Kuwait


In summary

While Kuwaiti courts in general honour parties’ agreements to arbitrate, in 2021 the Kuwaiti Cassation Court handed down a couple of judgments that deviated from this well-established practice. The two surprising judgments were issued by the Cassation Court in disputes involving commercial agencies and construction contracts, respectively. In both cases, the Court set aside the arbitration agreement and assumed jurisdiction over the disputes. This article will shed light on those two judgments and provide a general overview of arbitration in Kuwait, with a focus on the conditions required to be satisfied for a valid arbitration agreement and the enforceability of foreign awards.


Discussion points

  • Arbitration agreements under Kuwaiti law
  • Arbitration in disputes arising from commercial agencies and distributorships
  • Article 702 of the Kuwaiti Civil Code and capacity to enter into arbitration agreements
  • Apparent authority, subsequent approval and estoppel
  • Enforcement of arbitral awards

Referenced in this article

  • Court of Cassation, Challenges No. 3784, 3980 of 2019, Commercial Circuit No. 4, dated 27 May 2021
  • Court of Cassation, Challenge No. 3963 of 2019, Commercial Circuit No. 2, dated 7 February 2021
  • Court of Cassation, Challenge No. 2195 of 2018, Commercial Circuit No. 4, dated 28 March 2019

Overview of arbitration in Kuwait

Unlike certain other Arab countries, Kuwait did not adopt the UNCITRAL Model Law on International Commercial Arbitration, nor did it enact a separate piece of legislation to regulate arbitration. Instead, arbitration is still governed by specific provisions under the Kuwaiti Civil and Commercial Procedures Law (KCCPL),[1] namely articles 173 to 188. However, as the KCCPL was promulgated more than 40 years ago, and its provisions regulating arbitration are not exhaustive or updated, there is a legislative vacuum with regard to various issues relating to arbitration, which are left to be resolved by Kuwaiti courts (which are generally influenced by the jurisprudence of Egypt and other civil law system countries).

We will focus in this section on (1) the arbitration agreement (and its requirements as set out in article 173 of the KCCPL) and (2) the conditions of enforcement of local and foreign arbitral awards.

Arbitration agreement

Kuwaiti law generally permits parties to an agreement to select arbitration as a dispute resolution mechanism. Arbitration agreements are regulated under article 173 of the KCCPL. Article 173 lists the various formalistic requirements to be satisfied and the matters that may be subject to arbitration. It provides:

Arbitration may be agreed upon in respect of a particular dispute, and likewise, in respect of all disputes arising from the execution of a specific agreement.
Arbitration shall not be proved except in writing.
Arbitration shall not be permissible in respect of matters where conciliation is not permitted; and arbitration shall not be valid except in respect of a party who has the capacity to dispose of the litigated right.
The subject matter of the dispute must be determined in the arbitration agreement, or during the proceedings, even if the arbitrator is authorized to act as amiable compositeur, otherwise arbitration shall be void.
Courts shall not assume jurisdiction over the disputes which were agreed to be referred to arbitration. The plea for lack of jurisdiction may be relinquished, either expressly or implicitly.
Arbitration shall not include summary matters unless otherwise expressly agreed upon.

It appears from the above that article 173 provides for certain requirements to be satisfied in order for an arbitration agreement to be valid. Similar to any other contract, arbitration requires valid consent by both parties (that is, valid offer and acceptance).[2] While one may argue that article 173 does not require the arbitration clause to be in ‘writing’ in order to be valid, and that writing is only required for evidentiary purposes, limiting the means of proof of the arbitration agreement to writing suggests that an oral arbitration agreement, while theoretically possible, would not be feasible in the absence of any written evidence. For instance, proving an arbitration agreement’s existence by witness testimony is not a viable option in view of the clear text of article 173, which expressly states that the existence of an arbitration agreement shall only be proved by evidence in ‘writing’.

Another essential requirement is defining the scope of the arbitration agreement. Under article 173, the arbitration agreement must specify the matters to be referred to arbitration. Therefore, the arbitration agreement may not be drafted with any ambiguity as to the matters covered by it. In the absence of such determination in the arbitration agreement, the parties may agree on the scope of the arbitration during the proceedings, which is likely to take place at the initiation of the proceedings (eg, request for arbitration, terms of reference, etc).

