The judgment of the Abu Dhabi Court of Cassation impacts the applicability of the principle of freedom of contract and provides lessons to contracting parties who are subject to an arbitration agreement and who may wish to challenge any judicial proceedings relating to a contractual dispute. We consider this judgment and its impact below.
The facts of the case were as follows:
- The main contractor for two projects subcontracted the construction works pursuant to two subcontracts in 2014.
- The subcontractor’s representative executed the two subcontracts pursuant to a power of attorney from 2012. The power of attorney did not grant the subcontractor’s representative the express authority to agree, on behalf of the subcontractor, to arbitration as a dispute resolution mechanism, as required by Article 58(2) of the UAE Civil Procedures Law.
- The subcontractor completed the works in 2017, however remained unpaid by the contractor for the completion of the works.
- The subcontractor executed another power of attorney in 2018 after the works were completed which authorised the subcontractor’s representative to agree, on behalf of the subcontractor, to arbitration as a dispute resolution mechanism.
- The subcontractor filed a case in the Abu Dhabi Court of First Instance in 2019 against the main contractor for the unpaid amounts of AED 75 million.
- The contractor challenged the court’s jurisdiction to hear the case on the grounds that the underlying contract between the parties was subject to an arbitration agreement.
- The court nonetheless appointed an engineering expert to further consider the case.
- The parties engaged in the expert procedures for a “long period of time”, during which they reached an agreement on several detailed matters of expertise, and on the specific entitlements of the subcontractor. In addition, the contractor conducted research on the subject matter of the case.
- The court held in February 2020 that, as the underlying contract was subject to an arbitration agreement, it had no jurisdiction over the dispute.
- The subcontractor appealed the judgment to the Abu Dhabi Appeals Court. The Appeals Court upheld the ruling of the Court of First Instance in June 2020. The subcontractor subsequently filed an appeal before the Court of Cassation, where its application was accepted and heard.
Judgment of the Court of Cassation
The Court of Cassation overturned the decision of the Appeals Court, and found that the courts had the jurisdiction to hear and rule on the case for two reasons:
- The subcontractor’s signatory to the underlying contract did not have the authority, under the 2018 power to attorney to bind the subcontractor to the arbitration agreements in the subcontracts. Although the power of attorney granted in 2018 authorised the subcontractor’s representative to agree to arbitration as a dispute resolution mechanism, the court disagreed with the Court of Appeal, which had held that the 2018 power of attorney was a subsequent ratification of the arbitration agreements under the subcontracts. The Court of Cassation instead held that such power of attorney was applicable only to new contracts and not to the subcontracts as it was granted subsequent to the completion of the works in 2017.
- The contractor had waived its right to challenge the jurisdiction of the courts as a result of the extent of its substantive engagement with the court and expert procedures, as well as deliberations on the merits of the dispute.
The judgment of the Court of Cassation raises a number of key issues.
- The Courts of the UAE still consider an individual’s lack of authority to sign an arbitration agreement as a good ground to invalidate the same. This approach has been adopted previously by some UAE Courts and has been criticised by the international arbitration community. There is no system of binding precedent in the UAE Court system, but nevertheless, decisions of higher courts are persuasive, and this decision should be carefully heeded by the UAE arbitration community, which has otherwise seen positive developments in recent years, including the Federal Arbitration Law of 2018.
- Even where a party challenges the validity of the jurisdiction of the court at the outset of a matter, any subsequent engagement with the merits and/or process risks waiving the right to make that challenge. Depending on the extent of their engagement with any UAE court proceedings relating to the subject matter of the underlying contract or the counterparty during those proceedings, there is a risk that a party could be deemed as having waived their right to contest the jurisdiction of the courts in relation to the relevant dispute.
- There is clearly a balance to be struck as to the level of engagement in any court proceedings even where a valid arbitration agreement appears to exist. While parties should not be penalised for cooperating with each other to narrow the issues in dispute, there are risks in doing so, particularly if the existence of the arbitration agreement is not promptly raised with the court, but even if (like here) it is promptly raised, the arbitration agreement is only as valid as the authority of the person who entered into it. It is hoped that future court decisions will clarify the thresholds required to establish judicial jurisdiction over a dispute, where arbitration is (at least on the face of the relevant contract) the agreed dispute resolution mechanism.
For more information, please contact Nick Oury, Partner, Benjamin Hopps, Of Counsel, or your usual Herbert Smith Freehills contact.