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Ince’s Quick Guide to Tailoring Your Dispute Resolution Clauses

Insights / 07-07-2020 / UAE

We have previously published a Quick Guide on factors to take into account when deciding on a dispute resolution mechanism. As previously mentioned, the dispute resolution clause is often not given the attention it deserves by the contracting parties and is frequently referred to as the "midnight clause”.

In practice, contracting parties often resort to standard “boiler plate” wording without realizing the potential implications of doing so when a dispute actually arises.

In this follow on Quick Guide we will look at some of the key considerations which need to be kept in mind when drafting an appropriate dispute resolution clause. We do not intend to provide an exhaustive list of all the considerations when drafting a dispute resolution clause; but to provide some guidance to assist the contracting parties. As with our previous Quick Guide, we have looked at the key considerations from the UAE law perspective, however many of the points raised have universal application.

Clarity

First and foremost, the dispute resolution clause should be clear and unambiguous. The UAE Courts will endeavor to give full effect to a clause referring a dispute to arbitration. However, if the clause is poorly drafted or contradictory in its meaning to another clause in the contact, it is likely that the UAE Courts would assume jurisdiction and consider the arbitration clause to be null and void. The rationale for the UAE Courts’ approach is that arbitration as a method of resolving disputes is an exception to the parties’ right to have their dispute heard before the courts and therefore, unless the arbitration clause is clear and unambiguous, the dejure jurisdiction of state courts would apply. Another reason why the dispute resolution clause should be clear, regardless of whether it provides for state court jurisdiction or arbitration, is that the parties do not want to find themselves in a situation where they first have to solve jurisdictional issues if a dispute actually arises to determine in which forum the substantive dispute should be heard.     

The distinction between the governing law clause and the dispute resolution clause

A distinction should be drawn between the governing law clause and the dispute resolution clause. The governing law clause deals with the substantive law governing the contract, while the dispute resolution clause establishes the mechanism that the parties wish to use to resolve disputes arising out of their contract. Whilst it is common for a single clause to deal with both the governing law and dispute resolution, it is advisable to keep both clauses separate for the sake of clarity and to avoid any possible confusion.

Multi–tier dispute resolution clauses

In complex energy and infrastructure contracts, multi-tier dispute resolution clauses, which are also known as “waterfall” clauses, have become commonplace and are included in many standard form contracts, such as FIDIC contracts. This type of dispute resolution clause provides that when a dispute arises, the parties should undertake certain steps prior to commencing litigation or arbitration. In its simplest form, the parties negotiate an amicable settlement prior to commencing arbitration or litigation. In a more complex form, a clause may require the parties to go through a formal mediation or a conciliation process or to refer the dispute to expert determination or adjudication. Depending on how the clause is drafted, the results of these mechanisms may not necessarily be binding on the parties.

When used properly and within the context of a well-structured dispute resolution process, alternative dispute resolution methods such as negotiation, mediation and adjudication have the potential of resolving the dispute in a timely and cost effective way and perhaps even allow the parties to maintain a healthy commercial relationship.

However, poorly drafted multi–tiered dispute resolution clauses can be used by either party to delay the resolution of the dispute.

Therefore, it is important that the clause sets outs a clear timeline for when each stage commences and ends; whether the steps are mandatory or are preconditions to commencing arbitration or litigation; and what happens if one of the parties fails to engage with the agreed pre-litigation or pre-arbitration process. The parties should also avoid using statements such as ‘good faith’ because it introduces an element of subjectivity in the clause which may require the court’s or tribunal’s interpretation and may cause controversy. The multi-tiered dispute resolution clauses are also not suitable for all disputes and should only be utilized when the expected volume and type of claims and the value and complexity of the underlying contract justifies it.