Another issue that arises in this context is arbitrability (ie, whether the disputed matter may be subject to arbitration). In this regard, article 173 explicitly excludes certain disputes from being resolved through arbitration, that is matters where conciliation is not permitted. However, certain matters that may be subject to conciliation are non-arbitrable, including but not limited to criminal and labour matters. It is also worth noting that, unlike some other Arab countries in the region (eg, Lebanon), it is a well-established jurisprudence in Kuwait that disputes arising from commercial agency and distributorship contracts may be referred to arbitration.

In view of the above, if a contract provides for arbitration and the requirements and conditions set forth under article 173 are satisfied, Kuwaiti courts should, as a general premise, decline jurisdiction over disputes arising under a contract that provides for referral of disputes to arbitration. Yet, there are various complications that may arise out of the arbitration agreement and that may lead the Kuwaiti courts to exercise their jurisdiction over the dispute and set aside the agreement to arbitrate, as will be further explained below.

Enforcement of arbitral awards

While the KCCPL does not distinguish between domestic and international arbitration, nor does it include a specific definition of domestic and foreign arbitral awards per se (as is the case of numerous civil law countries), yet it draws a distinction between foreign and domestic arbitral awards in terms of enforcement and challenge. In this regard, it is inferred from article 200 of the KCCPL that the Kuwaiti legislator adopted a territorial approach (ie, the seat of arbitration and the place of issuance of the arbitral award) rather than an objective (ie, a dispute involving foreign and local parties or relating to cross-border transactions, etc) in order to distinguish between local and international arbitral awards. Under article 185 of the KCCPL, awards issued in Kuwait shall be enforced through a request submitted to the President of the Court, after depositing the award with the Clerks Department, in order for the award to be stamped with the writ of execution.

Enforcement of foreign arbitral awards (ie, those issued outside Kuwait) is governed by the provisions of the KCCPL relating to the enforcement of foreign judgments and awards; namely articles 199 and 200, as well as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the Convention).[3] Kuwait is a signatory to the Convention, and as such, the courts of Kuwait will (subject to articles 199 and 200 of the KCCPL, as discussed below) recognise and enforce arbitral awards rendered in other jurisdictions that are also signatories to the Convention, in a manner similar to the enforcement of a foreign judgment, through the submission of an application to the Kuwaiti courts without the latter re-examining the merits of the dispute.

Article 199 of the KCCPL states that foreign judgments will be enforced by the Kuwaiti courts if the following conditions are satisfied:

  • the courts of the jurisdiction in which the judgment was issued must afford reciprocal treatment to judgments issued by Kuwaiti courts;
  • the judgment was issued by a court of competent jurisdiction according to the law of the jurisdiction in which it was issued;
  • the parties were duly summoned to appear and were duly represented at the proceedings;
  • the judgment is res judicata according to the law of the jurisdiction in which it was issued;
  • the judgment does not contradict any prior judgment or order rendered by Kuwaiti courts; and
  • the judgment does not contain anything in conflict with general morals or public order of Kuwait.

Pursuant to article 200 of the KCCPL, the provisions applicable to foreign judgments as contained in article 199 (as referred to above) also apply to foreign arbitral awards. To satisfy the ‘reciprocity’ requirement, the foreign jurisdiction in which the arbitral award is rendered must also have ratified the Convention (or be party to another treaty with Kuwait providing for reciprocal enforcement of arbitral awards). In addition to the conditions listed above, article 200 provides that the subject matter of the dispute must be a matter that may be referred to arbitration under Kuwaiti law and the award must be enforceable in the jurisdiction in which it was rendered.

As mentioned above, the Kuwait Cassation Court (the highest court in Kuwait) requires, in accordance with article 4 of the Convention, the party seeking the execution of the foreign arbitral award to submit certain documents along with its application for enforcement, which are as follows:

  • the original version of the award or a true copy thereof;
  • the original arbitration agreement; and
  • if the award or the arbitration agreement, or both, are not drawn up in Arabic, a translation of the documents must be provided to Kuwaiti courts. The translation must be certified by an official or sworn translator or one of the members of the diplomatic or consular corps.

