Mohamed El Hawawy Joint Managing Partner, Dubai
Arbitrability of lease agreements in the UAE
Over the last few years the issue of the arbitrability of a real estate dispute has been hotly debated in the UAE courts and in the legal press. The issue is obviously important to the parties who want to know whether they can submit a real estate dispute to arbitration, whether the arbitration clauses in their existing contracts will be upheld, and whether any of the awards that have been already issued are enforceable in the UAE.
The issue of arbitrability of a dispute arising from the non-registration of transactions involving sale and purchase of property, appears to be settled in the UAE courts in that such a dispute constitutes a matter of public order and is therefore unarbitrable. In this article we focus on disputes arising from lease agreements in Dubai and Abu Dhabi, which do not involve issues of registration.
Local laws and decrees in Dubai and Abu Dhabi provide that any dispute between a landlord and a tenant shall be referred to a special rental disputes committee (the “Committee”). This requirement has caused uncertainty as to whether or not an arbitration agreement in a lease is enforceable. We address Dubai and Abu Dhabi legislation separately below.
Article 2 of the Dubai Decree No. 2 of 1993 concerning the formation of a judicial committee for the resolution of disputes between landlords and tenants (as amended) (the “Decree”) states that “a judicial committee to have the exclusive jurisdiction to consider all the disputes that may arise between the landlords and the tenants of any nature whatsoever shall be formed.”
Despite the fact that the above provision states that the committee has “exclusive” jurisdiction, the exclusivity could have been interpreted to mean exclusivity with regard to any other Dubai court and not with regard to an alternative dispute resolution mechanism agreed in the lease. Accordingly, the legal provision required judicial interpretation as to whether its effect renders an arbitration clause in a lease agreement, unenforceable.
In appeal no. 1 of 2011, the Dubai Cassation Court established that Article 2 of the Decree is a mandatory provision that cannot be contracted out by the landlord and the tenant. The Cassation Court held that Article 2 of the Decree applies to any Dubai court and any arbitration tribunal. On this basis, an arbitration clause in a lease agreement relating Dubai real property is not enforceable.
The position in Abu Dhabi has been less clear. Article 25 of the Abu Dhabi Law No. 20 of 2006 concerning leasing real property and regulating the lease relationship between landlords and tenants in Abu Dhabi (as amended) (the “Abu Dhabi Law”) does not state that the Committee has exclusive “jurisdiction”. The Abu Dhabi Law states that:
“The committee shall have the power to expeditiously determine the disputes arising out of the Lessor-Tenant relation pursuant to the provisions hereof, the civil transactions law of the United Arab Emirates and the amendments thereto in respect of any matter not stipulated herein, call for taking provisional measures applied for by either party to the contract. The committee shall also have the power to supervise the implementation of the provisions hereof and prosecute any party of the rental relation if they contravene the provisions hereof at the request of any party or the secretariat general of the Executive Council.”
In 2009, the Abu Dhabi Cassation Court considered the jurisdiction of the committee in a case where the landlord had commenced proceedings to evict a tenant on an urgent basis. The issue was whether or not the arbitration clause in the underlying agreement between the landlord and the tenant was effective in relation to urgent matters’ proceedings. The Court held that urgent matters’ proceedings must be commenced before the competent court (. the committee) rather than the arbitration tribunal even if there is an arbitration agreement between the landlord and the tenant. (Abu Dhabi Cassation Court Appeal no. 139 of 2009).
The Abu Dhabi Cassation Court issued a recent judgment at the end of 2016 where it held that the jurisdiction of the committee is a matter of public policy and that the parties cannot contracted out of the committee’s jurisdiction. In that case the arbitration agreement between the landlord and the tenant was rendered unenforceable and it was determined that the committee had jurisdiction to hear the dispute in question. This decision appears to have been based on the Abu Dhabi Cassation Court’s view that when the legislator issued an exceptional tenancy law whereby it disabled the general tenancy rules and established a special committee, including rules about the establishment of the committee and its procedural rules,, the effect was that the committee’s rules are matters of public policy, and so the parties cannot agree on arbitration (Appeals no. 426 and 525 of 2016).
It appears that the courts in Dubai and Abu Dhabi have taken similar views in that establishment by law of a special committee to resolve lease disputes, deprives the parties from their freedom to refer to their dispute to arbitration. It is worth considering the basis for this view.
The matters which cannot be arbitrated are set out in the Article 203 (4) of the UAE Civil Procedure Code which provides that: “It shall not be permissible to arbitrate matters in which conciliation is not permissible". It is an established principle that conciliation [and hence arbitration] is not permissible in relation to matters of public order. Article 3 of the UAE Civil Code defines the matters that constitute public policy.
The reasoning behind the courts’ findings of non-arbitrability of real estate disputes involving issues of registration, has been that the disputes related to “circulation of wealth” and “rules of individual ownership” which are matters of public order under Article 3 of the UAE Civil Code. The courts have however stopped short of saying that all disputes involving real estate are matters of public order and therefore unarbitrable. Some disputes relating to real estate have found to be capable of being resolved by arbitration.
This makes the findings of the Dubai and Abu Dhabi courts in relation to arbitrability of lease contracts quite interesting. It appears that the argument in the Abu Dhabi Cassation Court judgment issued in 2016 is that as the law has established a special committee, it is now a matter of public order that all disputes must be submitted to that committee and cannot be arbitrated. This seems to be an expansive interpretation of the relevant legislation, which does not expressly prevent the parties from referring disputes to arbitration.