Contracting with governments: pitfalls, arbitration, sovereign immunity and enforcement

Entering into a contract with an entity owned or controlled by the state poses unique challenges not faced when dealing with a private commercial counterparty. Parties should be aware of certain distinctive features of negotiating with a state entity from the start of any commercial relationship. It is particularly important for parties to consider these implications when conducting business in the Middle East given that:

i. state entities play a major role in the procurement of major projects, particularly in GCC countries; and

ii. the reconstruction of infrastructure and the development of natural resources in countries such as Iraq require significant foreign investment in the form of contracts with state-owned entities.

Determining whether or not a commercial party is dealing with a state entity is not always a straightforward process in the Middle East. As such, parties should take extra care and consider the following factors at the outset:

a) the capacity of the entity to enter into an arbitration agreement;

b) the ability of the state in question to raise a defence of sovereign immunity in the future; and

c) the investment treaty protections that a company may be able to utilise.

In this article, we set out the key factors that parties should consider when negotiating with a state entity in order to maximise the protections available should a dispute arise at a later point.

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First insight – the new UAE Federal Arbitration Law and the future for UAE arbitration

On 3 May 2018, HH Sheikh Khalifa bin Zayed Al Nahyan, the President of the United Arab Emirates, issued Federal Law No. 6 of 2018 promulgating the country’s much anticipated new Federal Arbitration Law (the “New Law“). The New Law, which is heavily based on the UNCITRAL Model Law on International Commercial Arbitration, will replace and supersede Articles 203 to 218 of the Civil Procedures Code (Federal Law No. 11 of 1992 (as amended)) which currently govern arbitrations seated onshore in the UAE (the “Civil Procedure Code“).  The New Law applies to any arbitration conducted in the UAE, unless the parties have agreed that another law should apply, (Article 2) and to ongoing arbitration proceedings, even if the arbitration agreement was concluded before the Law came into effect (Article 59).

The New Law will take affect one month after its date of publication in the Official Gazette.  This article highlights some of the most significant developments and identifies key similarities and differences between the New Law and the UNCITRAL Model Law on which it is based. Continue reading

New UAE Federal Arbitration Law issued

The President of the United Arab Emirates has issued Federal Law No. 6 of 2018, promulgating the much anticipated new federal arbitration law in the UAE. As we reported in March, the new federal law, which is based on the UNCITRAL Model Law, will replace and supersede Articles 203 to 218 of the Civil Procedures Law No. 11 of 1992, which currently govern arbitrations seated onshore UAE, and will provide a properly structured procedural framework for domestic and international arbitrations seated in the UAE. The law will be published in the Official Gazette of the Union, and will come into effect one month after the date of publication.

Craig Shepherd, Head of the Global Contentious Construction Practice at Herbert Smith Freehills and Head of the Dubai Dispute Resolution team, commented: “The new Federal Arbitration Law is a very exciting development for the whole of the UAE. While the state has developed a reputation as the pre-eminent seat in the Middle East for arbitration, it did risk falling behind other nations who have introduced comprehensive new laws. That issue has now been addressed, and I am sure the new law will help cement the UAE’s position in the global arbitration market.”

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Recent arbitration developments in the UAE

In the last few months, there have been two notable developments in the United Arab Emirates relating to arbitration. First, it was announced on 27th February 2018 that the Federal National Council of the United Arab Emirates has approved the highly anticipated draft of the Federal law on Arbitration (understood to be based on the UNCITRAL Model Law on International Commercial Arbitration). Second, the Legal Affairs Department of the Government of Dubai has clarified that all lawyers who are licensed in Dubai have the right of audience before any arbitration tribunal in Dubai, including foreign lawyers, and that visiting lawyers may also appear before arbitral tribunals in Dubai. These significant and welcome developments are discussed further below.

