Arbitration Construction between Dubai and Yemen - Case Study Example

?The following draft clause has been inserted into a capital construction contract (the Agreement), to be signed between your company (based in Dubai) and company based in Sana’a (Yemen). Being the contract manager and the arbitration specialist, you are requested by the C.E.O. to comment this proposed draft and, if needed, recommend the necessary amendments. “Any dispute or whatever nature arising out of or in any way relating to the Agreement or to its construction or fulfilments can be referred to arbitration. Such arbitration shall take place in Dubai or Sana’a, or any other place as the parties may agree, and shall proceed in accordance with the Rules of Arbitration of the LCIA-DIFC in Dubai. Both parties hereby agree that, at least, one arbitrator should be Dr Karim Akram.” Introduction Arbitration is by definition a form of alternative dispute resolution that is generally carried outside the court system. Typically the involved parties involved in a dispute will refer it to a number of people who are known as the arbitrators. The decision of the arbitrators involving the dispute is taken to be final and all parties involved in the dispute are bound by such decisions. The basic contention in employing arbitration is to utilise a third party to scrutinise the available evidence to reach an acceptable decision that is legally binding on the disputing parties. In addition the decisions reached at through arbitration are taken generally as enforceable1. In addition to arbitration, the road to mediation can also be pursued as a means of alternative dispute resolution but such a discussion is beyond the scope of the current issue at hand. However, it must be taken to note that the outcomes of mediation are typically non binding on the involved disputing parties. Arbitration has traditionally been in use for the settlement of commercial disputes between parties. More specifically, the practice of arbitration has been applied to international commercial disputes since the issue of court jurisdiction is bound to arise in international commercial disputes. The general rules applicable to arbitration are often encased in the commercial contract that is created between the involved parties. Another aspect of the arbitration process is the role of the arbitrator. As opposed to mediation, the arbitrator will not have to find common ground between the disputing parties. Instead, the arbitrator is only bound by tradition to examine the presented evidence and to reach a final verdict without any requirement to find common ground. The arbitrator can and generally does provide a determination of the incurred liability and also might subscribe the quantified damages. Applications of Arbitration to the Current Scenario The current arbitration clause that is being inserted into the commercial agreement will serve to simplify the alternative dispute resolution mechanism. It must be taken into account that the current commercial agreement is not limited to one geographical domain but instead, it is composed of a company in Dubai and a company in Yemen. Any arbitration carried out in these circumstances will amount to arbitration for international commercial transactions. To be more specific, the current arbitration mechanisms will encompass the domain of arbitration systems in place in the Middle East. In historical terms, dispute resolution has always been a problematic aspect of commercial transactions in the Middle East. It was not until recently that arbitration mechanisms of a regional nature were created in the Middle East. A number of arbitration centres of international application are available in the Middle East including the Dubai International Arbitration Centre (DIAC). In recent years several Middle Eastern nations have subscribed to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known simply as the New York Convention). In light of these developments, it could be said that the Middle Eastern region is showing a progressive shift for a proper arbitration culture. The more typical approach in the application and implementation of these arbitration awards has been a focus on foreign investors. The massive transformations in the arbitration culture in the region are being undertaken to provide foreign investors with cover. The basic contention here is to create arbitration provisions that are progressive, transparent, accessible and identifiable for foreign businesses. However, it must be kept in mind here that the current arbitration clause being inserted into the commercial contract will serve not foreign businesses but two business entities based in the Middle East. This has significant implications for the current arbitration clause since the nature of arbitration is deemed to differ as will be discussed later. UAE’s move to Arbitration Progression In the early years of the twenty first century, UAE did not possess a robust or applicable framework for arbitration. It was only in 2006 