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DIFC Court determines it has inherent jurisdiction to stay proceedings in favour of DIAC arbitration
Practical Law UK Legal Update 2-522-2014 (Approx. 5 pages)
DIFC Court determines it has inherent jurisdiction to stay proceedings in favour of DIAC arbitration
by Henry Quinlan (Partner), Natalie Wainwright (Legal Consultant) and Victoria Bloom (Trainee), DLA Piper Middle East LLP
| Published on 01 Nov 2012 • United Arab Emirates |
The Dubai International Financial Centre (DIFC) Court has confirmed that it has the inherent jurisdiction to grant a stay of proceedings in favour of a Dubai International Arbitration Centre (DIAC) arbitration. In so holding, the court did not follow its previous decision on this issue in the recent Injazat case. However, the court did support the finding in Injazat that the DIFC Arbitration Law, as presently drafted, fails to implement the New York Convention.
Background
Articles 12.1 and 12.2 of the Rules of the DIFC Court (RDC) provide that a defendant who wishes to dispute the Court's jurisdiction to try the claim or argue that the Court should not exercise its jurisdiction may apply to the court for an order declaring that it has no such jurisdiction or should not exercise any jurisdiction which it may have.
The DIFC Court may stay the whole or part of any proceedings or judgment either generally or until a specified date or event under Article 4.2 of the RDC. Under Article 4.9 the Court may exercise its power on an application or of its own initiative.
The DIFC Court also has the power to make orders and give directions as to the conduct of any proceedings before the DIFC Court that it considers appropriate, including orders, injunctions, interim and interlocutory orders, contempt orders, orders made in the interests of justice and the referral of matters to the Attorney General of Dubai under Article 32 of DIFC Law No 10 of 2004.
Under Article 33 of DIFC Law No 10 of 2004 the DIFC Court may stay any decision, order or proceeding as it considers appropriate.
Article 12.7(4) of the RDC provides that an order containing a declaration that the court has no jurisdiction, or will not exercise its jurisdiction, may also make a further provision to stay the proceedings.
Facts
International Electromechanical Services Co. LLC (the claimant) (ultimately) entered into a sub-contract (the Nominated Subcontract) with Al Fattan Engineering LLC, the main contractor and first defendant in the present case (the first defendant). The Nominated Subcontract related to mechanical, engineering and plumbing (MEP) works to be completed on the Currency House development based in the DIFC, and contained a back-to-back clause and an arbitration clause that, in short, provided for all disputes to be referred to DIAC arbitration. The back-to-back clause provided that the Nominated Subcontractor's obligations in the Subcontract towards the Main Contractor would be the same as those of the Main Contractor towards the Employer and the Engineer. This clause envisaged that all obligations that the Main Contractor owed to the Head Contractor would now also be owed to the Main Contractor by the Sub-Contractor.
Al Fattan Properties LLC (the second defendant), purportedly agreed, by way of a Direct Payment Acceptance Letter, that it would make the payments for the MEP works directly to the claimant.
The claimant commenced proceedings in the DIFC Courts, seeking damages from the first and second defendants in respect of the sum of AED 14,383,114.28, said to be outstanding following the completion of the MEP works.
The defendants initially applied to the DIFC Court for an order staying the proceedings on the grounds that the Nominated Subcontract contained an arbitration agreement, and that, therefore, the court did not have the requisite jurisdiction to hear the dispute under Article 12.1 of the RDC. The court later amended this application so that it proceeded (Article 12.2 of the RDC) as an application for a discretionary stay of proceedings. The court considered itself to have the requisite jurisdiction to hear the dispute (as it related to a project that was contained within the physical bounds of the DIFC and was pursuant to a contract signed in the DIFC) but that still left open the question of whether that jurisdiction should be exercised, given the arbitration agreement in the Nominated Subcontract.
The court considered that there were three issues for determination:
- Whether the Defendants had established a prima facie case that there was a valid arbitration agreement and if so, that any such agreement covered the current dispute.
- Whether the court had jurisdiction to stay the proceedings either as a result of a statutory power conferred on the court or an inherent jurisdiction (having regard to the recent Injazat case, discussed in Legal update, DIFC Court declines to stay proceedings in favour of LCIA arbitration).
- Whether, in its discretion, the court should exercise its power to grant a stay, and if so, upon what conditions.
Decision
Justice David Williams QC allowed the application for a stay of proceedings.
Validity of the arbitration clause
It was eventually accepted by all parties that a valid arbitration clause existed under Dubai law. The main point of controversy between the parties was whether the current dispute fell within the scope of the arbitration clause in the contract. The claimant contended that because its claim related to the non-payment of sums owing by the second defendant under the Direct Payment Acceptance Letter, the arbitration clause (to which the second defendant was not a party) did not apply to the current dispute.
