In a case of earlier this year (see Case No. 32/2019, Dubai Court of Appeal, ruling of 5 February 2020), the UAE courts had a first opportunity to test their supervisory powers under Article 19(2) of the UAE Federal Arbitration Law (FAL), which entered into force with effect from 16 June 2018. More specifically, the Dubai Court of Appeal found against the proper jurisdiction of the DIAC tribunal, deciding to annul the tribunal’s affirmative award on jurisdiction.
Article 19(2) FAL and how it operates
By way of background, Article 19(2) defines the curial courts’ supervisory powers with respect to a tribunal’s exercise of its kompetenz-kompetenz power, that is, the power to determine its own jurisdiction, under Article 19(1). Importantly, the courts’ supervisory powers are limited to situations in which the tribunal finds in favour of its own jurisdiction. In other words, Article 19(2) only comes into play where a tribunal has adopted a ruling affirming its own jurisdiction. It cannot be invoked in response to a negative ruling on jurisdiction, that is a ruling whereby a tribunal declines its proper jurisdiction under the FAL.
A negative ruling on jurisdiction can only be challenged by recourse to the formal challenge provisions contained in Articles 53-54 FAL. This is because a negative ruling on jurisdiction will take the form of a final award, which will terminate the arbitration proceedings. It therefore follows the challenge regime of final awards under the FAL.
By contrast, a ruling by the tribunal affirming its own jurisdiction will typically take the form of a partial award on jurisdiction, as it makes a final finding on and therefore determines the matter of jurisdiction, yet leaves the merits of the parties’ dispute undecided. For the avoidance of doubt, if the tribunal reserves a decision on jurisdiction until the final award, its findings on jurisdiction (whether in favour or against) will be subject to the challenge regime of a final award, and more specifically Article 53 FAL.
Under Article 19(2), a party is empowered to request the competent curial court, that is, the president of the competent Court of Appeal, to rule on the matter of jurisdiction within 15 days from the date it has been notified of an affirmative ruling on jurisdiction. The shortness of this period promotes procedural efficiency. In the same spirit of procedural efficiency, the court, in turn, will have to render a decision on the challenge within 30 days of being seized, a decision that will be final and binding and, as such, cannot be appealed. Pending an application under Article 19(2), the arbitration proceedings will be stayed unless decided otherwise by the tribunal upon the request of a party. In this sense, the stay of the proceedings is automatic in order to manage the risk of shoring up arbitration costs unnecessarily should the courts ultimately find that the tribunal does not have jurisdiction.
Under Article19(2), the curial courts enjoy a comparatively wide margin of discretion. They are invited to review the actual merits of the tribunal’s findings on jurisdiction, and to decide the matter of jurisdiction afresh on the basis of the text of and the information provided by the award.
Importantly, there is an argument that in accordance with the waiver provision under Article 25 FAL, an aggrieved party under Article 19(1) must engage Article 19(2) and formally challenge a tribunal’s affirmative ruling in favour of its own jurisdiction before the curial courts, or risk waiving its right to challenge such a ruling later, for example, at the enforcement stage.
Article 19(3) ensures that if the curial courts affirm that the tribunal does not have proper jurisdiction, the party that insisted on the continuation of the arbitration proceedings will bear the arbitration costs. This likely excludes legal or party costs by analogy to Article 46(1) FAL. That said, the arbitration costs are understood to include all arbitration costs, that is, both those incurred before and after initiation of the challenge under Article 19(1). The rationale behind this provision is evidently to hold liable for all arbitration costs the party that brought the proceedings in blatant disregard of the tribunal’s lack of jurisdiction. As such, it aims to discourage vexatious parties from commencing arbitration in circumstances where the tribunal does not have proper jurisdiction, whether for reasons of prematurity (and hence a failure to comply with attendant conditions precedent) or of forum non conveniens (arbitration not being the proper forum, there being no enforceable arbitration obligation).
The Dubai Court of Appeal’s findings in Case No. 32/2019
In Case No. 32/2019 more specifically, the Dubai Court of Appeal confirmed, contrary to the findings mistakenly reached by the tribunal on the subject, the strict application of the conditions precedent of the International Federation of Consulting Engineers (FIDIC) standard form 1987 (4th edition) under UAE law. In the case at hand, the court found that the claimant had commenced arbitration prematurely, that is, prior to completion of the pre-arbitral conditions under FIDIC, including more specifically a timely referral of the parties’ dispute for determination by the engineer within the meaning of Cl. 67.1 FIDIC. The courts confirmed that they will not accept a belated referral to the engineer, for example, after commencement of arbitral proceedings:
“If the two parties agreed that the dispute shall be referred to the consultant engineer in construction contracts in order to discuss the same prior to arbitration, then no such party shall have the right to refer the dispute to arbitration prior to referring the dispute to the engineer as aforesaid unless otherwise agreed by the two parties…”
To do so would turn conditions precedent into conditions subsequent and turn the very rationale of the FIDIC pre-arbitral conditions on their head. The FIDIC conditions precedent are designed to exhaust opportunities for non-contentious forms of dispute resolution and amicable settlement before escalation to adversarial means of dispute resolution, including arbitration. Non-contentious forms of dispute resolution are cost-saving and assist the parties in preserving their ongoing working relationship, obviating the need to commit valuable and costly managerial resources to formal dispute resolution.
By finding in favour of strict compliance with FIDIC conditions precedent, the Dubai courts affirmed established case law precedent that originated under the former UAE Arbitration Chapter (see Case No. 140/2007, Civil Cassation, Dubai Court of Cassation, ruling of 7 October 2007):
“If the parties have agreed that the dispute should be referred to a consulting engineer in construction contracts for a determination thereon before proceeding with the request for arbitration, then neither of the parties may go directly to arbitration before presenting the dispute to the said engineer, unless the contracting parties have agreed otherwise after concluding the contract.”
Importantly, under UAE law, conditions precedent are strictly binding as the law of the parties in accordance with the overarching maxim of pacta sunt servanda (the contract being the law of the parties). Short of party agreement to proceed without the pre-arbitral conditions or to comply late, the only remedy for a failure to comply is to start a fresh arbitration. For the avoidance of doubt, the same considerations apply mutatis mutandis to counterclaims. Arguments of good faith under Article 246 of the UAE Civil Transactions Code, according to which contracting parties are required to perform their contractual obligations, must fail, as they would essentially amount to a re-writing of the parties’ original contract and more specifically of the multi-tiered dispute resolution provision originally agreed by the parties. These arguments of good faith include an obligation to arbitrate, in good faith, in favour of, for example, suspending the arbitration in order to exhaust the conditions precedent after commencement of an arbitration.
Be that as it may, parties are encouraged to comply strictly with FIDIC (and for that matter any) conditions precedent to which they subjected themselves on entering into the contract. Failure to do so can have draconian consequences, such as those evident from the present case. Here, the claimant will lose the better part of AED 900,000 worth of arbitration costs (in addition to legal and counsel costs), having not only imprudently commenced the arbitration prematurely, but also having insisted on continuing with the arbitration process rather than to suspend, pending the court’s investigations under Article 19(2) FAL.