that the UAE adopted the New York Convention as its 138th member. Keeping in line with this progressive transformation further changes were introduced in 2008. For the first time, the UAE government has created an arbitration law that has been released for commentary. Furthermore, the Dubai International Financial Centre (DIFC) put in place a wide-ranging arbitration law that provides a framework for arbitration though certain shortcomings still exist. Lastly, the DIFC and the LCIA teamed together to fashion the new DIFC-LCIA Arbitration Centre that is located in Dubai. These moves tend to signify that the move towards arbitration frameworks is strong in Dubai and the subject arbitration clause can be taken aid of if a need arises. However, the state of affairs in Yemen must also be looked into in order to comprehend if arbitration is permissible under Yemeni law or if a framework of the kind exists. Arbitration Framework for Yemen Yemen has only recently put together an arbitration framework with other regional players such as Jordan and Kuwait. A chief difference between the Yemeni arbitration framework and the UAE arbitration framework is the basis on which they are construed. The UAE arbitration framework is composed largely on Shariah law but the Yemeni arbitration framework is composed of a looser system that allows the application of non-Shariah law2. This move has been taken in order to allow arbitrators to apply any set of laws that the disputing parties may choose for application. These sets of laws may be composed of non Shariah compliant laws as well. The Yemeni framework has been created with the contention of luring foreign investors no matter what sets of laws need to be applied for arbitration. Implications for the Current Scenario In turn this means that the Yemeni framework may allow arbitration for matters such as speculative contracts or for example matters relating to the award of interest3. When arbitration clauses are construed in states that apply Shariah law, the arbitration awards must account for4: description of the subject dispute; findings in light of the Shariah as applicable to the dispute; award reasoning in the light of the principles of the Shariah; the final decision. Another contentious issue in the Middle East is the application of arbitration as approved by a court. Most Middle Eastern countries mandate that an arbitration award cannot have res judicata unless it has been sanctioned by a court of law. This principle stands true without any consideration for whatever sets of laws have been chosen for the arbitration. Interestingly enough, the Yemeni arbitration framework provides that an arbitration is binding on the disputing parties but the UAE framework does not. Instead, the bereaved party may approach a court of law and invalidate the arbitration on the grounds that it was not sanctioned by a court. In the current arbitration clause, it has been mutually agreed that the arbitration rules shall be the Rules of Arbitration of the LCIA-DIFC in Dubai. This would tend to indicate that nowhere the arbitration takes place, the arbitration could still be brought to court because there is such a shortcoming in the UAE arbitration framework. Hence, if our company and the Yemeni company were to fall into a dispute, the arbitration carried out could be challenged in a UAE court. This would also mean that if the Yemeni company does not like the arbitration award provided, they have legal recourse available in the UAE. Alternatively, it could also be argued that our company would have legal recourse available in Yemen and if required a Yemeni court could be prodded to judge the binding effect of the arbitration. However, in both cases, the essential advantage of arbitration would be lost altogether. In either case if the arbitration award is taken to court for either its legal binding effect or its enforceability, there are significant chances that legal entanglement may occur. This would tend to delay the final judgement over the issue and the dispute would tend to assume a longer form than wanted. This would essentially jeopardize the business interests of our company since the applicable law would be left to problems of jurisdiction. Also, in this case the enforceability of the final arbitration award would be endangered as the enforceability in either jurisdiction would come into doubt. Other than the problem mentioned above, there are also significant chances that the Yemeni company may choose legal recourse in case that the arbitration award chooses to use non Shariah law. In such a case, the position of our company would tend to be very weak since the UAW law does not provide for application of non Shariah law. Such circumstances would ensure that our company would lose the case and may have to compensate the Yemeni company. There are also chances that the judge may choose to fine our company based on our choice of the applicable laws. In addition to the above, the current system of court review in place in UAE means