Joinder and consolidation

The UAE Civil Procedures Law (Federal Law No 11 of 1992) permits the joinder of third parties to litigation proceedings after filing of the case but prior to the issuance of the judgment at the Court of First Instance. However, an arbitral tribunal will not have the power to allow a third party, who is not a party to the arbitration agreement, to be joined to an arbitration without the consent of that third party as well as the original parties to the arbitration.

Therefore, in instances where there are multiple parties and multiple agreements related to the same project, careful consideration needs to be given to how the dispute resolution clauses are drafted in order to minimize the risk of parallel proceedings and contradictory outcomes. It should be noted that most arbitral institutions have revised their rules in recent times to deal with the joinder and consolidation issues, which could potentially streamline the arbitral process.

Whilst each situation should be dealt with on the basis of its particular facts, generally the presence of multiple related agreements, it would be preferable for the disputes to be referred to the relevant state courts as the running of parallel arbitration proceedings would often be costly, time consuming and there is a risk that the arbitral awards rendered would not be reconcilable.

Service

Another issue that is commonly overlooked by contracting parties is how the proceedings are to be validly served on the other parties. To avoid unnecessary delays when a dispute arises, the method and address, be it physical or email address, of service should be clearly set out in the dispute resolution clause or the notice provisions in the contract. Whilst this is particularly important for court proceedings, especially when parties from different jurisdictions are involved, it is equally relevant to arbitration clauses. You would not want to find yourself in a position where service could only be effected using diplomatic channels which could take months, if not years, to complete.

Authority to enter into an arbitration agreement

If the parties choose to have their dispute arbitrated, it is important to keep in mind that under the UAE Companies Law (Federal Law No 2 of 2015), the directors of a public joint stock company or a limited liability company may not enter into arbitration agreements unless specifically authorized to do so by the company's articles of association or a special shareholders’ resolution. The position remains the same following the introduction of the new UAE Arbitration Law (Federal Law No 6 of 2018), Article (4)(i) of which specifically requires that the arbitration agreements are to be signed by a person with authority to do so. Otherwise the arbitration agreement would be considered null and void. 

Essential elements of a dispute resolution clause

If the parties choose to refer their disputes to arbitration in the dispute resolution clause in their contract, there are several essential elements which the clause should cover, for example, whether the arbitration will be conducted pursuant to institutional rules or on an ad hoc basis, the number of arbitrators, the language of the proceedings and the seat of the arbitration. The seat of arbitration dictates which courts will have a supervisory role on the proceedings and also gives the award its “nationality” which has a bearing on the enforcement of the award.

Most arbitral institutions have published model clauses and where possible, these should be used so as to avoid any issues with the arbitration clause.

If the parties choose to refer their disputes to state courts in the dispute resolution clause, it is important that the selected courts are accurately named so as to avoid any ambiguity as to where the proceedings should be commenced.

Sovereign immunity

This is particularly relevant where dealing with state or quasi state owned entities. Although in practice an arbitration clause is usually considered a sufficient wavier of state immunity, it is advisable to include an express waiver to ensure that any judgment or arbitration is enforceable.

The concept of the sovereign immunity does not exist under UAE Law. However, Article 247 of the UAE Civil Procedures Law provides that no public property owned by the UAE or any of the Emirates may be attached.

Conclusion

The above key considerations provide an overview of what should be taken into account when drafting a dispute resolution clause, but do not seek to provide an exhaustive list. These key considerations demonstrate the breath of factors which actually need to be considered when drafting a dispute resolution clause. Contracting parties are encouraged to appreciate the importance of such clauses at the negotiation stage to avoid any future jurisdictional and procedural hurdles if a substantive dispute arises.

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dispute resolution / Disputes

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Insights / Part 1: Ince’s Quick Guide to Tailoring Your Dispute Resolution Clauses

29-06-2020 /

We have drafted the following quick guide from a UAE perspective outlining some of the key factors that should to be considered when deciding on which dispute resolution mechanism to incorporate into your contract.

Part 1: Ince’s Quick Guide to Tailoring Your Dispute Resolution Clauses