Beware – authority (or maybe not) to arbitrate!

Introduction

In a recent case, in circumstances where the contractual agreement itself was valid, the Dubai Court of Cassation held that the separate agreement to arbitrate contained in that agreement was invalid on the basis that the signatory, although authorised to enter into the agreement, was not specifically authorised to bind the entity to arbitration. It is trite law that the agreement to arbitrate is a separate agreement to the agreement in which it is contained.

Relevant Laws

Federal Companies Law

Under article 154¹  of the New UAE Companies Law (Federal Law 2 of 2015) (Federal Companies Law) the directors of a public joint stock company may not enter into arbitration agreements unless specifically authorised to do so under the company’s articles of association or a special shareholders resolution (unless an agreement to arbitrate is a matter which falls squarely within the objectives of the company).

In a recent decision, the Court of Cassation appears to have applied these strict requirements to a JAFZA offshore entity. The JAFZA Offshore Companies Regulations (2018 and 2003) (JAFZA Regulations) make no reference as to whether specific authority is required to enter into arbitration agreements. It is noted however that in contrast to the laws of several free zones within the UAE, there is no provision in the JAFZA Regulations which expressly disapplies the provisions of the Federal Companies Law and therefore it has been a grey area as to whether the strict requirements regarding authority to arbitration as set out article 154 applies to JAFZA entities.

Federal Civil Procedures Law

Article 58(2)²  of the Federal Civil Procedures Law (Federal Law 11 of 1992) (Federal Civil Procedures Law), which provides a general restriction that the power to agree to arbitration cannot be delegated to others without a special authority to that effect, is also relevant. Practitioners have often relied on this provision to support the view that written special authority to arbitrate is required by signatories to agreements which contain an arbitration agreement. Such reliance may be misplaced as the Dubai and Abu Dhabi Courts of Cassation have in several instances confirmed that this provision only applies to the authority of an attorney to represent parties in Court. It does not impose any particular requirements for an agent to be authorised to agree to arbitration on behalf of a company.

Federal Arbitration Law

Finally, article 4 of the New UAE Arbitration Law (Federal Law 6 of 2018) (Federal Arbitration Law) states that “an Arbitration Agreement may only be concluded by a physical person who has the legal capacity to act or by the representative of the juristic person authorised to conclude the Arbitration Agreement, or otherwise the Agreement shall be null and void.”

Facts

The relevant contract (Contract) contained a DIFC-LCIA, DIFC seated arbitration clause (Arbitration Agreement). The governing law of the Contract was that of England and Wales. Contrary to the agreed dispute resolution mechanism, Party A, a JAFZA offshore entity, commenced proceedings against Party B, a Cayman Islands entity, in the Dubai Courts (in circumstances where Party B had already taken steps in accordance with the Contract to commence arbitration proceeding in the DIFC-LCIA and had obtained an interim injunction in support of arbitration in the DIFC Courts against Party A).

The Dubai Court of First Instance accepted jurisdiction, finding that the Arbitration Agreement was invalid on the basis that the signatory to the Contract was not specifically authorised to agree to arbitrate as a matter of UAE Law. This decision was subsequently reversed by the Court of Appeal.

However, on appeal, the Court of Cassation found, contrary to the principles of apparent authority, that the Arbitration Agreement was invalid and therefore the Dubai Courts had jurisdiction. In reaching the decision the Court of Cassation found that, whilst authorisation had been issued to the signatory to the Contract (being one of two directors) to carry out all of the affairs of Party A and to sign and execute all business matters, this authorisation did not specifically and expressly authorise the signatory to enter into the separate agreement in the Contract to arbitrate. Accordingly it was invalid.

Whilst the Court of Cassation’s decision does not set out a detailed reasoned basis for its findings it appears to have applied provisions (as set out above) of the Federal Companies Law, the Federal Civil Procedures Law and the Federal Arbitration Law in reaching its decision.

Key points to note

• In reaching its decision, the Court of Cassation disregarded the governing law of the Contract and the law of the seat of the arbitration. The issue of the applicable law is significant because the Court of Cassation applied UAE law (and it is arguable whether it did so correctly) and did not consider the doctrine of apparent authority which would be applied under English law (the law of the Contract) and DIFC law (the law of the seat).

• The Court of Cassation disregarded the principles set out in its own recent case law. Having said this it is noted that the UAE is a civil law jurisdiction and, as such, there is no general system of binding judicial precedent applied by the onshore Courts to the interpretation of UAE law. As practitioners will be aware, in a sequence of recent rulings starting in 2015, the Dubai Courts confirmed that the doctrine of apparent authority may, in certain instances, apply to the formation of arbitration agreements. For instance:

• In Case No. 547/2014, the Dubai Court of Cassation held that:

“This Court has also decided that if a specific company’s name was listed in the preamble or introduction of a contract and was signed by another person at the foot of the page, a presumption is established that the signatory has signed the contract in the name of and on behalf of the company.”

This decision has been subsequently applied by the DIFC Court.

• In Case No 386/2015, the Dubai Court of Cassation held that:

“If the name of the legal person is only mentioned in the agreement without the name and capacity of its legal person, and the agreement is illegibly signed and if such agreement includes the arbitration clause, this shall constitute a crucial pretext affirming that the natural person who signed the agreement is the representative of such legal person and has the competency to act and agree to arbitration.”

• The Court of Cassation disregarded the DIFC-LCIA Arbitration Rules. The parties agreed that the arbitration would be governed by the Rules of the DIFC-LCIA. Article 23.1 of those rules provides that the Arbitral Tribunal has the power to rule upon its own jurisdiction and authority, including any objection to the initial or continuing existence, validity, effectiveness or scope of the Arbitration Agreement.

• The decision by the Court of Cassation appears to be in breach of the UAE’s obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (Convention). Article II.1 of the Convention requires Contracting States to recognise arbitration agreements. Article II.3 provides that the Courts of a Contracting State, when seized of an action where the parties have made an arbitration agreement, shall, at the request of one of the parties, refer the parties to arbitration unless it finds the agreement is null and void, inoperative or incapable of being performed.

Warning – take heed

To summarise, whilst DIFC seated arbitrations are governed by the DIFC Arbitration Law, the determination as to whether the arbitration provision has been properly authorised by a UAE party may yet be subject to review by the UAE courts applying UAE law.

In this regard, UAE law effectively views an arbitration agreement as a separate agreement that needs to be specifically authorised in a particular way – i.e., authorisation of the agreement itself is a separate question from authorisation of the arbitration provision/agreement within such agreement.

In respect of the manner of authorisation, it can be undertaken in one of two ways: (1) by the shareholders of the UAE company or (2) by the board of the UAE company but only in the case of express authorisation by the shareholders in the memorandum and articles of association of the UAE company: a general authority without explicit mention of arbitration is insufficient. As such, absent such explicit authorisation in the memorandum and articles of association, the shareholders of the UAE company must expressly, in writing, authorise the entry into the arbitration agreement.