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Ince’s Quick Guide to Tailoring Your Dispute Resolution Clauses

Insights / 29-06-2020 / UAE

We often get questions from our clients on why we recommend a certain dispute resolution clause in a particular context over another.

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.

Common dispute resolution options

Court jurisdiction

The UAE has three distinct court jurisdictions:-

  • The onshore, or local UAE Courts, where the jurisdiction and judicial system is governed by Federal Law No. 11 of 1992 on the Civil Procedures Law (the “CPC”). Under the CPC, the UAE Courts have automatic jurisdiction over matters involving real property located in the UAE, where the defendant is incorporated/domiciled in onshore UAE (subject to limited exceptions), and employment matters involving employers domiciled in onshore UAE.
     
  • The courts of the Dubai International Financial Centre (“DIFC”), which is a financial free zone. The DIFC and the DIFC Courts are governed by a common law system largely based on English law. The DIFC Courts will typically have jurisdiction over matters with a connection to the DIFC or where the parties have opted into DIFC Court jurisdiction.
     
  • The courts of the Abu Dhabi Global Markets (“ADGM”). Similarly to the DIFC, the ADGM is a financial free zone governed by a common law system largely based on English law.

Arbitration

It is possible to contract out of court jurisdiction and to opt for arbitration as the dispute resolution forum. Arbitration is a private, binding and enforceable dispute resolution mechanism which may be chosen by the parties as an alternative to litigation before the national courts.

Arbitration may be conducted ad hoc (governed by the procedural laws of the chosen seat of arbitration), or in accordance with the rules of an arbitration centre.

Although corporate, commercial and financial matters can be referred to arbitration, parties cannot resort to arbitration to resolve their disputes relating to employment issues, criminal activity, personal status, commercial agency agreements and other public policy matters. Any disputes in connection with these matters will be subject to the exclusive jurisdiction of the UAE courts.

Mediation

Another dispute resolution mechanism available to the parties is mediation.

Mediation involves amicable discussions between parties which are assisted by an independent mediator. The mediator’s job is to facilitate settlement rather than determine the dispute. Therefore, it is recommended that arbitration or litigation mechanism is also incorporated into the dispute resolution clause in case settlement is not reached through mediation.

Overall, mediation is a useful tool to avoid lengthy proceedings and costs through courts or arbitration.

Some of the key considerations for choosing a dispute resolution mechanism

Where are the assets located?

One of the most important questions to consider is where your counterparty is located/domiciled and where are their assets. This is because there having a judgment or an award in your favour is of no use if it cannot be enforced.

For example, if the counterparty’s assets are located in onshore UAE, it may be sensible to choose UAE Courts to decide the dispute, as the local UAE Court judgments are easily enforceable in onshore UAE.

Depending on the jurisdiction, enforcement of a foreign court judgment can be problematic in the absence of a treaty for mutual recognition and enforcement of judgments. On the other hand, if the foreign country is a signatory to the 1958 New York Convention (as the UAE is), enforcement of an international arbitral award is likely to be easier.

What is the nature of the obligations under the contract and is a dispute likely to be complex?

If the obligations under a contract are straightforward and the lifetime of the contract is limited, courts may be a better option than arbitration as the court’s jurisdiction to order interim remedies and decide on expedited issues is wider than that of an arbitral tribunal.

However where the underlying contract and its obligations are complex (e.g. high value construction contracts), it may be preferable to choose arbitration in order to benefit from specialist arbitrators in a particular field, or from the procedural flexibility to conduct the proceedings.

Whether the governing law will be applied by the chosen forum?

Whether the dispute resolution forum will actually apply the parties’ choice of governing law is an important factor to consider.

For instance, the UAE Courts, with the notable exception of the DIFC and ADGM courts, will typically apply UAE law in practice regardless of a different governing law clause. On the other hand, an arbitral tribunal will be bound by a parties’ choice of law regardless of the seat of arbitration and whether it is ad hoc or institutional.

Costs

As a general rule, arbitration tends to be more costly than litigation.

However, costs recoverability differs between arbitration and litigation. In the UAE, UAE courts do not typically award costs. On the other hand, ADGM and DIFC courts do deal and hear issues on costs; and so do arbitral tribunals if the parties have agreed the issue of costs are part of the tribunal’s jurisdiction.

Evidence

The way a party presents evidence and the extent of its disclosure obligations will affect the administration of the proceedings determining a dispute. It is accordingly a significant factor in deciding upon a certain dispute resolution mechanism.

In the UAE onshore courts, proceedings are conducted in Arabic and all documents that a party seeks to rely on must be translated into Arabic by a certified translator. By comparison, the working language of both the DIFC and ADGM Courts is English so no such requirement exists in those two forums.

On the other hand, in the onshore UAE courts parties are not required to undergo a document disclosure exercise. The position is different under the rules of certain arbitral institutions, or in the English courts for example, where obligation on a party to disclose documents is extensive.

Procedural rules

Given that an arbitral tribunal’s jurisdiction depends on the parties’ agreement, it may sometimes be limited and not extend to ability to grant interim relief. The lack of these remedies may prolong proceedings in circumstances where they can prevent a breach, or provide sufficient remedy for a party to settle.

In addition to considering the availability of interim remedies and extent of the tribunal or court’s power, one should also consider the appeal-ability of the resulting judgment or award.

In the UAE, a party may appeal judgments relatively easily up to the local courts of cassation, including on the basis of a point of law rather than point of fact. On the other hand, arbitral awards are not appeal-able and may only be challenged on limited grounds via local courts.

The appeal-ability of a judgment or award may affect the timeline and costs involved with concluding proceedings, as well as the certainty of obtaining a “final” outcome.

Confidentiality

The parties should also consider whether their preference is to have their dispute heard in private or in public.

Arbitral proceedings and their outcomes are generally not published, and non-disclosure obligations with respect to the conduct of the proceedings may be embedded into an arbitration clause. On the other hand, court judgments in most jurisdictions are accessible to the public and parties’ names and the issues in dispute will eventually be in the public domain.

For example, if reputational issues are at stake or the subject matter involves confidential information or trade secrets in practice parties tend to opt for arbitration.

Conclusion

Whilst the dispute resolution mechanism in contracts is often not given the attention it deserves, parties should consider all the above factors and assess on balance, the best option or combination of options available, and legal advice should be sought where appropriate in order to tailor an appropriate dispute resolution clause for that particular contract.

In our next quick guide on dispute resolution clauses, we will discuss how to draft and formulate the various clauses depending on the choice of jurisdiction.

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