Settling out of court

An increasingly beneficial alternative to litigation

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The development of an efficient, modern and systematic arbitration process is arguably a central tenet that accompanies a country’s economic development and progress. Among other marks of quality, growth-oriented countries and specifically financial centres that wish to remain at the front line of innovation are today measured by their ability to ensure that their international clientèle and business partners are effectively serviced when disputes emerge.

The Gulf region’s aspiring financial hubs Bahrain and Dubai International Financial Centre (DIFC) — ranked as the world’s fastest growing financial center — have provided regional examples by setting arbitration rules and favorable environments for dispute resolution, servicing businesses and the Gulf region as a whole.

Saudi Arabia, previously criticized for its lack of a comprehensive arbitration system, has recently passed legislation (the new Arbitration Law approved on April 16 this year) that is meant to pave the way to greater credibility in effectiveness of commercial dispute resolution in the country.

Pillars of arbitration

Arbitration is an increasingly popular method to resolve disputes, although some argue that widespread use of arbitration in international business disputes is still a recent development when compared with reliance on the court system. However, an increasing number of market participants (international companies and corporations) are now requesting the inclusion of arbitration clauses in their contractual documentation. This is also the case for smaller companies transacting with larger international companies.

One could argue that this trend is likely to continue as more and more businesses begin to appreciate its benefits as a means to resolve disputes, particularly in the context of banking and commercial disputes — which can be costly, public and very lengthy.

One of the main advantages of arbitration is that the entire process is usually maintained confidential. High profile companies and international businesses, as well as smaller corporations who want to avoid the stigma of litigation, find this very appealing as it enables them to control the dispute process by maintaining a reserved status, and also enables them to manage costs and the duration of the proceedings.

Dubai International Financial Centre – London Court of International Arbitration (DIFC-LCIA)

Arguably, the DIFC has the most sophisticated arbitration system in the GCC region. The Bahrain International Commercial Arbitration Centre and the Gulf Cooperation Council Commercial Arbitration Centre are also effectual centres that have been relied upon by parties. Yet, the United Arab Emirate’s political stability and steady economic growth make the facilities of the Dubai International Financial Centre – London Court of International Arbitration (DIFC-LCIA), which are provided under a partnership of the two institutions, a stronger option for parties wishing to arbitrate.

The DIFC Arbitration Law 2008 was the legislative springboard developed for dispute resolution. Its foundations lie on the UNCITRAL Model Law on International Commercial Arbitration which covers the arbitral process, agreement and recognition of arbitral awards. Hence, parties in the UAE have the option to arbitrate in the countries which are party to the 1958 New York Convention on Reciprocity and Enforcement of Arbitral Awards.

More and more parties are now selecting the seat of arbitration in DIFC and are using the DIFC-LCIA Arbitration Rules, which are modelled on the LCIA rules. The registrar department of the DIFC-LCIA has confirmed that the number of arbitration cases have increased by 30 percent in 2012. In addition, the DIFC-LCIA has been appointed as the registrar of the Financial Markets Tribunal created by DIFC Law No. 1 of 2004. These are considerable achievements that consolidate the status of the DIFC-LCIA as a primary centre for dispute resolution and a convincing alternative to other centres.

One of the main advantages of a DIFC-LCIA arbitral award that has been recognized and ratified by the DIFC Courts is that it may be enforced in Dubai, based on the Protocol of Jurisdiction between Dubai Courts and DIFC Courts and relevant corresponding Dubai Law on the Judicial Authority of the DIFC. Thus, the losing party cannot question the validity of the arbitral award under the UAE Civil Procedure Code (CPC). In Dubai, therefore, a DIFC-LCIA award should be enforced directly through the Dubai courts, without going through the ratification process. In 2011, the local Dubai Courts enforced a DIFC-LCIA award for the first time, confirming the practical enforceability of such awards and a significant advance for arbitration in the region.

Historically, there have been some limitations with respect to enforcing a New York Convention foreign arbitral award in the UAE: its enforcement is slow and expensive and it could be rejected by local courts as unenforceable because of non-conformity with the UAE Civil Procedure Code (“CPC”). Another recent important case involves the Dubai Court of Appeal, which upheld the judgement of the Court of First Instance, implementing that court’s findings on the application of the New York Convention under UAE law. This is a favorable result as it reinforces the UAE’s acceptance of its obligations under the New York Convention and another victory for the credibility of arbitration in the region.

Yet, as there is no doctrine of “binding precedent” in the UAE, the DFIC-LCIA arbitration route remains the most effectual. Finally, unlike other centres, the DIFC-LCIA charges costs on an hourly basis as opposed to the total amount of the dispute in question, which is beneficial from a costs perspective.

Saudi Arabia arbitration law

Saudi Arabia has been regarded as having the least sophisticated arbitration system in the region. Historically, businesses could refer disputes to local courts and the board of grievances, or refer disputes to domestic arbitration pursuant to the 1983 Arbitration Law, with highly uncertain results. The Saudi arbitration landscape has been transformed with the implementation of the New Arbitration Law. This is overall a remarkable development for the Gulf region as the previous law was not detailed enough to give commercial parties sufficient confidence in the system. Prior to the new Arbitration Law, domestic arbitration was not often chosen due to particular difficulties arising under the 1983 Arbitration Law (for example the enforcement of an arbitral award required ratification by the relevant court).

The limitation of the process was highlighted by the fact the supervising court could easily reconsider the merits of the dispute and there was a very high risk that the court would disregard the decision of the arbitral tribunal and emit its own prevailing decision. This undermined the arbitration process significantly. The new law, on the contrary, provides that the relevant court may not examine the subject matter and facts of the dispute in considering whether the award should be invalidated, and arbitral awards made under the new law acquire the force of res judicata and are enforceable (subject to the non violation of Sharia law and public order).

Looking ahead

The evolution of arbitration in the Gulf indicates that its role is progressive and more market players are favoring it to litigation. International companies clearly have a strong preference for arbitration, but it is also becoming a sound dispute resolution choice for local companies who realize its many benefits. In addition, the concrete trends in Dubai indicate that it is capable of offering certain international arbitration services which are as effective as London, Singapore and Hong Kong. It is expected that the anticipated UAE Federal Arbitration Law will only consolidate this status further.

Nicole Purin

Nicole Purin is a legal and finance expert based in the United Arab Emirates.