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The first arbitration-related cases of the ADGM courts (Part 1): [2019] ADGMCFI 0004

As the readers of this blog will be aware, the Abu Dhabi Global Market (ADGM) is a judicial free zone in the heart of the emirate of Abu Dhabi. It administers its own system of common law courts, the ADGM courts, which are competent to hear arbitration-related actions brought before them in their capacity as curial or enforcement courts under the 2015 ADGM Arbitration Regulations. The ADGM Arbitration Regulations apply as the procedural law to arbitrations seated in the ADGM or to actions for enforcement of arbitral awards (whether domestic or foreign) before the ADGM courts. Being common law courts, the ADGM courts source their judiciary from common law jurisdictions, including in particular the UK.

Earlier this year, the ADGM courts rendered two of their first arbitration-related rulings, one dealing with the enforceability of an ADGM arbitration agreement (A3 v B3 [2019] ADGMCFI 0004 (4 July 2019)), the other one dealing with the enforcement of a foreign LCIA award under the New York Convention (A4 v B4 [2019] ADGMCFI 0007 (8 October 2019)). I will discuss each one of these in a sequence of two blogs. This Part 1 discusses the first ruling, highlighting the important contribution it makes to arbitration in the ADGM.

In A3 v B3, Justice Sir Andrew Smith was asked to consider a claim for a declaration that a lease arrangement between A3 and B3 for a property in Al Maryah Island, Abu Dhabi, (the lease) contained a valid and binding arbitration agreement providing for arbitration under the Rules of Arbitration of the International Chamber of Commerce (ICC) International Court of Arbitration (ICC Rules) with the seat in the ADGM (the arbitration agreement). The question that arose more specifically was whether A3 benefited from a unilateral option to amend the underlying terms of arbitration and whether the exercise of that option by A3 resulted in the arbitration agreement.

By way of background, the lease was governed by ADGM laws and contained an arbitration clause according to which, apart from providing other procedural detail on the anticipated arbitration process (such as on the formation of the tribunal, with default appointments by the Director General of Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC), the confidentiality of the proceedings, and so on), failing amicable settlement between the parties, a dispute arising from the lease was to be finally settled by reference to the Arbitration Regulations of the ADCCAC (ADCCAC Regulations) with the seat in Abu Dhabi (the arbitration clause). Importantly, within the terms of the arbitration clause, A3 and B3 further agreed that:

“… should the Abu Dhabi Global Market establish an arbitration centre, in advance of the formal commencement of any relevant proceedings, [A3] may notify [B3] that the arbitration provisions set out in [the arbitration clause] shall be replaced by reasonable alternative provisions in order to provide for jurisdiction by such newly established centre within Abu Dhabi Global Market and B3 shall sign such documentation as may reasonably be required by [A3] to give effect to such alternative.”

By notice of late 2018 (the notice), A3 sought to exercise its unilateral option under the arbitration clause, (i) informing B3 that the ADGM Arbitration Centre (ADGMAC) had been established and started operations in the ADGM from 17 October 2018 and (ii) introducing the following amendments to the arbitration clause: any dispute between the parties to be finally settled by arbitration under the ICC Rules with the seat in the ADGM, default-appointments care of the ICC International Court of Arbitration. The notice requested B3 to confirm agreement to the proposed terms by returning a countersigned copy. B3 did not reply, nor did it raise any objections to the notice.

In December 2019, A3 commenced arbitration under the ICC Rules, seeking a declaration of the valid termination of the lease and monetary relief. B3 remained silent. In further course, by virtue of its powers under Article 6(4) of the ICC Rules, the ICC court decided that the arbitration should not proceed, without (as is common in these cases) providing reasons. Importantly, Article 6(6) of the ICC Rules empowers a party to ask a court having jurisdiction whether there is a binding arbitration agreement in the event that the ICC court decides against an arbitration to proceed under Article 6(4).

Smith J found the ADGMCFI competent to hear the case on the basis that the question of the enforceability of the arbitration agreement was “a civil or commercial case or dispute involving the Abu Dhabi Global Market” (paragraph 15). Given B3’s silence throughout the proceedings, Smith J addressed the following questions in order then to conclude in favour of the validity and enforceability of the arbitration agreement:

  • Legal effect of arbitration clause. Based on English case law precedent, Smith J found that a simple reference to arbitration is sufficiently certain to give an arbitration agreement legal effect. The wording of the arbitration clause was sufficient to refer any dispute arising from the lease to arbitration.
  • Unilateral option under the arbitration clause. Smith J found that “[t]here can be no doubt that arbitration options are recognised by the English common law (which, of course, applies and has legal force in, and forms part of the law of, the Abu Dhabi Global Market)” (paragraph 19). Even if the arbitration clause imported a unilateral element into the arbitration agreement “and in that sense an element of imbalance into the dispute resolution provisions, […] the notion, once current, that mutuality is a requirement of a valid arbitration agreement was rejected by the English Court of Appeal in Pittalis v Sherrefettin, [1988] 2 All ER 227” (paragraph 19, underlining in the original). According to Smith J, the wording of the arbitration agreement complied with the requirements of objective reasonableness in providing acceptable amendments by reference to ADGM arbitration:

    “I consider that the replacement provisions satisfy the requirement of reasonableness. They serve the commercial purpose of the clause: in general terms, they were designed to provide for arbitration in the only arbitral centre or institution that has been established in the Abu Dhabi Global Market, a centre that is a highly reputable [sic] and was established in conjunction with the ICC opening a representative office in the Abu Dhabi Global Market.