that the arbitration award may not be the final word on the dispute. The court review procedures generally have enough room to allow for unwanted judicial management. This in turn tends to promote judicial meddling that could well easily result in procrastination and unwanted delays as to the final outcome5. The enforceability of the arbitration award is at risk in the UAE based arbitration system but using the Yemeni arbitration system exposes our company to greater risks. In these circumstances, another notable issue is that Yemen is not as yet a part of the New York Convention while UAE is already a part of it. On the one hand, the New York Convention poses stringent limitations to why a country’s courts could reject a foreign arbitration award6. However, on the other hand, the New York Convention makes it abundantly clear that a country’s courts may choose to reject a foreign arbitration award that is opposed to the public policy of the country in question7. Again, as mentioned before, if non Shariah laws are chosen for use in the arbitration award, there are chances that the Yemeni company may use the grounds described above to revert the arbitration award. The current understanding in the arbitration clause looks towards the arbitration rules shall be the Rules of Arbitration of the LCIA-DIFC in Dubai. However a look into these rules will make one realise that the framework provided for arbitration is loose ended and tends to promote vagueness. One chief criticism of the current arbitration system in UAE has been the fact that its rules can be moved ostensibly from one direction to the other. In case that arbitration is required, the Yemeni company may choose to meddle up the UAE arbitration laws so that delays are created in choosing the right arbitration laws. This would again promote inefficacy of the entire arbitration system and would tend to reduce its overall worth. At this point in time, the UAE does not have a common arbitration law. The UAE instead has chosen to include the arbitration clauses in the UAE Civil Procedure Code. Consider for example the following excerpt from the UAE Civil Procedure Code regarding arbitration8: “It is important to note that disputes arising out of commercial contracts to which the Dubai Government or any of its subsidiary departments are a party are not governed by the UAE Code. Such disputes, if submitted to arbitration, fall under other specific laws.” In this case, it has been made abundantly clear that arbitration laws for government departments and their subsidiaries are not subject to UAE laws. This may be seen as another indication of the overall weakness of the arbitration framework in Dubai since the government fails to support it for its own purposes. Another problem with the current arbitration clause is its non conformance to Dubai’s arbitration clauses in the UAE Civil Code. Article 205 of the UAE Civil Code makes it abundantly clear that arbitrators can only take action if they were specifically named in the commercial contract. In our case, only one arbitrator has been chosen while the others remain unidentified which is against current UAE law. If brought to court, this may serve as a strong grounds to annul the arbitration award leaving our company vulnerable. In addition, Article 206 of the UAE Civil Code stipulate certain conditions for the arbitrator that may be put to question by the opposing party if the arbitration award is taken to court. Being a question of fact, it may take a long time to settle such an issue which would again lead to unwanted delays. Even with these shortcomings being present in the current arbitration framework, there is an overwhelming move to favour arbitration in UAE over the past few years. Firstly the UAE courts have made it abundantly clear that the contracting parties must fulfil the “conditions precedent” before referrals for arbitration can occur9. Failure to do so is considered as pact sunt servanda and arbitration can thus be rejected for an in court settlement. In addition, the UAE courts have made it clear that public order cannot be used as a ground to set aside an arbitration award10 though domestic public order could be used as a valid cause. This serves to indicate that arbitration awards are on the rise and that the courts in UAE are actually providing greater independence and leverage to such arbitration awards. Hence, arbitration awards are being preferred as the means to decide on disputes in commercial transactions rather than the courts as previously. Recommendations Courts in UAE have tended not to recognise or enforce any arbitration awards that had minor shortcomings in their proceedings or in their content11. A pertinent case is International Bechtel Co. Ltd. v Department of Civil Aviation of the Government of Dubai where the award was rendered void because the arbitrator had chosen a different method than the UAE courts to swear witnesses12. A number of legal practitioners have expressed the fear that arbitration awards are essentially