Justice Williams followed the approach of the House of Lords in Premium Nafta Products Ltd (20th Defendant) & Ors v Fili Shipping Company Ltd & Ors [2007] UKHL 40 (discussed in Legal update, Fiona Trust: House of Lords uphold Court of Appeal):
"semantic distinctions between "arising out of" or "arising under" are of little use when interpreting the scope of an arbitration agreement".
The court's task was to determine what the parties objectively intended to express by choosing the wording of the clause, having regard to the commercial background of the case. The court found that due to the existence of the back-to-back clause, which envisaged that all of the obligations would be novated to the respective parties, it was "inconceivable" that the claimant signed the Nominated Subcontract without intending that the arbitration clause be mirrored in the Nominated Subcontract.
Residual discretion to stay
The court agreed with Justice Steel's decision in the Injazat case that Article 13(1) of the Arbitration Law does not apply to non-DIFC seated arbitration, meaning that there was no mandatory statutory requirement to order a stay. The judge then considered whether he could exercise his residual discretion to stay proceedings in favour of the arbitration agreement. Justice Williams referred to the problem Justice Steel experienced trying to find discretion to allow a stay when faced with such "detailed and precise" legislation.
Justice Williams approached the issue from the opposite perspective. He quoted Articles 32 and 33 of DIFC law No 10 of 2004 and Articles 4.2, 4.9 and 12.7(4) of the RDC as conferring a statutory power to stay proceedings. He further found that the scope and conditions for exercise of the court's inherent jurisdiction to stay proceedings are "wide ranging", following his consultation of the 2010 White Book (which the DIFC Court can turn to for guidance in circumstances where its own legislation is silent).
Justice Williams opined that the question was not whether or not the court had the inherent jurisdiction to stay proceedings, but rather, "whether the established jurisdiction to stay proceedings, where the subject matter of that jurisdiction is covered by an arbitration agreement, has been eliminated by legislation".
Justice Williams found that in this case it had not:
"…it takes more than an implication drawn from silence to demonstrate a legislative intention to remove the Court's inherent jurisdiction and statutory powers to grant a stay."
The court did not follow the findings in the Injazat case and confirmed that the DIFC Court may use its inherent discretion to stay proceedings in favour of non-DIFC arbitrations.
In reaching this conclusion, the court considered that it could not have been the intention of the legislative body to create a Financial Free Zone where agreements to arbitrate, including those with a foreign seat, would be more difficult to enforce in greater Dubai. Nor could the legislature have intended to render the court powerless to prevent an abuse of process, which arguably was the case in Injazat. However, it must continue to be noted that DIFC Arbitration Law as presently drafted is in contravention of the UAE's treaty obligations under the New York Convention. There is no provision within the DIFC legislation for the application of Article 13(1) where an arbitration is seated outside the DIFC. This is a clear failure on the part of the Emirates to implement the terms of the New York Convention.
Comment
Whilst the Injazat case was a technically sound decision, as a matter of policy, the DIFC court would have been anxious to ameliorate the decision of Justice Steel. This policy issue was clearly prevalent in the mind of Justice Williams:
"…an interpretation of the DIFC Arbitration Law which prohibited the DIFC Court from staying court proceedings brought in breach of a non-DIFC arbitration agreement would thwart the promotion of the DIFC as a jurisdiction supportive of arbitration…"
The present case has established that the court can use its inherent jurisdiction to stay proceedings in favour of a valid arbitration agreement where the seat of the arbitration is outside of the DIFC. However, this case can be distinguished from that of the Injazat case. As Justice Williams highlighted, the DIFC and the seat of the arbitration agreement were in the same state, Dubai. Consequently, pursuant to Article II(3) of the New York Convention (which only applies to arbitration with a foreign seat), a stay was not required in the circumstances. The obvious reason for the limitation for domestic arbitration agreements is that the primary goal of the New York Convention is to support international commercial arbitration.
The fact that the dispute concerned a domestic arbitration means that this issue is by no means settled. As noted by the judge at paragraph 122 of the judgment, the DIFC Arbitration Law, as presently drafted, remains in contravention of the UAE's treaty obligations under the New York Convention, where the seat of the arbitration is outside of the UAE. That Law must be amended as a matter of some urgency to ensure that Article 13(1) applies where the seat of arbitration is outside Dubai.
Since the claimant was unable to seise the DIFC court's jurisdiction in circumstances where a valid arbitration agreement existed, this decision has rendered a fairer judgment than the technically correct decision in Injazat. However, it may well be seen to add fuel to the ever-raging debate concerning judicial interference in cases where legislation is so "detailed and precise" that any such interference may be deemed unjustified.
Until a decision is taken to amend Article 13, or a case is tried where the seat of arbitration is situated outside of the UAE, future users of the DIFC court will not have any certainty as to what decision the Court will come to in circumstances where the seat of the arbitration is outside of Dubai.