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UAE Law: Choice of governing law and Jurisdiction

June 2019 - Litigation & Dispute Resolution. Legal Developments by Al Rowaad Advocates & Legal Consultants.

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Significant growth in the international trade and commerce has appended eminence to clauses of dispute resolution in the private international law. In a globalized world, everything is believed to be moving at a speed of knot. New innovative techniques have enormously affected the manner in which business is conducted. 

This is especially obvious with regards to worldwide business transactions. Contracts are closed between two parties sitting in two different parts of the world and without meeting each other vis-à-vis. In view of that, more accentuation ought to be placed on the private international legal framework of the states, guaranteeing that they don’t stale and are up to international guidelines in managing issues that constantly emerge in International businesses.

As cross-border transactions constantly arise, a pertinent issue naming “choice of law” holds significant importance in the private international law applicable to international commercial agreements. Contracts are mere pieces of paper without any legitimate impact unless a specific reference to some private law is given which characterizes the commitments expected by the parties to the agreement and the recommends the way of redress through the appropriate court system in case of failure to perform contractual obligations.

A governing law provision in any commercial contract defines the law which will govern or regulate the contract in the event of a dispute, as opposed, jurisdiction clause specifies the courts or international institution that will have exclusive jurisdiction to try the matter or resolve disputes. These clauses are though equally important as that of the commercial arrangements between the parties; they are yet neglected amid drafting the general terms of the contract and are considered as standard boiler plates at the end of the contract.

It is vital that these conditions gain as much importance as the substantive arrangements of the agreement. Failure of parties to agree on the governing law can lead to expensive and massive suits deciding the relevant law and jurisdiction to be applied to the agreement. Corporate Lawyers of Dubai assist numerous multi-billionaire companies to have tailor-made commercial contracts prior to entering into an agreement which suits the requirements of both the parties.

Choice of Law Provision

The decision of governing law for the contract is one arrangement in the contract where the parties assign the law of a particular jurisdiction to oversee and regulate the disputes merging between the parties. A such, the parties indicate or stipulate that any claim arising out of the contract will be resolved by the law of a concerned jurisdiction. This decision generally becomes binding on the parties when the parties refer the matter to arbitration.

A significant number of parties, according to statistics of the International Chamber of Commerce, involves governing law in their contract. A standard governing law clause states that “ this law of this country shall govern the agreement”. There are several preconditions which must be considered prior to choosing a particular which are detailed as below:

A.     Worthiness of the Law for resolving dispute:

International law has authorized parties to adopt any law which might govern their contract, ergo, parties mustn’t focus on choosing their home country law for purpose of avoiding additional expenses, but must evaluate the worthiness of law in different jurisdiction which will be appropriate for their commercial arrangements. There are numerous jurisdictions which have an offer importance to case laws and precedents, whereas several jurisdiction are silent on such matters and they not even recognize certain notions of the contract.

B.      Jurisdiction issues

Parties generally consider the law of a particular jurisdiction wherein they wish to resolve the dispute. However, this standard can be amended as numerous courts are willing to apply foreign law for resolving the matter if the parties have specifically agreed. Yet, parties should be careful while drafting the contract, as it will often be burdensome for parties to decide what foreign law should be applicable, should the dispute arise. They must also be careful as certain jurisdiction does not apply the foreign choice of law and must also consider the manner in which the court will apply the foreign law. On the contrary, most international arbitration institution is readily acceptable on the foreign choice of law and have arbitrators who can easily understand the foreign law to ease the procedure.

C.      Affinity to the law

Given the vast cases, parties choose the law which they are familiar to rather than opting a more neutral law. Also, the latter can bring unaccepted surprises which parties are not aware of considering dissimilar procedural aspects.

Jurisdiction Provision

Another most common uncertain clause is to determine the jurisdiction where the word “may” and “shall” can bring unwanted confusion. Importantly, if parties which to have a non-exclusive jurisdiction the word “may” can be utilized, on the contrary for an exclusive jurisdiction the word “shall” should be used. An ideal jurisdiction clause states that “the parties shall/may submit their dispute emerging out of or in connection with the concerned agreement to (court /arbitration) of this country.”

A bare review of the foregoing standard jurisdiction clause we note that the first step is to determine which institution shall be given authority to resolve the dispute that is either courts or arbitration institute. Both the system have their pros and cons, hence parties should beforehand determine what should be appropriate for the said matter. It most certainly believed that arbitration offers wide variety of options and advantages over courts which are outlined as below:

a.      Choice of arbitrators expert in such matter;

b.      Private proceedings;

c.       Binding decisions;

d.      Choice of governing law;

e.      Choice of enforcing judgments in different territory;

f.        Common language of arbitration.

UAE Law and Choice of Law

In UAE international parties may face needless issues regarding the application of foreign law to govern the contract. As in certain cases, courts inherit the jurisdiction and governs it according to the UAE local laws such as Civil Transactions Law or Civil Procedure Code. In addition, the courts of UAE will not let go jurisdiction to another court over a matter where UAE courts will in all case have the jurisdiction. This is can be witnessed in the following disputes:

a.      Disputes pertaining to real-estate situated in UAE;

b.      Contract finalized in UAE;

c.       Happening of an event in UAE;

d.      Matters regarding the employment of a resident in UAE;

e.      Issues regarding UAE Commercial agencies;

f.        Property matters related to UAE.

 In accordance with the above, if the UAE courts will inherit the jurisdiction, the governing law will be the law of UAE itself. Accordingly, the court will strike down the governing law and jurisdiction clause in the agreement.

What do we learn?

What if there is no governing law and jurisdiction clause in a particular contract? Before the parties get an opportunity to determine the dispute on merits, the parties will have to exclusively determine the courts or law that will govern the contract, which is an expensive and cumbersome decision. The non-presence of governing law and jurisdiction clause confuses the parties to determine if there is a dispute or not and leads to unfavourable decisions.