DIFC Arbitration Law amended to ensure compliance with the New York Convention

On 15 December 2013, the Dubai International Financial Centre (DIFC) Authority enacted Law No.6 of 2013 (Arbitration Amendment Law) which amended the DIFC Arbitration Law to make it clear that the DIFC Courts have the power to stay court proceedings in favour of a foreign seated arbitration.   This is a welcome development and brings clarity to an area of DIFC law where there was arguably an inconsistency with the UAE's obligations under the New York Convention.

 The UAE has been a signatory to the New York Convention since 2006.  The DIFC is a separate jurisdiction under the UAE constitution and its laws are modelled on international standards and principles of common law.  Pursuant to the law establishing the DIFC, the DIFC is bound by all international conventions ratified by the UAE.[1]  Moreover, the DIFC passed its own Arbitration Law in September 2008 which is based largely on the UNCITRAL Model Law.[2]       

However, there was previously a small (but significant) inconsistency between the New York Convention and the DIFC Arbitration Law.  In particular:  

• Article II(3) of the New York Convention provides that the court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement to arbitrate, shall refer that matter to arbitration unless it finds that the arbitration agreement is null, void, inoperative or incapable of being performed. 
• However, Article 13(1) of the DIFC Arbitration Law, which empowered the DIFC Courts to stay arbitration proceedings in favour of an arbitration agreement, was expressed in the DIFC Arbitration Law to apply only in relation to arbitrations seated in the DIFC.

 This inconsistency was highlighted by two first instance decisions in 2012: 

• In May 2012, in Injazat Capital Limited v Denton Wilde Sapte,[3] the DIFC Court (Justice David Steel) refused to stay an action before the DIFC Court despite the contract providing for disputes to be referred to LCIA arbitration in London.  The Court held that pursuant to Article 13(1) of the Arbitration Law the DIFC Courts only had power to dismiss or stay proceedings in favour of arbitration where the seat of arbitration was the DIFC.  Interestingly, the judgment noted that "an interpretation of the DIFC Arbitration Law which prohibited the DIFC Court from staying court proceedings brought in breach of a non-DIFC arbitration agreement would thwart the promotion of the DIFC as a jurisdiction supportive of arbitration."  Nonetheless, the Court refused to exercise any residual discretion to apply a stay and concluded that the legislation was sufficiently "detailed and precise" to preclude the exercise of the Court's discretion.  A link to the HSF blog covering the decision is here. 
• However, less than six months later in IES v Al Fattan Engineering[4] the DIFC Court (Justice David Williams) considered the issue of Article 13(1) of the Arbitration Law again.  This time, while noting that Article 13(1) did not provide for a stay of court proceedings in favour of a non-DIFC seated arbitration, the Court confirmed that the DIFC Court may use its inherent discretion to stay proceedings in favour of non-DIFC arbitrations.  A link to the HSF blog covering the decision is here.   

The IES decision was welcomed by the arbitration community in the DIFC and appeared to confirm the position that the DIFC Courts would exercise its discretion to stay DIFC Court proceedings in favour of foreign seated arbitrations.  Nonetheless, notwithstanding the IES decision there was still the inconsistency between Article 13(1) of the Arbitration Law and Article II(3) of the New York Convention.  In addition, the IES decision did not overrule the decision in Injazat and there were instead two conflicting first instance decisions on the issue, albeit the later decision seemed to be viewed by pro arbitration commentators as the preferable approach.  

However, any uncertainty has been conclusively resolved by the Arbitration Amendment Law which now expressly provides that Article 13(1) will apply where the seat of arbitration is outside of the DIFC and also where no seat has been determined (a link to the Amendment Law is here: DIFC_Arbitration_Law_2008_Amendment_Law 20131).  This quick response should be welcomed and is consistent with the DIFC's position as a jurisdiction that is supportive of arbitration.

For more information, please contact Stuart Paterson, Partner, or Mike McClure, Senior Associate, or your usual Herbert Smith Freehills contact.