Arbitration in transition: Continued fallout from the DIFC-LCIA dissolution
The sudden dissolution of the Dubai International Financial Centre (DIFC) Arbitration Institute (DAI), and therefore, effectively the abolition of the joint venture institute with the London Court of International Arbitration (LCIA), the DIFC-LCIA, in September 2021, marked a significant shift in Dubai’s legal and arbitration landscape. This restructuring, mandated by Decree No. 34 of 2021 concerning the Dubai International Arbitration Centre (Decree 34), resulted in uncertainty as to the status of existing cases and the transfer of all future disputes governed by DIFC-LCIA arbitration clauses to then be administered by the Dubai International Arbitration Centre (DIAC), unless the parties agreed otherwise. Ultimately, after six months, it was agreed that the LCIA would administer the active cases at the time, resolving one of the major uncertainties, yet many remain.
The DIFC-LCIA was established in 2008 through a partnership between the DIFC DAI and the LCIA. Over the years, the DIFC-LCIA was known for its efficiency and neutrality and had gained significant trust and popularity in the Middle East as the go-to dispute forum. DIAC was founded in 1994, and, in part because of Decree 34, has undergone significant transformation since, including the introduction of new DIAC Arbitration Rules, effective as of March 2022 (the 2022 DIAC Rules). The 2022 DIAC Rules were intended to align DIAC with other leading international arbitration centres.
Overnight, Decree 34 effectively abolished the DIFC-LCIA with no warning and without a detailed transition plan for current and future cases. Ongoing cases were halted, waiting for clarity. Complicating the matter further, Decree 34 mandated the immediate transfer of all DIFC-LCIA cases, assets, and personnel to DIAC. At the same time, DIAC was unprepared to handle the influx.
The implications of Decree 34’s sudden shift on existing DIFC-LCIA arbitration agreements has been subject to ongoing scrutiny in courts in Dubai and around the world.
Disputes under DIFC-LCIA arbitration agreements
A key issue has emerged regarding the resolution of disputes under existing DIFC-LCIA arbitration clauses. According to a combined interpretation of Articles 6a and 8c of Decree No. 34, there are concerns that this unilateral transfer significantly undermines the principle of party autonomy, and more importantly, consent, in arbitration. In the last year, courts in several jurisdictions — including the UAE, the US, and Singapore — have attempted to address these issues.
Articles 6a and 8c of Decree 34 stipulate that arbitration agreements made under the DIFC-LCIA before March 20, 2022, should be managed by the DIAC according to its 2022 DIAC Rules, unless the parties specify otherwise. This automatic transfer of DIFC-LCIA arbitrations to the DIAC has led to questions about its alignment with international arbitration standards. Consequently, various jurisdictions are scrutinizing the enforceability of DIFC-LCIA arbitration clauses, with differing outcomes.
From an international enforcement concern, critics argue that this approach could violate the New York Convention’s requirement for referral to arbitration according to the parties’ original agreement, as the DIAC and DIFC-LCIA are not identical in terms of procedural rules or administration. Recent court cases have confirmed these concerns. Two recent rulings from the United States and Singapore have underscored the complexities introduced by Decree 34.
The approach in the US
In Baker Hughes Saudi Arabia Co. Ltd v. Dynamic Industries Saudi Arabia, 2:23-cv-1396 (E.D. La. 2023), the Court found that DIFC-LCIA arbitration agreements are no longer enforceable. In Baker Hughes, the defendants sought to compel the plaintiff to resort to arbitration under the 2022 DIAC Rules.
The Court refused on the basis that (a) the claimant “agreed to arbitrate in the DIFC-LCIA, not the DIAC”; (b) DIFC-LCIA and DIAC are “not the same forum”; and (c) neither the US Courts nor the government of Dubai have the power to rewrite the arbitration agreement that was agreed between the parties. The court stressed that arbitration is fundamentally a contractual matter and forcing parties to arbitrate the 2022 DIAC Rules, rather than the agreed DIFC-LCIA, would constitute a substantial deviation from their original agreement.