While providing the Court with the above-noted documents would create a legal presumption that the award should be enforceable, as per article 5 of the Convention, the party against whom the execution action is filed may challenge the enforcement of the arbitral award and consequently circumvent such presumption (ie, the automatic enforceability of the foreign award) by providing the Court with evidence showing any of the following:

  • the parties to the arbitration agreement (according to the relevant law) lacked capacity, or said agreement is not valid under its governing law or, failing any indication in this respect, under the law of the country where the award was rendered;
  • the party against whom the award is being enforced was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings, or was otherwise unable to present its case;
  • the award is ultra petita, as it examined a different issue not contemplated by, or not falling within, the terms of the arbitration agreement. Having said this, it should be noted that if the relief granted in respect of the matters that were agreed to be arbitrated can be dissociated from those that fall beyond the scope of the arbitration agreement, the former may still be recognised and enforced separately;
  • the composition of the arbitral tribunal, or the arbitration proceedings were not in accordance with the parties’ agreement, or in the absence of such agreement, were not in accordance with the requirements under the law of the seat of arbitration; or
  • the award has not yet become binding on the parties, or has been set aside or suspended by a competent court, or under the law of the country in which that award was rendered.

The recognition and enforcement of an arbitral award may also be refused if the competent courts in the country where recognition and enforcement is sought, find that:

  • the subject matter of the dispute is not arbitrable under the law of that country; or
  • the recognition or enforcement of the award would be contrary to the public policy of that country.

Of relevance in this regard, a question arose before the Kuwaiti courts as to the application of the conditions set under article 199 of the KCCPL, particularly that the foreign arbitral award must not contradict a prior judgment issued by a Kuwaiti court. In a dispute raised before a Kuwaiti court in 2016 between an Italian company and a Kuwaiti counterparty, the Court of Appeals issued a judgment nullifying the arbitration agreement, while the Italian defendant in the Kuwait court litigation was at the same time pursuing arbitration before the ICC. The arbitral tribunal in the ICC proceedings issued an award in favour of the Italian entity and a sister company, pursuant to which an enforcement action was initiated before the Kuwaiti courts on behalf of the sister company, seeking enforcement of the arbitral award on the basis of the Convention. The Kuwaiti party challenged the enforcement on the basis of article 199 arguing that there existed a previous judgment issued by a Kuwaiti court which contradicts the arbitral award.

The matter was appealed before the Cassation Court, which concluded that as the sister company was not a party to the judgment issued by the Kuwaiti courts, the Kuwaiti judgment was not binding on it and consequently, the Court ordered the enforcement of the award. Of particular importance, we note that the Court of Cassation ruled that a judgment issued by the Kuwaiti courts must have been issued between the same parties and regarding the same dispute, in order to block the enforcement of a conflicting foreign arbitral award. In this regard, the Cassation Court emphasised the following:

In addition, it is established in the jurisprudence of this Court that judgments are only binding on the parties thereof and that such binding effect is a public order matter; therefore, notwithstanding that the condition that the foreign arbitral award should not contradict with any judgment previously issued by a Kuwaiti court was provided for in the Kuwaiti procedural law only and without any reference to the same in the Convention’s articles, however, it comes as part of the condition set by the Convention that the arbitral award should not contain anything that violates the public order, as the contradiction between the foreign award and the domestic judgment is a form of violation of the public order in the country of the judge where the execution is requested, because it negates the presumption of validity and truth which are the main features of the national judgment, on the basis that issuing a judgment which contradicts a previous judgment entails a denial of the res judicata nature of this judgment which must be respected and abided by, and which constitutes a legal error and a violation of the public order. Accordingly, the contradiction between the arbitral award and a judgment or order previously issued in the State of Kuwait does not occur except when the award contradicts a previous judgment that was rendered in the same dispute that the arbitral award adjudged, as this contradicts the res judicata nature of such judgment in a way that makes their execution together impossible.[4]

State sovereign immunity and arbitration

The general premise in Kuwaiti practice is that administrative contracts concluded with the government should be governed by Kuwaiti laws and subject to the exclusive jurisdiction of Kuwaiti courts. In certain sectors, such as public–private partnership (PPP) projects, the governmental authority may agree on arbitration as the dispute resolution mechanism in accordance with the PPP Law.[5] Also, governmental entities entering into agreements with foreign parties with regard to a transaction or a project to be implemented outside Kuwait may agree to foreign law and international arbitration.

