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Protecting precautionary attachments in UAE: how far can you go without breaching an arbitration agreement?

Security, required by employers and funders in the form of bonds or guarantees to secure a contractor’s performance, are a common feature of international construction projects. If a dispute arises under the construction contracts, it is common to see applications for interim injunctive relief to restrain demands  being made on bonds or to restrain the issuing banks from paying out if one is made.

In cases where parties have agreed to arbitrate disputes, this raises the question as to the extent to which they may apply to the court for interim relief without breaching the arbitration agreement.

This is a question that was recently considered by the English Commercial Court in SRS Middle East FZE v Chemie Tech DMCC.

This blog focuses on the practical issues that arise in such cases, with particular focus on making applications for interim protective relief in the UAE courts.

Facts

The claimant contracted with the defendant to engineer and construct a new tank storage terminal and connect it to existing infrastructure in the Al Hamriyah Free Zone in Sharjah.  The contract provided that any disputes would be resolved by ICC arbitration seated in London.

Pursuant to the contract, a performance guarantee was issued to the claimant by Orient UNB Takaful PJSC for 10% of the contract price. The performance guarantee was expressly governed by UAE law and the ICC 458 Uniform Rules for Demand Guarantees.

In April 2020, the claimant purported to terminate the contract for cause (essentially delayed performance) and made a demand upon Orient for payment under the performance guarantee.  The defendant did not accept that the claimant was entitled to terminate the contract and commenced arbitration on 4 June 2020.

The following court proceedings were issued in relation to the performance guarantee:

  • Proceedings in Sharjah. On 17 May 2020, the defendant sought an interim restraining injunction to prevent payment out by Orient under the performance guarantee and an interim freezing injunction against the claimant for the amounts claimed by the defendant (the Interim Relief Claim).  The Interim Relief Claim succeeded, on the defendant’s second appeal before the Sharjah Federal Court of Appeal, on 9 September 2020.  There was debate over whether the source of the power to grant the Interim Relief Claim was article 114(2) of Sharjah Cabinet Decision No. 57 of 2018 or article 22 of the Civil Procedure Law.
  • Proceedings in Dubai. On 24 June 2020, the claimant filed a claim against Orient for encashment of the performance guarantee. This was a claim under the performance guarantee so did not breach the arbitration agreement in the contract.
  • Proceedings in Sharjah. In mid-September 2020, the defendant filed a claim for substantive relief against the claimant in the Sharjah court (Sharjah Claim). It is this claim that was, allegedly, brought in breach of the arbitration clause. The defendant brought this claim because it was advised that a procedural rule required it to file an action for the establishment of its substantive rights, or else the provisional measures granted in the Interim Relief Claim would become deemed void ab initio (from the beginning).

After the Interim Relief Claim succeeded on 9 September 2020, the claimant wrote to the defendant seeking assurance that no substantive relief claims would be filed in any UAE courts and instead any substantive issues would be decided in the ICC arbitration.

The judgement describes the defendant’s solicitors’ correspondence as “being coy as to whether it had in mind to try to have the merits of its substantive claims determined by the Sharjah Court”.

The defendant claimed that it filed the Sharjah Claim because it was advised by local UAE counsel that it was required to do so by article 114(2) of Sharjah Cabinet Decision No. 57 of 2018 in order to preserve the precautionary attachment awarded in the Interim Relief Claim.

In October 2020, the claimant made an application for an anti-suit injunction in the Commercial Court in London to restrain the proceedings in Sharjah.

Interim protective measures: how far can you go?

The court considered a number of issues, but one of the key issues was application of the principle formulated in The Kallang (No.2).  The effect of this principle is that an anti-suit injunction will generally not be granted in respect of court proceedings if its sole purpose is to seek interim protective measures in support of the applicant’s substantive claim brought or to be brought in arbitration.  However, if the actions go beyond simply seeking reasonable security for the arbitration proceedings, there is a breach of the arbitration agreement, which the English court will restrain.

The court considered whether the Sharjah Claim went beyond, or threatened to go beyond, the seeking of the protective measures that were sought by and obtained in the Interim Relief Claim.

The defendant argued that the sole purpose of the Sharjah Claim was simply to preserve the precautionary attachment it had been granted.  However, it was not clear, on the evidence whether the defendant needed to file the Sharjah Claim in the first place in order to preserve the interim relief obtained.  This involved a debate over whether the source of the power to grant the Interim Relief Claim was article 114(2) of Cabinet Decision No. 57 of 2018 or article 22 of the Civil Procedure Law. Nor was it clear whether staying the Sharjah Claim in favour of the ICC arbitration would or might mean the provisional measures would be lost.

In deciding to grant an anti-suit injunction restraining the defendant from pursuing the Sharjah Claim, the court adopted the following approach:

  • If under UAE law, the Sharjah Claim could be stopped, pursuant to article 8 of the Arbitration Law, but with the provisional measures granted in the Interim Relief Claim left in place in support of the pending ICC arbitration, then the defendant should be consenting to the article 8 application.
  • However, if maintaining the provisional measures required the Sharjah Claim not to be stayed in favour of arbitration, but to be pursued for merits adjudication, then they are not provisional measures the defendant should have sought. In continuing with the Sharjah Claim, the defendant would be breaching the arbitration agreement, and should be restrained from doing so.

Impact of case on applications for precautionary attachments in UAE

There are a number of interesting practice points arising from this case particularly as to the extent to which the Sharjah Claim was necessary in order to preserve the precautionary attachment awarded in the Interim Relief Claim.

Legal basis for application

It is correct that under certain legislation, in particular, article 114(2) of Cabinet Decision No. 57 of 2018, within eight days following the issuance of a precautionary attachment order, an action must be filed before the competent court for substantive relief otherwise the precautionary attachment would be deemed void. However, article 22 of the Civil Procedure Law, which is the basis of the Interim Relief Claim, does not include any requirement for a substantive relief application to be filed.

An important point to note in this context is that the “competent court” is not defined in article 114(2), creating confusion as to whether a precautionary attachment can be preserved solely by commencing arbitration or whether a local court claim is necessary despite the arbitration agreement. Also article 114(2) does not set out what the substantive relief application must contain, and so it is unclear whether setting out the applicant’s intention to preserve the interim relief order and not seek substantive relief would be sufficient to meet the article 114(2) requirement.

Another point that is not addressed in the legislation is whether, once an action is filed, it can be stayed or discontinued in favour of arbitration. The approach taken by the English court to grant the anti-injunction suit to restrain the defendant from pursuing the Sharjah Claim was a sensible one. However, the employer’s request for the Sharjah Claim to be discontinued was denied. Interestingly, neither party had filed any evidence as to how the Sharjah proceedings, once filed, could be brought to an end and with what consequences.

Practical considerations

One significant issue in this case is that the contractor remained silent as to its intentions relating to the filing of the Sharjah Claim. Perhaps, with hindsight, had the contractor been clearer in its response to the employer on its rationale for filing the Sharjah Claim, the anti-suit injunction could have been avoided. The procedure for securing precautionary attachments in the UAE is less than clear and so, in order to avoid costly and potentially unnecessary legal proceedings, parties may want to set out their position clearly (and early) in correspondence.

 

 

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