The approach in Singapore
On the other hand, Chua J. of the High Court of Singapore addressed this issue in DFL v. DFM, [2024] SGHC 71 by upholding the enforcement of a Provisional Award on Interim Relief granting a freezing order and an injunction, issued pursuant to an arbitration conducted under the 2022 DIAC Rules. In April 2022, days after DIAC and the LCIA issued a joint press release providing certainty over the situation, the applicant commenced arbitration against the respondent under the 2022 DIAC Rules arising out of alleged non-payment pursuant to a settlement agreement. In November 2022, the tribunal issued the Provisional Award, which the applicant then sought to enforce in Singapore.
Like Baker Hughes, Chua J. found that the parties did not agree to arbitration under the 2022 DIAC Rules. Specifically, that parties “cannot be compelled to submit to arbitration under a set of rules that they did not agree to” and that Decree 34 “could not force an arbitration under the DIAC Rules on the respondent without his agreement”, citing to Baker Hughes. In analysing whether the respondent has consented to having the dispute settled in accordance with the 2022 DIAC Rules, Chua J. assessed two main arguments relevant to Decree 34.¹
First, the applicant argued that because there was a severability clause in the original settlement agreement, the arbitration agreement could be severed as the parties’ agreement was to resort to arbitration in Dubai. Chua J. disagreed, citing that the parties did not merely agree to arbitration in Dubai, but arbitration pursuant to the DIFC-LCIA rules, which differ from the 2022 DIAC Rules. Importantly, Chua J. relied on Gary Born’s analysis that the express agreement on the institutional rules form the “basic architecture of the arbitration”. Essentially, the provisions within an arbitration agreement are not themselves severable.
Second, the applicant argued that the respondent consented to the jurisdiction of the case. Chua J. found that while the respondent routinely reserved the right to bring jurisdictional challenges based on Decree 34, and did so in the respondent’s statement of defence, the respondent did not plead those jurisdictional objections within the context of the application for enforcement. Because of this, the respondent was deemed to have waived that objection vis-à-vis the application.
Thus, while Chua J. found, consistent with Baker Hughes, that Decree 34 cannot compel the parties to resort to the 2022 DIAC Rules, the respondent nonetheless submitted to the jurisdiction in failing to consistently raise its jurisdictional challenge.
DFL emphasizes the need for parties challenging jurisdiction on this basis to consistently raise and plead its jurisdictional challenges at every stage.
The approach in the UAE
The issue has also been addressed by various courts within the UAE.
Courts of Abu Dhabi
A recent case before the Abu Dhabi Commercial Court of Appeal (Case No. 449/2024),³ which upheld a decision by the Court of First Instance (Case No. 1046/2023). After Decree 34, the plaintiff, instead of resorting to arbitration under the 2022 DIAC Rules, sought recovery of unpaid debts, under a contract that contained an agreement to arbitrate pursuant to the DIFC-LCIA rules, before the courts of Abu Dhabi. In the Court of First Instance, the defendant sought to dismiss the case and compel the parties to resort to the arbitration agreement. The Court of First Instance agreed and dismissed the case.
In the Court of Appeals proceeding, the plaintiff / appellant (in part) argued that the arbitration agreement was invalid as a result of Decree 34.² Taking a different approach from Baker Hughes and DFL, the Court of Appeal determined that the dissolution of an arbitration centre does not constitute impossibility or inability to enforce the arbitration agreement. The Court reasoned that rules of arbitration institutions are not “inherently permanent or fixed” and that amendment from time to time does not render the underlying arbitration agreement impossible. The same logic was applied to the list of potential arbitrators. The Court noted that many arbitration agreements lack certain components — such as the procedure for appointment of arbitrators — have nonetheless been found enforceable, because the absence of these factors does not negate the parties’ clear intention to resort to arbitration.
The Court also noted that the plaintiff / appellant did not make any submissions on “the existence of substantial differences that could harm it in the event of resorting to arbitration at any other cetnre”. In taking this approach, the Court specifically stated that dismissing the plaintiff’s case does not force the parties to resort to arbitration at a specific institution, but instead “was a guarantee that neither party would violate their commitment to the arbitration clause”. In other words, even if the arbitration agreement was inoperable due to a reference to the DIFC-LCIA, this would not invalidate the parties’ intent to resolve conflicts by arbitration.
