Analysis

Jurisdiction clauses of arbitration – hitting the ball in the right court

By MECN Adminstrator

Posted on August 8, 2012

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Following the recent decision by the Dubai Real Estate Court which rejected a lawsuit by investors in Victory Tower in Business Bay, Dubai, that both the plaintiff and the defendant will lose their right to proceed if they had agreed to an arbitration clause in the contract before the dispute, Fareya Azfar, head of arbitration at TLG The Legal Group, looks at the background.

The United Arab Emirates have always adopted a pro freedom-of-contract attitude when it comes to formation of contracts, including the freedom to decide the governing law and jurisdiction, provided that such is not prohibited by law or is contrary to public order or morals. The parties to a contract usually decide upon the jurisdiction of a body to hear any dispute arising from the contract in the jurisdiction clause.

Book one of Federal Law No.11 of 1992 (as amended) (the “Civil Procedure Code”) deals with the jurisdiction of the UAE Courts to hear all civil, commercial and administrative disputes. However, Article 23 of the Civil Procedure Code also provides, “If the Defendant does not appear and the court does not have jurisdiction to hear the action in accordance with the foregoing article, the court shall rule of its own motion that it does not have jurisdiction”. This Article demonstrates that the courts should reject hearing cases, where it does not have jurisdiction. While it is true that the Dubai Courts jealously guard their jurisdiction for matters of a public nature such as criminal matters or cases relating to personal status, it has been quite meticulous in upholding the principle of freedom to contract by refusing to hear matters, where parties have expressly agreed to a different jurisdiction for commercial and civil matters.

Arbitration clauses and jurisdiction of the court

With the rise of alternative methods of dispute resolution, conferring the “jurisdiction of arbitration” to hear disputes has become a popular practice in commercial and real estate contracts. It is mandatory that the parties agreeing to a jurisdiction of arbitration have expressly agreed so in writing[1] in order for it to be binding.

Where parties have agreed to resolve any dispute in arbitration, they are said to have waived the jurisdiction of the court to hear the dispute. In these cases, the jurisdiction of the court is ousted and the Dubai Courts have rejected cases for want of jurisdiction, provided that the parties have expressly signed an arbitration agreement contracting out of the national courts.

Article 203 (5) of the UAE Civil Procedure Code says: “If the parties to a dispute agree to refer the dispute to arbitration, no suit may be filed before the courts”

The Dubai Courts have demonstrated a positive stance in honoring the arbitration agreement and stepping down where the parties have agreed to refer the dispute to arbitration. In the Dubai Court of Decision 192/2007, the judge stated that arbitration is “exceptional mode of dispute resolution” and has regarded it to be a ”departure from the general rule that it is the courts that have jurisdiction over all disputes save those are excepted by a special provision of the law” The Courts have construed the arbitration clause narrowly and are alert to see anything that may amount to a waiver of it.

Raising objections to the jurisdiction of Court in the presence of arbitration agreement

Having strongly upheld the jurisdiction of arbitration in the presence of an express arbitration agreement, the UAE Civil Procedure Code also provides instances where a dispute can be heard before the court if the other party does not object to the filing at the first hearing.[2] Most people would believe that a party can only rely on the arbitration clause if they object to the filing of the case in the first hearing, but this interpretation would lessen the significance and purpose of the arbitration agreement and for this reason the courts must be cautious of deciding so. It is also worth noting that the provisions of the UAE Civil Procedure Code  also provides that any party can raise the defence of the court having no jurisdiction at any stage of the proceedings.[3] Moreover, the courts are also allowed to rule on issues of jurisdiction on their own motion, even if neither party has raised an objection.

The Dubai courts have rigorously upheld these provisions   and further, went on to state that an appeal on a question of jurisdiction, whether raised by the parties or not, is deemed to exist as matter of question within the scope of the appeal before the court[4]  In  Decision 256/2008, the Dubai Court of Cassation stated: “Questions of jurisdiction of authority and jurisdiction by category are matters of public order, and are always deemed to be in existence in litigation before the court.  The court is obliged to deal with such matters of its own motion, and the parties may rely on lack of jurisdiction of authority or jurisdiction by category at any stage of the proceedings”

Non-objection to the jurisdiction of Courts by implicit acceptance

Article 203 (5) of the UAE Procedural Code allows the issue to be heard in  court if the other party does not object to the jurisdiction  in the first hearing by  taking it as an implicit acceptance. However, given that the parties have the right to raise objections on jurisdiction at any time during the proceedings by law, the ‘non-objection’ of filing the suit in the court is not to be taken lightly.

The Dubai Courts have been wary of concluding that a non-objection to an arbitration clause is to be considered as acceptance of the jurisdiction of the court, since the parties may not resort to the courts if they had agreed that disputes between them should be resolved by arbitration.[5]

There may be instances when the other party did not have the chance to raise an objection in the first hearing by reason of absence or by not being notified of the proceedings in the proper manner. Secondly, if the party raises an objection in subsequent hearings, this demonstrates that they have not accepted the jurisdiction of the court, and in the absence of a clear and unequivocal intention of the party to waive the arbitration clause or agreement, the courts must reject to hear the suit, which was wrongly filed in the court.

As lawyers, we have on numerous occasions raised objections to the jurisdiction of the court, where the contract contained an arbitration clause and have found the judges rejecting the cases for lack of jurisdiction. The Courts have decided that where the parties have expressly agreed to refer the matter to arbitration, they have waived their right to refer the dispute to litigation and therefore the right jurisdiction to hear the matter lies in arbitration. Therefore, the Courts are steadfast in preserving the sanctity of the contract and the principle of freedom of contract by upholding the jurisdiction of the governing body agreed between the parties.

Conclusion

As seen above, the rejection of the suit filed in the courts, in the presence of an express agreement to arbitrate, is not a new practice and this approach has been adopted by the Dubai Courts for some time. This stance derives from the provisions of the UAE Civil Procedure Code, which clearly provides that the parties to a contract cannot file the case in the court, where they have expressly agreed to the jurisdiction of arbitration by way of an arbitration clause or a separate arbitration agreement. The Courts have retained the power to intervene only in certain instances. The Courts have also shown flexibility in hearing objections as to the jurisdiction at any stage of the proceedings as provided in the Civil Procedure Code as non-objection to the jurisdiction of the Court has to be clearly demonstrated.  It is also worth noting that the courts also have the right to decide the issue of jurisdiction on its own motion and this encourages them to adopt a pro-contract approach even where the parties have not raised any objections to the jurisdiction.