In this vein, a question arises regarding the governmental entities’ sovereign immunity under Kuwaiti law. Similar to numerous jurisdictions around the world, in order to answer this question a distinction should be made between ‘immunity from jurisdiction’ and ‘immunity from execution’. On the one hand, Kuwaiti laws do not protect governmental entities from being sued by private investors before Kuwaiti courts or (where, and to the extent permitted) arbitral tribunals. For example, a governmental entity may be validly involved as a party in arbitration proceedings relating to a PPP agreement, or a project or transaction implemented outside Kuwait. However, under Kuwaiti law, the state’s private and public assets enjoy sovereign immunity from enforcement that may not be waived except by a special law. Consequently, even if a governmental entity is successfully sued by way of arbitration or before the courts, the foreign investor may not attach the assets of the state located in Kuwait based on the arbitral award or court judgement issued in its favour. However, attaching the state’s assets outside of Kuwait may be possible subject to the laws of the jurisdictions where such assets are located. State-owned companies are also subject to the same sovereign immunity regime as governmental bodies. That said, it should be noted that Kuwaiti government ministries and other public entities usually honour their obligations by participating in agreed arbitration proceedings and executing unfavourable awards.

Recent trends of the Kuwaiti Cassation Court

The risk befalling arbitration agreements in commercial agency disputes (Cassation No. 3963 of 2019 Commercial Circuit No. 2, Dated 7 February 2021)

In 2015, a Kuwaiti agent (the claimant) dealing in pharmaceutical and medical products initiated litigation proceedings before local courts seeking statutory compensation from both a German pharmaceutical company (the principal) and its newly appointed Kuwaiti agent (the new agent), as a result of the allegedly unjustified termination of the agency relationship. The claimant argued before the Kuwaiti courts that the collusion between the principal and the new agent led to the termination of its agency agreement, which resulted in substantial material and moral damage. Accordingly, the claimant requested the Kuwaiti courts to compensate it for the sustained damage in accordance with articles 282 and 284 of the Kuwaiti Commercial Code, which provide the local agent with fair compensation upon termination of the relationship with the foreign principal, even if the termination is the result of the expiry of the term of the agreement.[6]

The Court of First Instance recognised the claimant’s and principal’s agreement on arbitration as the chosen dispute resolution mechanism and refrained from exercising its jurisdiction over the subject dispute. Unsatisfied with the judgment, the claimant challenged the same before the Court of Appeals, which also upheld the parties’ arbitration agreement and confirmed the first instance judgment.

The claimant challenged the Court of Appeals’ judgment before the Kuwaiti Cassation Court raising various arguments, among which, that the arbitration agreement should be set aside as the subject matter of the dispute involves examining the liability of the new agent who is a non-signatory party to the arbitration agreement. The claimant further argued that the dispute against the new agent may not be dissociated from the dispute against the principal, and as such, Kuwaiti courts should have jurisdiction to hear the subject dispute in its entirety.

In 2021, the Cassation Court accepted the claimant’s arguments, disregarded the arbitration clause and decided to refer the case back to the Court of First Instance to examine its merits. In its reasoning, the Cassation Court first explained the different concepts applicable to the arbitration agreement, inter alia, its consensual nature, that arbitration is an exceptional route of settling disputes, the importance of specifying the scope of the arbitration agreement and that the intention of the parties should be interpreted narrowly so as to limit the effect of the arbitration agreement to those parties only. The Court, then, ruled that the arbitration agreement, which was designed to settle disputes arising from a specific contractual relationship, should not be expanded to cover other disputes, even if the latter and the original disputes are interrelated. The Court added that if such interconnection cannot be dissociated, Kuwaiti courts must exercise their jurisdiction over all the subject disputes and set aside the arbitration agreement between the principal and the terminated agent. The Court reasoned its decision by noting that the settlement of interrelated disputes should have one solution only.

This new approach by the Cassation Court would, in our view, undermine arbitration agreements included in agency/distributorship agreements. Based on this decision, a terminated agent, intent on evading an already agreed arbitration arrangement, would only need to join the new agent to its compensation claim in order to set aside the arbitration agreement and force the foreign principal to pay compensation under Kuwaiti laws, notwithstanding the agreement to refer disputes to foreign arbitration and the application of a foreign law.

