DIFC: Severe Restriction for DIFC Enforcement

Nicholas Gould and Tatyana Tall, Partner and Paralegal, Fenwick Elliott

The Dubai International Financial Centre

Jurisdiction in Dubai comprises the local United Arab Emirates (UAE) or “local” courts and the Dubai International Financial Centre (DIFC) court or the “offshore” court. One of the principal differences between the two jurisdictions is the legal system. The local UAE courts use the civil law and its main arbitral institutions are the Dubai International Arbitration Centre (DIAC) and the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC). In contrast, DIFC has a common law system, and the DIFC–LCIA Arbitration Centre.  The DIFC Arbitration Law 2008 is based on the UNCITRAL Model on International Commercial Arbitration and has been referred to as a “Common Law island floating in a Civil Law sea”.1

The DIFC was launched under the United Arab Emirates (UAE) Federal Decree No. 35 of 2004 as part of Dubai’s strategic vision to diversify its economic resources and attract capital and investment in the region. The Federal Law No. 8 of 2004 authorised the creation of financial free zones within each Emirate, which are entirely free from, and independent of, the civil and commercial federal law of the UAE. Hence each Emirate has the ability to organise its financial free zone or several financial free zones empowered with its own legal and regulatory framework.

There are three independent bodies that have been established at the DIFC to enable and support the growth and development of businesses in the Centre: the DIFC Authority, the Dubai Financial Services Authority (“DFSA”) and the Dispute Resolution Authority (“DRA”).

a) The DIFC Authority was established by virtue of Dubai Law No. 9 of 2004, as amended. The DIFC Authority is responsible for overseeing the strategic development, operational management and planning of the DIFC and for the development and administration of laws and regulations other than those related to the financial services firms.

b) The DFSA was created under Dubai Law No. 9 of 2004. It is an independent regulator of financial and related services conducted in or from the Centre. The DFSA also supervises regulated companies and monitors their compliance with the applicable laws and regulations. The DFSA’s powers as a regulator are granted to it under the provisions of the Regulatory Law, DIFC Law No. 1 of 2004. The DFSA is authorised to make rules that enable it to respond swiftly to market developments and business needs.

c) Originally formed under Dubai Law No. 9 of 2004, the DIFC Court act as an independent administration of justice for resolving all civil and commercial legal matters. A new Dubai Law No. 7 of 2014 replaced the DIFC Judicial Authority with a new body known as the DRA. The DRA is comprised of three authorities: DIFC Court, which were established under Dubai Law No. 12 of 2004, the Arbitration Institute, and any other tribunals or ancillary bodies established in accordance with Article 8(5)(b) of this Law. The DRA’s mission is to be “a platform for delivering legal excellence in the Middle East and the gateway to a suite of services available to businesses operating in Dubai and beyond”.2 Interestingly, the DRA is helping to support the Dubai Plan 2021, Expo 2020 and UAE Vision 2021.

Conduit for DIFC Arbitral Awards

Between January and June 2016 the total number of enforcement cases before the DIFC courts grew by 194 per cent, from 17 to 50. The average claim value of enforcement cases also grew significantly from AED6 million in the first half of 2015 to AED31 million in 2016.

This substantial growth can be attributed to recent DIFC courts’ decisions where the DIFC Court has confirmed that DIFC law permits the court to be used as a so-called “conduit” jurisdiction for the enforcement of both foreign and domestic arbitral awards in local UAE courts, even in circumstances where the award debtor has no presence or assets in the DIFC itself.

While local UAE courts are slowly evolving into a more arbitration-friendly jurisdiction, the DIFC court still provide a more predictable and straightforward jurisdiction in which to recognise and enforce both foreign and domestic arbitral awards.

Under Article 5(A)(1)(e) of the Judicial Authority Law and Article 42(1) of the DIFC Arbitration Law, the DIFC Court has to recognise any foreign or domestic arbitration award. It is subject to the procedural requirements of Article 43 and the limited defences of Article 44 of the DIFC Arbitration Law. In addition, the DIFC Court is required under Article 42(1) of the DIFC Arbitration Law and Article 7 of the Judicial Authority Law to enforce any foreign or domestic arbitration award within the DIFC, subject again to Articles 43 and 44 of the DIFC Arbitration Law.

Also, when enforcing against award debtors based in mainland Dubai, domestic award creditors are now unlikely to be able to take advantage of the significantly more efficient and reliable enforcement regime available in the DIFC until the award has been finally ratified by the local UAE court (which is generally a time-consuming process).

The New York Convention and the UAE Civil Procedure Code

In some cases arbitral awards were enforced under the UAE Civil Procedure Code (“CPC”) using rules similar to the New York Convention. Since the UAE ratified the New York Convention by a federal decree on 13 June 2006, the provisions in the Convention for recognition of foreign awards have become mandatory laws in the UAE and override the provisions in the UAE CPC relating to enforcement of arbitral awards (Articles 235 and 236).

Nevertheless in the majority of cases foreign awards have been successfully enforced under the New York Convention. In a ruling of 18 August 2013 (Case No. 156/2013, ruling of the Dubai Court of Cassation), the Dubai Court of Cassation affirmed that both the Court of First Instance and the Court of Appeal (Case No. 40/2013, ruling of the Dubai Court of Appeal of 31st March 2013) were essentially correct in their refusal of enforcement where a foreign award was denied recognition on the basis of Article 235 of the UAE CPC (as the court considered it lacked jurisdiction as the Respondent was not domiciled or resident in the UAE – not a recognised challenge under the Convention). Therefore, some uncertainty remained as to the UAE’s application of the Convention.