It appears that the Abu Dhabi courts extended this logic to arrive at the conclusion that the abolishment of the DIFC-LCIA does not mean that the arbitration agreement is invalid or incapable of performance in and of itself.
DIFC Courts
Justice Black KC in the DIFC Court of First Instance recently considered a similar issue in Narciso v Nash (ARB 009/2024). Narciso involves some complicated parallel proceedings including an active case in Sharjah Courts and DIAC improperly treating the defendant’s request for arbitration as a request for DIAC to act as the appointing authority. Nonetheless, the claimant made for arguments concerning the jurisdiction of the DIFC Courts, including whether Decree 34 was applicable in the DIFC. Black J. holds that per Dubai Law No. 5 of 2021, Decree 34 does form part of the law of DIFC as Decree 34 expressly includes the DIFC in its provisions.
In analysing the affect of Decree 34, Black J. holds that “Decree 34 does not purport totally to rewrite the terms of every arbitration agreement made before the Effective Date … [o]n the contrary, Article 6(a) provides that all agreements to resort to DIFC-LCIA arbitration concluded by the Effective Date of the Decree were deemed valid but DIAC would replace the DIFC-LCIA”.
The defendant argued that the arbitration agreement was invalid on a number of grounds, including (1) under Article II(3) of the New York Convention; (2) arbitration being a consent-based regime; (3) the arbitration agreement is unenforceable because DIFC-LCIA no longer exists; (4) relying on the conclusions in Baker Hughes; and (5) Decree 34 conflicts with the principle of party autonomy. Black J. dismisses all of these grounds and upholds the validity of the arbitration agreement.
In addressing the New York Convention argument, Black J. cited the travaux préparatoires of the New York Convention and the reasoning of the Abu Dhabi Court of Appeal, in that the states parties to the Convention did not consider abolishment of an arbitral forum among the criteria for assessing the validity of an arbitration agreement.
In addressing the Baker Hughes argument, Black J. holds that the District Court “did not appear to appreciate the difference between forum and the procedural rules”. Specifically, Black J. endorses the holding in Abu Dhabi in that the agreement to arbitrate is an agreement to resolve their dispute via international arbitration, subject to a set of institutional rules, not necessarily a specific set of rules.
Conclusion
Thus far, in the short time since Decree 34, the courts in the UAE have consistently upheld the effects of Decree 34 and the validity of the arbitration agreements impacted thereto. Whereas, in the US, there is a strong decision that emphasizes the fundamental aspect of arbitration, consent. At the same time, the High Court of Singapore endorses this position but avoids the issue on waiver grounds.
The varying international approaches reflect ongoing uncertainties about the enforceability of DIFC-LCIA arbitration clauses following Decree 34. Given these discrepancies, the risk remains that foreign courts may adopt further varying stances. For parties with existing DIFC-LCIA clauses, aligning arbitration agreements with the new framework — either by explicitly consenting to resolving disputes via arbitration pursuant to the 2022 DIAC Rules or expressly choosing another institution — remains advisable. This proactive step can help avoid jurisdictional disputes, enforcement issues, and costly international litigation, in the midst of heightened party tensions during a dispute.
¹ The applicant also argued that the respondent submitted to the jurisdiction of the tribunal by amending its statement of defense to include counterclaims. Chau J. did not address this argument having already found that the respondent waived the right to contest jurisdiction by not pleading its jurisdictional arguments in response to the application. The respondent argued that because the tribunal had not yet ruled on the jurisdiction issue,a decision by the High Court would be premature. Chau J. dismissed the respondent’s argument on the same basis as above.
² The plaintiff/applicant also argued that the arbitration agreement pre-dated the parties to the case as the defendant/respondent was added to the agreement later.
³ We note that the DIFC Courts have previously addressed the impact of Decree 34 in other cases including Likitif v. Luvain (ARB 028/2020).
Authored by: R. Carter Parét*, Nasma Al Sabe and Ellen Ray
