dhabi Court of Cassation – Case No. 55/2014.
  5. Banyan Tree Corporate PTE LTD v Meydan Group LLC, DIFC Courts – Case No. ARB 003/2013; (1) X1 (2) X2 v (1) Y1 (2) Y2, DIFC Courts – Case No. ARB 002/2013.
  6. DIFC Courts Practice Direction No. 2/2015.
  7. Dubai Court of Cassation – Case No. 156/2013.
  8. Dubai Court of Cassation – Case No. 434/2014.
  9. (1) X1 (2) X2 v. (1) Y1 (2) Y2, DIFC Courts Case No. ARB 002/2013.
  10. Dubai Judicial Authority Law, Law No. 12/2004 (as amended by Law No. 16/2011), article 7(3).
  11. Meydan Group LLC v Banyan Tree Corporate PTE LTD, DIFC Court of Appeals Case No. CA-005-2014.
  12. Dubai Court of Appeal – Case No. 211/2014.
  13. Banyan Tree Corporate Pte Ltd v Meydan Group LLC, DIFC Courts – Case No. ARB 003/2013, ruling of the Court of First Instance, 1 May 2015.
  14. (1) X1 (2) X2 v. (1) Y, DIFC Courts Case No. ARB 001/2014.
  15. Bahrain Legislative Decree No 9/2015.
  16. Bahrain Legislative Decree No 9/2015, article 3.
  17. Bahrain Legislative Decree No 9/2015, article 7.
  18. Bahrain Legislative Decree No 9/2015, article 6.
  19. Bahrain Legislative Decree No 30/2009.
  20. Qatar Law No. 7/2005.
  21. Qatar Emiri Decree No 5/8.
  22. Qatar Law No. 13/1990, article 205.
  23. Qatar Law No. 13/1990, article 207.
  24. International Trading and Industrial Investment v DynCorp Aerospace Technology, Civil Appeal No. 33/2008.
  25. Qatar Court of Cassation – Petition No. 64/2012
  26. Qatar Court of Cassation – Appeals Nos. 45 and 49/2014; Qatar Court of Cassation – Decision No. 164/2014.
  27. Saudi Royal Decree No. M/46.
  28. Saudi Royal Decree No. M/34.
  29. Presidency of the Federal Appeal Court of Baghdad – Case No. 288/B/2011.
  30. Noor Kadhim, ‘Between Iraq and a Hard Place’, Kluwer Arbitration Blog, March 2014.