Dubai Court of Cassation rules that unilateral arbitration agreements are not enforceable

In Case No. 735 of 2024 (Commercial), the Dubai Court of Cassation held that a unilateral arbitration agreement is not a valid and binding arbitration agreement under UAE law.

Background

A dispute arose between a contractor and subcontractor about payment under two subcontract agreements, which contained identical arbitration agreements.  In particular, they provided that if a dispute was not resolved by amicable settlement, it should be referred to either (a) arbitration at the Dubai Chamber of Commerce, or (b) the local courts of the UAE.  The choice of forum was to be decided by the contractor.

The subcontractor commenced a claim in the Dubai Court of First Instance seeking payment.  In response, the contractor argued that arbitration was the correct forum for the dispute.  However, the contractor's argument was rejected by the Court of First Instance.

The contractor then appealed to the Court of Appeal on the basis that the Dubai courts lacked jurisdiction due to the arbitration clause, as it gave the contractor the right to determine which forum should resolve any dispute between the parties.

The appeal was rejected, and the contractor then appealed to the Court of Cassation.

Court of Cassation's decision

The Court of Cassation also found in favour of the subcontractor and rejected the appeal.  It stated that, pursuant to UAE law, in order to be valid, an arbitration agreement must be clear and explicit, with no ambiguity or vagueness, and the agreement to arbitrate cannot be presumed or merely implicit.

As such, while acknowledging that the position is different in other jurisdictions, the Court of Cassation held that the unilateral arbitration agreement was not a valid arbitration agreement as it did not constitute a clear mutual agreement to resolve the dispute by arbitration, to the exclusion of the onshore UAE courts.  In addition, the court stated that since the dispute resolution clause prevented the subcontractor from referring a dispute for resolution until the contractor had decided on the forum, it created an unfair advantage for the contractor.

Comment

The Court of Cassation's judgment suggests that the Dubai courts (and potentially other UAE onshore courts) are likely to find that a unilateral arbitration clause is unenforceable.  However, unilateral arbitration clauses are frequently used by parties, particularly in certain industries, such as finance, where banks and lenders often look to include such options in their contracts.  This may allow simple debt claims to be brought in a court, potentially to save costs or to obtain summary judgment, with more complex or sensitive claims being dealt with in confidential arbitration.

Therefore, it is important that parties appreciate the risk of including such clauses in contracts where the UAE courts may have jurisdiction over the dispute.  This includes where a party commences a claim in the onshore UAE courts regardless of the governing law of the contract or the seat of any arbitration agreement, as in considering whether an arbitration agreement is valid, the onshore UAE courts will apply UAE law.

Given the Court of Cassation's decision, it is also unclear how an onshore UAE court would approach the enforcement of an arbitral award obtained pursuant to a unilateral jurisdiction clause.

On that basis, there is a clear risk that the onshore UAE courts may accept jurisdiction despite the existence of a unilateral arbitration agreement.  Where this risk may arise, parties should consider avoiding the inclusion of unilateral arbitration clauses.