at the mercy of the courts13. This can be avoided in the current case by ensuring that procedural shortcomings are removed. For one thing, the number of arbitrators has to be odd and has to be decided before hand as per the UAE Civil Code. Hence, the arbitration clause should list the names of the arbitrators or should remove the “at least” phrase with respect to the current arbitrator. Therefore, the arbitrator in this case would be Dr. Karim Akram alone or if other arbitrators are needed, there names should be listed as well. Along with problems related to arbitration awards in foreign countries being recognised in UAE, there is also the problem of their enforcement. Practitioners have claimed that the enforcement of arbitration awards under the UAE Civil Code are lengthy and often unpredictable leading to their loss of reliability as a form of alternative dispute resolution14. This situation can be dealt with by assigning Dubai as the preferred location of arbitration so that if any dispute arises, the arbitration is carried out at LCIA-DIFC without having to decide where to arbitrate after the dispute arises. This would tend to reduce the time required for arbitration and would also avoid length delays. Based on the arguments presented above, it is obvious that the current arbitration framework in UAE needs careful usage in order to guarantee success. It is therefore proposed that the arbitration clause be modified as shown below to extract better results: “Any dispute or whatever nature arising out of or in any way relating to the Agreement or to its construction or fulfilments can be referred to arbitration. Such arbitration shall take place in Dubai, and shall proceed in accordance with the Rules of Arbitration of the LCIA-DIFC in Dubai. Both parties hereby agree that there should be one arbitrator who should be Dr Karim Akram.” Conclusion The UAE Civil Code is limited in its application related to arbitration at this point in time. One problem is the limited coverage provided by the Code and another problem is the determination of how the provisions of the Code are to be applied15. Additionally it has been felt that the role of courts in arbitration is overwhelming. The courts may choose to intervene and supervise the arbitration process. This in itself tends to undermine the authority available to the arbitrator(s). Under Article 209 of the UAE Civil Code, the arbitrator does not have any power to impose fines and neither can he enforce his judgment on the disputing parties. In order for an arbitrator to go for enforcement, the arbitrator has to go to a court of law again. However, these aspects of arbitration in the UAE are changing and are giving way to arbitration awards that are held up in most circumstances. Where one approach could be to relinquish the current arbitration clause, another could be to strengthen the arbitration clause to reflect contemporary legal realities. In this sense the arbitration clause should be modified as shown in the recommendations section above so that the company receives due coverage under existing arbitration laws in the UAE. References Books Arthur Sullivan and Steven S Sheffrin, Economics: Principles in Action, (Upper Saddle, New Jersey: Pearson Prentice Hall 2003) Case Law Dubai Court of Cassation, 124/2008 Dubai Court of Cassation, 146/2008 Journal Articles Arthur J. Gemmell, Commercial Arbitration in the Islamic Middle East, 5 Santa Clara J. Int’l L. 169, 170 (2006) Mark Wakim, Public Policy Concerns Regarding Enforcement of Foreign International Arbitral Awards in the Middle East, 21 N.Y. Int’l L. Rev. 1, 41 Patrick Bourke & Dominic Hennessy, Brighter times – developments in arbitration in the United Arab Emirates, IBA Legal Practice Div. Arbitration Committee Newsletter, September 2008, at p. 42 (Int’l Bar Assoc. 2008) (2008) Statutory Law Convention on the Recognition and enforcement of Foreign Arbitral Awards, Art. V, June 10, 1958, 21 U.S.T. 2517, I.I.A.S. No. 6997, 330 U.N.T.S. 38, available at http://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/XXII_1_e.pdf The UAE Civil Procedure Code, Federal Law No. (11) of 1992 Website Abdullay Kh. Al-Ayoub, International Commercial Arbitration in the Middle East, American Bar Association Section on International Law, at p. 6 (Spring Meeting, 2006), available at http://www.abanet.org/intlaw/calendar/spring2006materials.html Antonios Dimitracopoulos, Arbitration; Light at the end of the tunnel, Construction Week Online, May 3, 2008, available at, http://www.constructionweekonline.com/article-2862-arbitration_light_at_the_end_of_the_tunnel/1 Raid Abu-Manneh, Dubai: A Regional Arbitration Centre?, Mayer Brown International, LLP, August 10, 2009, available at http://www.martindale.com/international-law/article_Mayer-Brown-International-LLP_783158.htm Sona Nambiar, Common law needed as UAE sees spurt in arbitration, Emirates Business 24/7, September 9, 2009, available at http://www.zawya.com/story.cfm/sidZAWYA20090909041615/Rise%20In%20Arbitration Read More