The above-noted judgment also runs contrary to the earlier principles established by the Kuwaiti Cassation Court.[7] In similar previous cases, the Cassation Court concluded that the preliminary issue to be disposed of at the outset is whether a former agent is entitled to statutory compensation and such issue can only be determined on the basis of the contract between the former agent and the principal, and by the dispute resolution mechanism provided for in the said contract, be it arbitration or otherwise. Further, the courts usually refrained from addressing the collusion claim by the former agent against the new agent on the basis that it is prematurely filed pending the determination of the principal’s liability. In other words, the arbitral tribunal would need first to adjudicate the claim under the main agency contract and whether the agent is entitled to statutory compensation. Subsequently, and depending on the outcome of the arbitral process, the state courts would then examine the issue of whether or not the new agent colluded with the principal and whether it is jointly responsible with the principal to compensate the terminated agent.

This recent reversal of position by the Cassation Court and the obvious contradiction between its settled position and its recent judgment on interrelated agency disputes make it imperative that the Court unifies its approach and stick to its earlier position allowing for the settlement of agency or distribution disputes by arbitration if agreed by the parties. This unification of approach is desirable as, while the precedents of the Cassation Court are not legally binding on the lower courts, the latter use Cassation Court judgments as a guide in interpreting and applying the law.

Construction contracts and arbitration agreements (Challenges No. 3784, 3980 of 2019 Commercial Circuit No. 4, Dated 27 May 2021)

In 2017, a lower-tier subcontractor (sub-subcontractor) brought an action against the subcontractor seeking the recovery of its unpaid fees and dues and the release of its bank guarantees and tax retention. The Court of First Instance held that it has no jurisdiction to review the subject claim as the relevant subcontract agreement is back-to-back with the agreement concluded between the main contractor and subcontractor, which includes an arbitration clause. The Court of Appeals upheld the first instance judgment and confirmed its lack of jurisdiction.

The lower-tier subcontractor challenged the appellate judgment before the Cassation Court on the basis that the subcontractor and the main contractor challenged the jurisdiction of the Kuwaiti courts only after submitting their defense on the merits. According to the lower-tier subcontractor, this constituted a relinquishment of their right to challenge the jurisdiction of Kuwaiti courts.

In 2021, the Cassation Court cancelled the appellate judgment and exercised its jurisdiction over the dispute. In its decision, the Cassation Court explained that the fact that the low-tier subcontract was back-to-back was not sufficient in and of itself to include disputes arising thereunder within the ambit of the arbitration agreement in the subcontract agreement. The Cassation Court further considered that the extension of the arbitration agreement to the low-tier subcontract would require explicit consent of the contracting parties. The Court justified its reasoning on the following legal grounds: (1) the independence of the legal relationship between the parties; (2) privity of contract; and (3) that the arbitration agreement may not be transferred from one contract to another in the above-noted scenario.

The impediment to arbitration arrangements under article 702 of the KCC

As discussed above, Kuwaiti courts generally honour the parties’ agreement to arbitrate and decline their jurisdiction to hear the disputes agreed to be subject to arbitration. Yet, litigants sometimes attempt to avoid arbitration by raising or claiming the nullity of the arbitration agreement, relying in this respect on article 702 of the Kuwaiti Civil Code (KCC), which stipulates the following:

There must be a special mandate for every disposition which is not an act of management, particularly for donations, sale, composition, mortgage, admission and arbitration, as well for making an oath and representation before Courts.

Article 702 is interpreted to require a ‘special mandate’ in relation to the authority to bind a company to arbitration. The Kuwaiti Court of Cassation has ruled on occasions that article 702 of the KCC requires a special mandate to agree to arbitration, not being a typical act of management for which the usual general authorisation would suffice. Therefore, the party who seeks to avoid arbitration sometimes relies on the above-noted article, arguing that the person who agreed to arbitration and signed the subject agreement, which includes the arbitration clause lacked the special mandate referenced in article 702.