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The DIFC’s conduit jurisdiction under attack? The Dubai Court attempts to reverse Banyan Tree

Following on from our reporting on the controversial first decision of the Judicial Tribunal in Daman Real Capital Partners Company LLC v. Oger Dubai LLC, Cassation No. 1 of 2016 (JT) (click here), there has been significant commentary on the possible implications for the DIFC's status as a conduit jurisdiction, particularly in connection with the enforceability in the DIFC of Dubai-seated arbitral awards, commonly referred to as the 'Banyan Tree' jurisdiction. 

At best, the Judicial Tribunal's decision seemed to provide yet another forum for onshore award debtors to use guerrilla tactics to frustrate and delay satisfaction of awards and, at worst, appeared to rule out enforcement of onshore seated DIAC arbitral awards in the DIFC, effectively overturning Banyan Tree.

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Arbitration in Dubai: two steps forward, one step back

Introduction

Dubai promotes itself as an arbitration-friendly jurisdiction, in line with its objective of attracting international business. A recent, much-publicised change to the UAE Federal Penal Code which introduces potential criminal sanctions for arbitrators, threatened to undermine this reputation.

It would now appear that this threat is real, as arbitrators are in increasing number withdrawing from UAE-seated tribunals and refusing nominations to sit as arbitrators on such tribunals.

While the apparent policy behind the new amendment is understandable, since it requires that arbitrators act with impartiality and integrity, the drafting has far-reaching and perhaps unintended consequences.

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Abu Dhabi Global Market Courts secure co-operation arrangements with UAE Ministry of Justice and Federal Courts

Following on from our previous post on the enactment of the Abu Dhabi Global Market Arbitration Regulations 2015 and the creation of a new seat of arbitration in the Middle East, the Courts of the Abu Dhabi Global Market (“ADGM”) have entered into a memorandum of understanding with the United Arab Emirates Ministry of Justice (the “MoU”).

The ADGM Courts are frequently compared to the Courts of the Dubai International Finance Centre (“DIFC”) as they both operate as autonomous common law jurisdictions, operating with an independent judiciary (largely made up of experienced common law justices), carved out from the civil law jurisdictions in which they are situated, the Emirates of Abu Dhabi and Dubai respectively. However, one key difference between the ADGM and DIFC Courts is that, rather than merely applying common law principles, the ADGM directly incorporates English common law rules and principles into its legal system.

The MoU marks an important step for the integration of the ADGM Courts into the UAE legal system. The Preamble to the MoU states that the ADGM Courts “form part of the judicial system of the UAE” and, importantly, should therefore be considered UAE Courts for the purposes of international treaties.

The MoU also provides for judicial cooperation between the Federal Courts of the UAE. Clause (2)5 of the MoU states that the Federal and the ADGM Courts are to “take all necessary measures that will ensure that enforcement of the ADGM Courts’ judgments and arbitration awards issued in the ADGM” can be sought before the Federal Courts of the UAE. Importantly, ADGM judgments and arbitral awards should be enforced by the Federal Courts “without examining the substance of the dispute”.

However, given that the three Emirates with arguably the most commercial activity – Dubai, Ras Al Khaimah and Abu Dhabi itself – have elected to opt out of the UAE’s Federal judicial system (and are therefore not Federal Courts), the practical benefits of the MoU may be limited. Similar memoranda will be required to institute the same relationship with the Courts of these Emirates.

Nonetheless, what the introduction of the MoU does clearly demonstrate is the political support the ADGM enjoys from the UAE authorities and the overriding intent that the ADGM be promoted as an accommodating and arbitration friendly forum. Judging by the development of the DIFC’s relationship with the Courts of Dubai and with other courts across the globe, the MoU is likely to be the first of many such memoranda.

For further information, please contact Caroline Kehoe, Partner, Stuart Paterson, Partner, Craig Shepherd, Partner, Joseph Bentley, Associate or your usual Herbert Smith Freehills contact.

Caroline Kehoe
Caroline Kehoe
Partner
+971 4 428 6302
Stuart Paterson
Stuart Paterson
Partner
+ 971 4 428 6308
Craig Shepherd
Craig Shepherd
Partner
+971 4 428 6304
Joseph Bentley
Joseph Bentley
Associate
+971 4 428 6350