United Arab Emirates: DIFC Court Of Appeal Dismisses Lack Of Authority Challenge To DIFC LCIA Award

DIFC Arbitration Law (DIFC Law No. 1/2008), Article 41, requires a party applying to set aside an arbitration award made in DIFC to furnish proof of any ground on which the party relies. This includes a challenge based on the ground that "a party to the arbitration agreement was under some incapacity or the said agreement is not valid under the law to which the parties have subjected it". The award debtor in Ginette ¹ failed to satisfy this burden of proof. Specifically, it was conceded by the award debtor that the settlement agreement containing the arbitration agreement was valid. In consequence, the Court of Appeal inferred as a finding of fact that board approval had also been given to the arbitration agreement contained within the settlement agreement. At the very least, the challenging party failed to prove that the company's board, whilst approving the settlement agreement, did not approve the arbitration agreement. Accordingly, the challenge to the arbitration award failed.

Background

The parties were engaged in the performance of number of significant contracts for engineering works in Dubai. In 2009 they entered into a settlement agreement pursuant to which Ginette PJSC agreed to make a substantial payment in a series of instalments.  The settlement agreement contained an arbitration clause which provided for any dispute to be referred to arbitration in the DIFC pursuant to the Arbitration Rules of the DIFC – LCIA Arbitration Centre. 

In early 2014 Geary Middle East FZE commenced arbitration, seeking payment of the final instalment of AED31,500,000 due pursuant to the settlement agreement plus interest.  The tribunal rendered its final award in November 2014 for the amount claimed plus interest and costs.  The award debtor's application to set aside the award was rejected by the DIFC Court of First Instance. 

Grounds of Appeal

The award debtor contended that as a private joint stock company incorporated in Dubai (outside DIFC) the signatory of the arbitration agreement was not capable of binding the company to arbitration in the absence of authority under the company's articles of association or a board resolution. The award debtor relied on the UAE Company's Law (Federal Law No. 8/1984), Article 103².  Article 103 provides that:

"The board of directors shall have all powers for carrying out the activities necessary to achieve the company's objectives except those powers reserved by the law or by the company's Articles of Association for the General Assembly.  However, the board of directors may not contract loans for more than a three year period, sell the company's real estate properties or its trading shop, nor mortgage such properties; and the board shall not relinquish the debts owed by the company nor shall it agree to a reconciliation or arbitration except when such actions are permitted by the company's articles, or when these actions are natural elements in the company's business; otherwise the board must obtain the General Assembly's approval for undertaking them".

The award debtor accepted that its Articles of Association granted the board the power to conduct conciliations and approve arbitrations but maintained that the board did not approve the arbitration agreement pursuant to which the award had been made and, accordingly, it was void. 

The award debtor sought to rely on the special treatment historically afforded to arbitration agreements by courts in the UAE.  The courts have often required evidence of specific authority conferred on an individual to enter into an arbitration agreement on behalf of another individual, including a corporate entity.  This reflects the court's concern that by entering into an arbitration agreement the protection afforded to any juridical person by the right have recourse to the courts is lost.

Appeal Judgment

The Court of Appeal noted that the award debtor has the burden of proving that the arbitration agreement is invalid.³  It was further noted that the award debtor conceded that the settlement agreement, which involved the payment of a substantial sum, was valid. In consequence, the Court of Appeal inferred as a finding of fact⁴, that the board also approved the arbitration agreement as part of that settlement agreement. 

The finding of fact meant that a decision was not required on a variety of other issues that were argued before the Court of Appeal.  This included the question of whether DIFC Law or UAE Law governed the validity of the arbitration agreement. 

The Court of Appeal, did, however, consider the award debtor's submission that under UAE Law the arbitration agreement was invalid.  Casting doubt on the view that an arbitration agreement is necessarily invalid in the absence of specific authority the Court of Appeal found that the judgments of the Dubai Courts cited to it in support of this principle were examples of the courts conducting an analysis of the factual evidence.  The Court of Appeal concluded that if special authority is required for a valid arbitration agreement to be signed, then this can be found on the available evidence.

Conclusion

The Court of Appeal's judgment rests firmly on the facts, specifically, a finding of fact that the company's board gave its approval to the settlement agreement and, in doing so, to the arbitration agreement contained within it.  The award debtor failed to furnish proof that the arbitration agreement was invalid. 

The Court of Appeal signalled its preference for a factual analysis in place of a legal one in the process reconciling the treatment of an arbitration agreement under DIFC Law and UAE Law respectively.

In principle, it remains possible for an award debtor to prove that an arbitration agreement is invalid due to a lack of authority of the signatory. Accordingly, obtaining evidence of specific authority at the time of signature remains advisable.  However, it is likely to take an exceptional case to persuade the DIFC Courts that the evidence demonstrates that authority was not given.  As the Dubai Courts also appear to be moving in the direction of limiting a party's scope for challenging an arbitration agreement on the grounds of lack of authority the approach of the two courts appears to be converging.

Footnotes

1 Ginette PJSC v (1) Geary Middle East FZE (2) Geary Limited [CA-005-2016]  dated 9 October 2016.

2 Now superseded by the UAE Commercial Company's Law (Federal Law No. 2/2015), Article 154

3 DIFC Arbitration Law (DIFC Law No. 1/2008), Article 41.

4 Pursuant to the Rules of the Dubai International Financial Centre Courts (2014), Rule 44.141.

DIFC Court Of Appeal Dismisses Lack Of Authority Challenge To DIFC LCIA Award

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