REUTERS | Ahmed Jadallah

Article 7 JAL: de-fining and re-fining its scope of application

In a ruling of 17 November 2019 (see YYY Limited v ZZZ Limited [DIFC] 2017 ARB 005, as per Justice Sir Richard Field), the DIFC Court of First Instance (DIFCCFI) had an opportunity to re-consider the proper scope of application of Article 7 of the Judicial Authority Law (see DIFC Law No. 12 of 2004 as amended by DIFC Law No. 16 of 2011) (JAL). In doing so, the DIFCCFI was faced with the question as to whether it was bound by a prior declaratory ruling of the Dubai Court of Cassation (DCC) in the same matter, finding in favour of the invalidity of an arbitration agreement between the parties due to a purported lack of capacity of one of them to sign.

The DIFCCFI found that it was not so bound, given that the binding force of Article 7(4) and (5) JAL was limited to judgments that were properly capable of enforcement by execution against the debtor’s assets (the term “executory” as used in Articles 7(2)(a) and 7(4)(a) JAL being properly translated as “appropriate for enforcement [by execution])” (paragraphs 67 and 68): declaratory judgments typically were not, whereas money judgments were.

The DCC’s ruling was declaratory in nature, declaring the invalidity of the underlying arbitration agreement, and could as such not produce a binding effect upon the DIFC Courts under Article 7(4) and (5) JAL. As a consequence, the DIFCCFI refused the automatic recognition of the DCC’s ruling under Article 7(4) and (5) JAL (paragraph 74).

According to the DIFCCFI, this outcome was also dictated by the limitations of the execution process operated within the DIFC as provided for in Part 45 of the Rules of the DIFC Courts (RDC) (paragraphs 67 and 73). For the avoidance of doubt, Part 45 RDC lists a limited range of methods of execution, which exclude enforcement by execution of declaratory judgments (see in particular Rule 45.3, according to which a judgment creditor may enforce a judgment or order for the payment of money by (1) a charge over property (a charging order); (2) attachment of assets (whether present or future); (3) execution against assets; or (4) the appointment of a receiver).

In concluding against automatic recognition, the DIFCCFI distanced itself from the broader approach taken by former Chief Justice Michael Hwang in Oger v Daman (CFI-013-2016 and ARB-002-2015), in which the Chief Justice held that:

“… under Article 7(5), [the DIFC Courts] ha[d] no power to review the merits of any judgment of Dubai courts, except as to form, [but that instead,] it had to recognise and enforce it” (see YYY Limited v ZZZ Limited at paragraphs 75 to 77).

In doing so, the DIFCCFI acknowledged that the Chief Justice had not been presented with any argument to the effect that only judgments capable of enforcement by execution against the assets of the judgment debtor could be enforced under Article 7 JAL (paragraph 78).

The DIFC courts also refused to recognise the DCC’s ruling at common law. According to the DIFCCFI, pursuant to the conflict of laws rules applicable in the DIFC (which draw in general on the English conflict of laws rules):

“… [a] foreign judgment is impeachable on the ground that its enforcement or, as the case may be, recognition, would be contrary to public policy.” (paragraph 81).

In applying this rule, the DIFCCFI found that the DCC’s ruling must not be recognised as to do so would be contrary to the public policy of the DIFC (paragraph 82). Handing down the DIFCCFI’s ruling, Justice Sir Richard Field reasoned as follows:

“82. … The NYC [the New York Convention] requires the courts of the contracting states to uphold arbitration agreements and I regard it as plain that when a domestic court is asked to find that an arbitration agreement is null and void in the circumstances contemplated in Article II.3, it should make that decision, as implicitly required by Article V 1. (a), on the basis of the law to which the parties have subjected the arbitration agreement [that is, English law as the governing law of the underlying Hotel Management Agreement]… With very great respect, it therefore appears to me that, in deciding as it did, the Dubai Court of Cassation was in breach of the NYC. It was suggested in argument that the Dubai law as to the authority necessary for an arbitration agreement to be binding through the consent of an agent is in the nature of ordre public and cannot be contracted out of. Even if this be so, I respectfully still take the view that the CC Decision [that is, the DCC’s ruling] was made in breach of the NYC and for this reason that decision should not be recognized by this Court. The NYC compelled the Dubai Cassation Court to apply English law in determining the validity of the arbitration agreement.

83. Even if the CC Decision was not made in breach of the NYC, there are two further reasons why, in my opinion, it would be contrary to the public policy for the DIFC to recognise the decision. First, recognition of the CC Decision would put the DIFC Court itself in breach of the NYC for failing to uphold the validity of the arbitration agreement, there being nothing in the English law of agency, the applicable law, which is of the nature of ordre public. Second, the DIFC Court is the court of the seat and therefore the supervisory court whilst the arbitration is in progress and recognition of the CC Decision would disable this Court from carrying out this very important function.

84. Even if the correct view is that the CC Decision falls within Article 7 (4) and (5) of the JAL, notwithstanding that it is a declaratory judgment, I would still hold that the DIFC Court has a residual discretion in very exceptional circumstances not to recognise Dubai judgments covered by those provisions. And for the reasons given in paragraphs 82 and 83 above, I would still decline to recognise the CC Decision.”

At first sight, the DIFCCFI’s reasoning with respect to the limited scope of application of Article 7 JAL is compelling. To the extent that it affects the proper construction of both Articles 7(2)(a) and 7(4)(a) JAL, it will limit the automatic recognition of both onshore Dubai and offshore DIFC declaratory rulings. In other words, as a result of the DIFCCFI’s ruling (provided its reasoning is recognised and adopted as the standard interpretation of the onshore/offshore operation of Article 7 JAL), the system of mutual recognition between the onshore Dubai courts and the offshore DIFC courts will no longer operate with respect to declaratory rulings of the Dubai and the DIFC courts.

In this sense, going forward, the area of onshore/offshore free movement of judicial instruments will exclude declaratory rulings. This could have significant ramifications, in particular considering that such limitation might extend to orders for the recognition and enforcement of declaratory awards, such as awards on jurisdiction. In addition, it is worth noting that even though English law might be considered properly applicable to the arbitration agreement, to the extent that the issue of lack of capacity addressed by the DCC is properly qualified as of UAE public policy, it would need to be given full credit by both the onshore Dubai and offshore DIFC courts, both of them being UAE courts, which in turn are bound by UAE public policy. This even holds in application to the New York Convention, which is based on the public policy at the seat of the supervisory court.

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