Choices, Choices! Courts or Arbitration in the UAE?

You are on the cusp of closing a successful transaction. All that is left is to put pen to paper (or finger to keyboard) and draft the agreement. At times like these, the focus is often on the commercial aspects of the transaction, such as the payment terms or consequences of breach. Extra effort and thought is put into crafting the perfect clause. Other clauses, those dealing with governing law and jurisdiction for example, do not receive the same attention and are lifted from template agreements. While the commercial clauses are important, attention should be given to these other clauses, which are often dismissed as mere boilerplate clauses.

This article focuses on the jurisdiction clause. A jurisdiction clause determines in which forum the parties must file a case. Typically, parties opt for either courts or arbitration. This prompts the question, which forum is most appropriate and why? In this article, we shall focus on the Dubai International Financial Centre (DIFC) courts versus the Dubai International Arbitration Centre (DIAC), particularly in light of recent amendments.

Before finalising the jurisdiction clause, a party needs to ask the following:

To initiate a claim, a party needs to pay fees. The quantum of fees varies between courts and arbitral institutions. Before the DIFC courts, the initial financial burden falls on the claimant, which is responsible for paying court fees. If successful, however, the claimant can recover these fees from the defendant as part of the costs awarded to it.

At the DIAC, the registering fee is paid by the claimant when filing the request for arbitration. Subsequent expenses, such as the tribunal’s fees and other administrative fees, are borne equally by both parties. There is a significant reduction in the financial burden of a claimant. Recent amendments to the DIAC Arbitration Rules in 2022 also enable the winning party to claim the legal costs from the unsuccessful party.

The amount of time to complete a DIFC claim or a DIAC arbitration is not straightforward to predict and varies depending on the number of interim applications and witnesses, and the amount of evidence filed.

For DIFC claims, a claim will take anywhere between eight months to two years. The rules provides timelines for filing pleadings, documents or witness statements.

Before the DIAC, the procedure is decided by the tribunal, in consultation with the parties. Therefore, there is more flexibility in an arbitration to file evidence and conduct the trial.

A recent amendment to DIAC procedural rules provides an option for expedited proceedings. Here, the tribunal restricts the evidence filed, and must issue an award within three months from the file being transferred from the DIAC centre to the tribunal. This option reduces the costs of and time taken in arbitration. However, expedited proceedings will only be allowed under certain circumstances; for example, if parties agreed to expedited proceedings in their agreement. Therefore, adding a provision for expedited procedures (if DIAC arbitration is chosen as the jurisdiction) is a practical option.

The DIFC courts do not conduct expedited procedures. If the defendant fails to appear, a claimant can file for default judgment, which is issued within two months. Another option is to file for immediate judgment. However, the burden of proof is very high and it takes around three months to decide.

A DIFC court’s judgment, or a tribunal’s award can be challenged. The grounds of challenge and the procedure vary.

Before the DIFC courts, a party intending to appeal must first seek permission from the Court of First Instance. To succeed in the permission for appeal, the party must prove that the judge was wrong on a matter of law or finding of fact, or there was procedural injustice. If permission to appeal is granted, the appeal is transferred to the Court of Appeal. The decision of the Court of Appeal is final and binding on the parties. There is only one level of appeal in DIFC courts, but the grounds are much wider.

A DIAC award can be challenged before the relevant court. The grounds for challenge are the improper execution of the arbitration agreement, the defendant not being able to present their defence, or the tribunal applying incorrect law or deciding on matters not within the scope of the agreement. The decision of the relevant court is binding; however, there is an option for parties to file a further appeal before the Court of Cassation. Before DIAC, there are two levels of appeal, but the grounds are restricted.

The most important step for each party – after the case – is enforcement. No party wants to have a mere paper decree, where they get a favourable but unenforceable decision. DIFC claims and DIAC arbitrations both culminate in enforcement, but the process differs between the two judicial institutions.

To enforce a judgment before a DIFC court, a party can file an enforcement proceeding and the execution court will pass appropriate orders against the unsuccessful party.

To enforce a DIAC award, it has to be recognised and ratified before a court. This is one step before filing for enforcement. Once the award is ratified, it will be treated akin to a court judgment, and a party can file for its enforcement.

The DIFC courts and the tribunals, have the power to pass interim orders in a claim. However, an interim order is meaningless until it is enforced. For the DIFC Courts, the process of enforcement is similar to a final judgment – ie, to file an application for enforcement.

However, for an interim order from a tribunal, it would need to first be recognised. The DIFC courts have recently recognised interim orders, irrespective of the seat of the arbitration. Previously, an interim order could be recognised by the DIFC courts only if the seat were the DIFC.

Most parties will try and settle their disputes before opting for courts or arbitration. The DIFC courts and the DIAC have encouraged the use of alternative dispute resolution methods such as mediation.

The DIAC Mediation Rules 2023, which came into force in October 2023, provide a robust procedure to conduct mediation for parties before filing an arbitration. The mediation process has set timelines so that it does not proceed indefinitely. Furthermore, the arbitration court appoints the mediator.

The DIFC court will stay proceedings where the parties wish to mediate. However, there is no standard procedure under the DIFC rules for mediation. Parties are free to adopt their own procedures. The DIFC courts do not appoint a mediator.

In view of the above it is beneficial for parties to spend time drafting a robust jurisdiction clause instead of accepting a template clause and running the risk of a jurisdictional challenge. A jurisdiction clause can also be tailored to each transaction. For example, for a debt recovery where the debtor is likely to abscond, the jurisdiction clause can give the option of approaching any other court. This provides flexibility for a claimant to choose a forum closest to the debtor.

Sometimes, jurisdictional clauses provide for both arbitration as well as courts as the jurisdiction. These types of clauses spell trouble for a party initiating a claim, as they raise a myriad of jurisdictional issues, which will only delay the relief.

It is important to pay attention to these clauses as failing to do so can lead to repercussions in the event of a dispute. As the adage goes, “a stitch in time, saves nine”. This is very true for jurisdiction clauses. It is always advisable to engage a lawyer to draft an agreement or to review an agreement before signing.