The UAE’s CPC Article 216(1) sets out a variety of grounds for annulment of an arbitration award. The UAE may annul an arbitral award if:

a) it is given without an agreement to arbitrate or is based on an invalid agreement to arbitrate;

b) it is void because a time limit has been exceeded;

c) the arbitral tribunal has exceeded the limits of the agreement to arbitrate (i.e. they had no jurisdiction in respect of all or some of the matter decided);

d) it has been given by arbitrators not appointed according to the law;

e) it is given by some member of the arbitral tribunal without them being so empowered in the absence of the others;

f) it is purportedly given under an agreement to arbitrate in which the subject of the dispute is not stated;

g) the agreement is made by someone not competent to agree to arbitration (this point frequently gives rise to issues concerning the terms of a power of attorney used to sign documents, or the authority of a signatory to the agreement to arbitrate or terms of reference);

h) it is given by an arbitrator who does not fill the legal requirement of the role; or

i) there is some breach in the procedures leading to the award.

Some of the issues above have been dealt with in subsequent judgments, but the approach adopted still lacks consistency. The Dubai Court of Cassation made it clear that a review of the merits of the award is not permitted, and the domestic UAE Court should resist interfering with any assessment of the substance of the award (Dubai Cassation No.486/2008, 30 October 2008).

Back to the procedure adopted by the DIFC, the international community welcomed the DIFC court procedure as it provides consistency or, at least, that is what many thought. 

The Decree

There has been much discussion about the use of the DIFC Court as a conduit jurisdiction following the line of decisions in Banyan Tree v Meydan Group LLC, DNB Bank ASA v Gulf Eyadah, and Oger Dubai LLC v Daman Real Estate Capital Partners Ltd after the formation of the “Judicial Tribunal for the Dubai Courts and the DIFC Courts” created by Decree No.19/2016 (the “Decree”).

Article 1 of the Decree provides for the establishment of a Judicial Committee (“the Committee”) comprised of seven members: three judges from the DIFC Courts, three judges from the Dubai Courts and the Secretary General of Dubai’s Judicial Council, with the President of the Dubai Court of Cassation (one of the three Dubai Court judges).  All of them have a casting vote. The main role of the Committee is to consider conflicts of jurisdiction between the DIFC Court and the local Arabic language Dubai Court. 

The Judicial Committee hands down its first decision

The power of the DIFC Court to act as a “conduit” jurisdiction may have been severely restricted by the first decision in Daman Real Partners LLC v Oger Dubai LLC, Courts of Cassation No. 1/2016 (JT). Under DIFC law, the grounds on which the DIFC Court can refuse to recognise and enforce either a foreign or domestic arbitral award are more limited than is the case in local Arabic courts.

It seems it is no longer possible to rely on an objectively assessed enforcement of arbitral awards by virtue of the conduit of the DIFC simply enforcing within the DIFC and subject to their own jurisdiction. In the Daman case there were already related proceedings taking place in the local court. As a result the Judicial Tribunal held that there was a conflict of jurisdiction, and that only one of the courts should determine to annul or recognise the arbitral award. The majority of the Judicial Tribunal ordered that the case be remitted to the Dubai Court. This was despite the fact that all three of the DIFC court judges sitting on the Judicial Tribunal objected.

In a dissenting opinion published by the Tribunal, the judges stated that while the DIFC Court respects the fact that the court with competence to annul an arbitration award rendered onshore in Dubai is the Dubai Court, the DIFC Courts hold exclusive jurisdiction to hear applications to enforce those arbitral awards within the offshore DIFC.

Practical implication

On the one hand, perhaps the Judicial Committee will only intervene where there are pre-existing proceedings already in the local court. On the other hand, it was suggested that this approach simply speaks to frustrate the DIFC’s jurisdiction to enforce an award made within its jurisdiction. Surely, the DIFC should be able to enforce the arbitral award while the local court then deals with and concludes the local court proceedings. In the case of Daman, jurisdiction has now simply passed entirely to the local court. Time alone will tell if this is going to be the trend for the future. In the meantime the ability to be confident of enforcements from the DIFIC has been severely curtailed. Clearly any local court issue could be commenced by a responding party in order to frustrate an otherwise straightforward enforcement.

Originally, the introduction of the Decree was supposed to help to regulate the position between the DIFC Court and the Dubai Courts. Whilst the main purpose is still the same, practitioners are now concerned about the decision in Daman as it encourages other award debtors to employ similar tactics to thwart enforcement of arbitral awards in the DIFC Court.

Given the potential implication for the DIFC’s much expressed position as a conduit jurisdiction, practitioners and parties alike will monitor closely further decisions of the Judicial Tribunal.

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• 1. “The Courts of the Dubai International Finance Centre — A Common Law island in a Civil Law ocean”, 01/11/2008 , Judges' Addresses (http://difccourts.ae/the-courts-of-the-dubai-international-finance-centr...)
• 2. http://www.dra.ae/