That said, it should be noted that there are many other precedents where the Kuwait Cassation Court recognised the validity of the arbitration agreement notwithstanding any alleged deficiency in the capacity of the person signing it on behalf of the company, based on the following legal theories:

Apparent authority

Apparent authority is a well-established legal principle in Kuwaiti jurisprudence. The Kuwaiti Court of Cassation has confirmed on a number of occasions that the concept of apparent authority was developed to align with the development of commercial transactions and in order to preserve the stability of legal positions based on apparent factors (eg, Court of Cassation judgment No. 204 of 1987 rendered on 22 February 1988).

Apparent authority applies where an agent acts on behalf of a principal without having the necessary authorisation to carry out such action, or where the agent acts in a manner that exceeds the limits of his or her mandate. The Court of Cassation has confirmed on a number of occasions (including in its judgment in Case No. 489 of 2000 rendered on 11 May 2002) that the following three conditions should be satisfied in order to establish apparent authority:

  • the agent acts on behalf of the principal without authorisation;
  • the third party dealing with the agent acted in good faith and was under the assumption that the agent was acting on behalf of the principal; and
  • the existence of external factors attributed to the principal enhancing the third party’s assumption that there is a valid agency.

In determining whether the aforementioned conditions are met, Kuwaiti courts will look into all of the surrounding facts of the dispute. The burden of proof as to whether the three conditions are satisfied will be on the party invoking apparent authority and would be a question of fact which would be determined at the courts’ discretion.

Subsequent approval

Ratification of acts initially carried out without authorisation is recognised under Kuwaiti law. In this regard, article 61(1) of the KCC provides as follows:

If a person concludes a contract, on behalf of another without representation therefrom, or exceeds the limit of his representation by concluding the contract, the consequences of this contract shall not be accrued to the principal, unless approved by him according to law.

Based on the above, if an agent (eg, manager, chairman or an officer of a Kuwait company) enters into an agreement with a third party on behalf of the company he or she represents but without its express approval, and the company approves the agreement at a later stage, such agreement between the company and the third party would be considered valid as from the initial date of entering into the agreement. The Kuwaiti Court of Cassation confirmed this principle in several judgments (see, among others, Judgment No. 28 of 1988; rendered on 27 February 1989).

Depending on the facts, a possible argument confirming the subsequent approval could possibly be based on the amendment of the original agreement (containing the arbitration clause) and its implementation over several years. In this vein, the Kuwaiti Court of Cassation decided that the implementation of the agreement over several years, during which the company received money based on the terms of the agreement without challenging the authority of the person signing on its behalf, may be interpreted as subsequent approval of both the agreement and the arbitration clause contained therein (Court of Cassation Case No. 225 of 2005 issued on 29 April 2006).

Estoppel

Kuwaiti laws do not expressly provide for the estoppel concept. However, there are certain rules in relation to the conclusion of agreements and parties performing them in good faith and equitable manner, which are akin to the concept of estoppel. In this regard, there are precedents by the Kuwaiti Cassation Court that recognised such equitable principles, thereby paving the way for the application of the estoppel principle in practice.

As such, it is clear from the above that the Kuwaiti Cassation Court’s position is contradictory at times. On the one hand, in some instances the Court nullified the arbitration agreement for lack of the special authorisation to sign it in accordance with article 702 of the KCC. On the other hand, the Court at other times relied on different legal principles such as apparent authority and subsequent approval in order to maintain the validity of the arbitration agreement. The increasing number of judgments upholding the latter position suggests that the Kuwaiti courts are favouring the implementation of agreed arbitration agreements in circumstances where it is deemed that article 702 is being misused or manipulated.


Notes

[1] Decree-Law No. 38/1980 Promulgating the Code of Civil and Commercial Procedures.

[2] Offer, acceptance and general conditions of contract are addressed in articles 31 to 52 of Decree-Law No. 67/1980 Promulgating the Civil Code.

[3] New York Convention on the recognition and enforcement of foreign arbitral awards became part of the Kuwaiti legal system by virtue of Decree-Law No. 10 of 1978.

[4] Cassation Court, Challenge No. 2195 of 2018, Commercial Circuit No. 4, Dated 28 March 2019.

[5] Article 29 of the Public Private Partnership Law No. 116 of 2014.

[6] Decree-Law No. 68/1980 Promulgating the Commercial Code.

[7] Court of Cassation, Challenges No. 2175 and 2191 of 2013, Commercial Circuit No. 3, Dated 19 January 2015.

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