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Extension of Arbitration Agreements in Multi-Contract Context: Dubai Perspective

March 27, 2024

Recent rulings from the Dubai Cassation Court(“DCC”) in the case No.828 of 2023 (commercial) dated 19 October 2023 and case No.618 of 2023 (Commercial) dated 26 October 2023 have spotlighted the principle of extending arbitration agreements in multi-contract scenarios. These landmark decisions shed light on crucial aspects of arbitration law, particularly concerning the extension of arbitration agreements in multi-contract context. 

The first ruling elucidated the essential prerequisites and terms governing the extension of arbitration in multi-contract scenarios. It laid down a foundational framework, outlining criteria necessary for arbitration agreements to extend seamlessly across related contracts. Conversely, the second ruling introduced an exception to these general conditions as established by the first decision..

In this analysis, we delve into the intricacies of these decisions, exploring the DCC’s reasoning and implications. We provide an in-depth overview of the foundational principles outlined in the first decision, offering insights into the court’s rationale. Additionally, we conduct a comprehensive examination of the second decision, dissecting the exceptions introduced and their potential impact on arbitration jurisprudence.

  1. Case Summary: 

On July 22, 2018, the Construction agreement (referred to as the “Main Agreement“) was finalized between the employer (referred to as the “Respondent”) and the contractor (referred to as the “Claimant”). The scope of works, centered around the club villas in Palm Jumeirah, encompassed various tasks including earthworks, construction works, plastering, screed works, stone barrier works, and concrete demolition works. Article 7 of the Main Agreement stipulated that any disputes arising from it would be resolved in accordance with the (DIFC-LCIA) arbitration rules, with Dubai, United Arab Emirates, designated as the seat of arbitration.

Between August and September 2018, six purchase orders (referred to as “POs” or “Subsequent Contracts”) were issued for various works within the same project. These POs involved tasks such as modifications to the Crook Rock Wall (textures), dismantling and installation orders with several change orders, foundation works for numerous villas, labor hiring, and the supply of equipment, as well as waterproofing of swimming pools R1, R2, R3 within the same project. “Notably, none of these POs contained arbitration agreements.

A dispute arose between the parties, leading the Claimant to file litigation case No.4423 of 2021 before the Dubai Court of First Instance (the “DCoFI”). The Claimant sought a specific amount from the Respondent, alleging a breach of contractual obligations stemming from both the Main Agreement and the Subsequent Contracts. While the Claimant secured a partial decision concerning the outstanding amount related to the POs, the DCoFI dismissed the case concerning the Main Agreement due to the presence of the arbitration agreement.

In response, the Respondent appealed the DCoFI decision under Appeal No.467of 2023 (Commercial), before the Dubai Court of Appeal (“DCoA”), seeking to overturn the DCoFI decision regarding the outstanding amounts of the POs. The Respondent argued that the Main Agreement and Subsequent Contracts constituted a single transaction, meaning that the arbitration clause of the Main Agreement should extend to the Subsequent Contracts. The DCoA revoked the DCoFI decision citing the arbitration agreement, stating that “since the POs were executed after the Main Agreement (the Framework Agreement) and were deemed extensions of the Main Agreement, covering the same villas designated for construction, the arbitration clause should apply. The DCoA also emphasized the appropriateness of settling all disputes arising out of the same transaction before the same forum (arbitration) as long as there is an arbitration agreement in place.

The Claimant challenged the DCoA decision before the DCC, arguing that the Main Agreement and the Subsequent Contracts were entirely separate and unrelated arrangements. According to the Claimant, the DCoA erred in its application of the law by extending the arbitration agreement to cover disputes arising from the POs.

  1. Court Reasoning 

The DCC underscored that when multiple contracts of similar nature are executed sequentially over time between the same parties, and the arbitration clause is embedded solely within the initial or Main Agreement, its effect extends to encompass all disputes arising from subsequent contracts. This extension is predicated on the subsidiary principle, which upholds the original agreement and reflects the parties’ implicit intent derived from pertinent factual elements. Consequently, regardless of whether these disputes are directly relevant to the Main Agreement or not, they fall under the purview of its arbitration clause.

Moreover, the DCC deemed this extension as commercially prudent, emphasizing its propensity to streamline dispute resolution within the overarching framework of the Main Agreement. Particularly within the construction industry’s intricate landscape, where technical complexities abound, consolidating dispute resolution mechanisms under a single arbitration clause enhances operational efficiency and coherence.