    All of the individual charges [sic] served this purpose and were properly incidental to it. I recognise that the alternative provisions that A3 required by the letter of 25 November 2018 not only provided for arbitration through the newly established arbitration centre, but also provided for the seat or legal place of the arbitration to be Abu Dhabi Global Market rather than Abu Dhabi. This change was not necessary in order to have arbitration by the new centre, but in my judgment it was reasonably incidental to the other changes, and within the scope of the power of A3 to require reasonable alternative provisions.” (Paragraphs 24-25.)

  • In addition, Smith J found that the condition precedent for exercising the unilateral option of the arbitration clause was met:

    “I consider it clear that the notion of an arbitral centre does not refer to a physical or geographical location, but an institution: this interpretation is dictated both by commercial sense and by the wording of the clause, which refers to ‘alternative provisions in order to provide for jurisdiction by such newly established centre’ (emphasis added), not ‘at such newly established centre’. The evidence before me makes clear that before 9 December 2018, on 17 October 2018, the Abu Dhabi Global Market Arbitration Centre was opened with the ICC operating a representative office there. I see no possible argument that the condition precedent for the exercise of the option was not satisfied.” (Paragraph 21.)

  • According to Smith J, despite B3 not having signed the amendments to the arbitration clause, the arbitration agreement remained effective as B3 was in breach of the arbitration clause by failing to provide sign-off and should as such not be allowed to benefit from its own breach (see Alghussein Establishment v Eton College [1988] 1 WLR 587).
  • Smith J found that the option was exercised in writing and that the arbitration agreement was in writing “whether the writing be only the Lease or the Lease and the [Notice] taken together” in accordance with Article 13 of the 2015 ADGM Arbitration Regulations (paragraph 27).

Even though the ADGMCFI’s ruling is well-reasoned overall, it gives rise to three main concerns:

  • A conflict of jurisdiction. Albeit arguable that the ADGMCFI was properly seized in the prevailing circumstances and that by virtue of the area of free movement with respect to judicial instruments between the ADGM and the Abu Dhabi courts (established by the Memorandum of Understanding between the Abu Dhabi Judicial Department and the ADGM Courts concerning the Reciprocal Enforcement of Judgments, dated 11 February 2018), the ADGMCFI’s order for enforcement of the arbitration agreement binds the onshore Abu Dhabi courts, these latter would likely have had parallel jurisdiction to hear the action on the basis of the arbitration clause providing for arbitration seated in onshore Abu Dhabi (the Abu Dhabi courts exercising their curial competence under the 2018 UAE Federal Arbitration Law) and would most probably have found differently from the ADGMCFI.
  • Misqualification of the ADGMAC and ICC. Smith J’s findings depart from the premise that the ADGMAC qualifies as an arbitration centre that is capable of meeting the requirements of the arbitration clause, which is open to unilateral amendment to reflect the establishment of an ADGM-based arbitration centre which may have “jurisdiction” over the dispute between the parties. In Smith J’s own analysis, this wording of the arbitration clause suggests that the parties contemplated the operation of A3’s unilateral option to amend only for shifting the proper forum of an arbitration to a genuine arbitration institution with powers to administer the arbitration process by reference to its own rules. The ADGMAC is no such arbitration institution, but only an arbitration logistics provider, offering a venue (not a forum) and state of the art hearing facilities for arbitrations seated in the ADGM or elsewhere. The ADGMAC does not dispense a set of institutional rules of its own and as such does not administer arbitral proceedings. As a result, it is arguable that:
    • the arbitration agreement was invalid and as such unenforceable, any unilateral amendments to the arbitration clause depending on the establishment of a proper arbitration institution in the aforementioned terms as a condition precedent; and that
    • the original arbitration obligation under the lease providing for ADCCAC arbitration with the seat in Abu Dhabi remained enforceable. This concern is not fully addressed by the presence of the ICC with offices at the ADGMAC, as even the ICC only operates a representative office in the ADGM and does not operate as an arbitration institution in its own right.
  • Unilateral arbitration clauses. Even though unilateral arbitration options might well be enforceable under English common law, the procedural imbalance they create question their enforceability under UAE law. More specifically, there is reason to believe that the mutuality of arbitration agreements might qualify as public policy under UAE law (especially given the characterisation of arbitration as an exceptional means of dispute resolution in derogation from the fundamental right to go to court) and as such would also bind the ADGM Courts (which form part of the UAE family of courts and are as such subject to UAE public policy). On this premise, Smith J should have been prompted to find (or at least examined whether) the unilateral option under the arbitration clause and hence the arbitration agreement (might have been) invalid and as such unenforceable.

To be continued…

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