Furthermore, the DCC’s rationale extends to purchase orders subsequently issued in August and September 2018, which are inherently interconnected with the Main Agreement both personally and objectively. In this context, the arbitration clause within the Main Agreement naturally extends to cover disputes arising from these POs, given their sequential execution and intrinsic linkage. Notably, the absence of explicit provisions within the POs to submit disputes to state court jurisdiction aligns with the implied intent of the parties, further bolstering the extension of the arbitration clause to these subsequent contracts. 

  1. Analysis 

Before embarking on our analysis, it’s crucial to highlight a significant aspect concerning the classification of purchase orders as distinct agreements. Our interpretation differs from the characterization of POs by the DCC as separate contracts, which seems inconsistent with Article 886 of the UAE federal law on civil transactions.

Turning to the subject matter of our analysis, the DCC differentiates between two distinct scenarios within multi-contract contexts:

First Scenario: Subsequent Contracts Without a Forum Selection Clause

In instances where subsequent contracts lack a designated forum selection clause, the DCC imposes three pivotal prerequisites for extending arbitration agreements:

  1. Same Parties: It is imperative that the parties involved in each contract within the group contracts are either identical or substantially similar. This requirement ensures continuity and consistency in the contractual relationship, safeguarding against potential jurisdictional ambiguities.
  2. Linked Contracts: The existence of a demonstrable link or nexus between contracts is crucial. This linkage signifies a complementary or implementing relationship with the main agreement, reflecting a cohesive and integrated contractual framework. The DCC emphasizes that these contracts should be both personally and objectively linked to uphold the integrity of the arbitration mechanism.
  3. Same Transaction: The criterion of a shared transactional nexus underscores the interconnectedness of contracts within a broader commercial or legal arrangement. This interconnection may manifest through a common subject matter, purpose, or involvement in a unified transactional context. 

In that vein, DCC overturned the DCoA decision in the case No. 40/ 2010 (Civil), asserting that when the employer and contractor mutually agreed to terminate the construction agreement and subsequently entered into a scaffolding lease contract, the arbitration agreement in the construction contract does not extend to the scaffolding lease contract. This decision was grounded in the notion that the scaffolding lease contract, being distinct and unrelated to the construction contract, operates as a separate entity, thereby falling outside the purview of the construction contract’s arbitration agreement.

Second Scenario: Subsequent Contracts with Different Forum Selection Clauses.

Alternatively, if Subsequent Contracts introduce a dispute resolution mechanism divergent from that outlined in the Main Agreement, it prompts a critical inquiry: Which mechanism governs all disputes if they are inseparable? Can we perceive the dispute resolution mechanism specified in the Subsequent Contract as an implicit amendment to the parties’ original agreement regarding dispute resolution in the Main Agreement?

In its Decision No. 618 of 2023, the DCC clarified that if one of the subsequent contracts includes a different forum selection clause, such as the Dubai Courts, distinct from the arbitration agreement contained in the main agreement, both mechanisms shall apply within their respective scopes.

The DCC rationalized that when two contracts are executed between the same parties, pertaining to a unified subject or objective, and an objective connection exists where the subsequent contract complements the main agreement, the arbitration clause in the main agreement shall extend to cover the subsequent contracts that complement it, provided they do not include a forum selection clause. This interpretation is grounded in the implicit intention of the parties. However, if the parties explicitly express in the subsequent contract their intention to resolve disputes solely through state courts, then this explicit intention must be honored within the scope of each contract, without extending to the other’s scope. 

The DCC concluded that the litigation clause in the Subsequent Contract does not extend to the Main Agreement that includes the arbitration clause, and it should not be considered a revocation of the arbitration clause in the Main Agreement.

The significance of these decisions becomes evident when considering the DCC ruling in the case No.1603 of 2022 (Commercial) dated 30 March 2023, where the DCC acknowledged the jurisdiction of local courts in the Subsequent Contracts due to lack of evidence supporting the existence of an arbitration agreement in these Contracts. The DCC indicated that, in the absence of any arbitration agreement in Subsequent Contracts, the default jurisdiction would be with the local courts even in multi-contract context.

  1. Conclusion:

In conclusion, while we consider the DCC’s recent trend a valuable step toward creating more certainty in multi-contract disputes, a lingering question remains, Will the DCC adopt a similar stance if the forum selection clause in the Subsequent Contracts indicates arbitration under a different arbitration institution?

Contacts

Mohamed El Khatib

Principal Partner – Head of Disputes
kamel.elshendidy@habibalmulla.com

Dr. Kamel Elshendidy

Counsel
yamen.deeb@habibalmulla.com

Kholoud Hafez

Associate
youssef.elgazairly@habibalmulla.com

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