UAE Arbitration Law and Public Policy In Relation To The Perspective of Arbitrability Example Of That Concept

The UAE regime governing arbitration was fundamentally altered in 2018. Prior to that date, arbitration was governed under Articles 203 to 218 of the UAE Civil Procedures Law (Book 2).

In the UAE Civil Procedures Law, Article 203(4) provided that:

“It shall not be permissible to arbitrate matters is which conciliation is not permissible. An agreement to arbitrate shall not be valid unless made by persons having the legal capacity to make a disposition over the right the subject matter of the dispute”

On 03 May 2018, the UAE has issued the UAE Arbitration Law. Article 60 of the UAE Arbitration Law repealed Articles 203 to 218 of the UAE Civil Procedures Law. Article 4(b) of the UAE Arbitration Law is the counterpart of the former Article 203(4) of the UAE Civil Procedures Law, mentioned above. Article 4(b) of the UAE Arbitration Law reads as follows:

“The agreement on arbitration may not be concluded with respect to the matters where conciliation is not allowed “

The UAE Law regime and its jurisprudence have identified those matters where conciliation is not allowed or permissible by linking the same to matters that are associated to public policy and peremptory/mandatory norms in the UAE Law Regime.

The Dubai Court of Cassation identified those peremptory/mandatory norms as being part of the UAE public policy while also providing a broad definition of what constitutes public policy:

“The legal rules that are considered public order are rules intended to achieve a general political, social or economic interest related to the higher society system and override the interest of individuals. All individuals must observe and realize this interest and they may not oppose it by agreements among themselves even if these agreements are achieved for their Individual interests, because individual interests do not exist in front of the public interest, and if the phrase or reference to the legislative text indicates the direction of the legislator’s intent from determining the legal base contained therein to the organization of a situation in itself in a specific manner that may not be violated, in compliance with the requirements of the public interest, then this rule is considered one of the peremptory norms related to public order and at the same time it is considered a rule complementary to the will of the contracting parties.”

(Dubai Court of Cassation – Civil Cassation number 142/2014 – Hearing 12-03-2015)

In another judgment, the Dubai Court of Cassation relied upon the former Article 203 of the UAE Civil Procedures Law in holding that it is not permissible to conciliate in disputes relating to public policy:

“It is decided – in the judiciary of this court – that it is not permissible to conciliate in matters related to public policy, and the fourth paragraph of Article (203) of the UAE Civil Procedures Law stipulates that it is not permissible to arbitrate in issues in which conciliation is not permissible, and accordingly, it is not valid to adopt the correction of a nullification of the first respondent company by removing the appellant / the simulated shareholder and enter another shareholder in violation of Article (22) of the Companies Law – a peremptory/mandatory provision – as to be subject to arbitration “

(Dubai Court of Cassation – Commercial Cassation number 367/2011 – Hearing 10-10-2012).

In the above example, the Dubai Court of Cassation explained how a matter cannot be conciliated and cannot be a subject to Arbitration in a case where there is a violation of a peremptory/mandatory provision legislated in the country which, in this instance concerned the application of Article 22 of the UAE Commercial Companies Law.

In conclusion, the UAE Civil Procedures Law, UAE Arbitration Law and Court Judiciary adopted the same principles that:

1. Arbitration is not permissible in matters where conciliation is not allowed.
2. Violation of public policy and/or peremptory/mandatory norms cannot be conciliated or be a subject to Arbitration.

Further, Article 53 of the provides furtherly in its Article 53, the grounds and reasons under which a party may seek to annul an arbitration award. Article 53 states that:

“Article 53 – APPEAL OF THE AWARD

• Arbitral awards shall not be challenged except by instituting an action for annulment or during the consideration of the confirmation decision. The party requesting the annulment of the arbitral award shall prove the existence of any of the following reasons:
  1. Absence of an Arbitration Agreement, or the Agreement is void, or terminated due to expiry of its term in accordance with the law to which the Agreement is subject by the parties or in accordance with this Law if there is no reference to a specific law;
  2. One of the parties, at the time of enforcement thereof, lacks capacity or of diminished capacity in accordance with the law which governs its capacity;
  3. The person lacked the legal capacity to take any action regarding the right, the subject matter of dispute, in accordance with the law governing his capacity, which is stipulated in Article (4) of this Law.
  4. If one of the parties to the Arbitration is unable to present its case as a result of not being given proper notice of the appointment of an Arbitrator or of the arbitral proceedings, the Arbitral Tribunal’s violation of the litigation principles or for any other reason beyond its control;
  5. If the arbitral award fails to apply the law agreed upon by the parties to govern the subject matter of the dispute;
  6. If the composition of the Arbitral Tribunal or the appointment of one of the Arbitrators is in conflict with the provisions of this Law or the agreement of the parties;
  7. If the arbitral proceedings are invalid to the effect that impairs the award; or if the award is rendered after the due time limit; or
  8. If the arbitral award deals with matters not falling within the scope of the Arbitration Agreement or exceeding the limits of this agreement. Nevertheless, when matters falling within the scope of the Arbitration can be separated from the parts of the award which contains matters not included within the scope of the Arbitration, the nullity affects exclusively the latter parts only.
• The court shall invalidate the arbitral award on its own if it finds out the following:
  1. The subject matter of the dispute is a matter in which Arbitration may not be held; or
  2. The arbitral award contradicts the public order and morality in the State.”

Based on the review and examination of the above-quoted Article 53 and Article 4(b) of the UAE Arbitration Law, an arbitral award may be nullified through the Court’s own motion where either the subject matter of the arbitration is not arbitrable or the award itself is in violation of public policy.

In other words, pursuant to Article 53(2) of the UAE Arbitration law, the violation of public policy is a ground for challenging an arbitral award and even more so, the Courts have a duty to ensure on its own motion that an arbitral award is in conformity with public policy prior to ratifying the same. In instances where there is doubt that the rendered award is in contravention with public policy, the Court will have to examine the entire case and scrutinise the findings of the award so as to find whether such award violates the State’s public policy. The aforesaid rule has been illustrated and established by the judiciary of Dubai Court of Cassation in one of its judgments where it stated that:

“It is decided – in the judiciary of this court – in accordance with the provisions of Article 216 of the Civil Procedure Law that the litigants may request the nullity of the arbitrators’ award when the court considers its ratification, in the cases mentioned in this article exclusively and related to the procedures or the arbitration agreement and that the authority of the court does not extend to discuss the subject matter of the award itself or to indicate if it conforms to the law or not, except that when it is proven that the arbitrator has gone beyond the limits of his jurisdiction and has decided on a matter related to public order that cannot be reconciled, the court must intervene by examining and scrutinizing that legal violation in the light of what it decides The laws inferable in the judge’s country, even if this violation is not one of the cases of nullity of the arbitral award contained in Article 216 above, given that public order is one of the first basic controls to be respected in all actions and rulings because it is related to the higher interest of society and to the social, political, economic or moral foundations. However, where the peremptory legal rule is not related to public order in its previous concept, or where its purpose is to protect private rights and interests, there is no place to raise the system. General as a basis for the application of this violating legal rule “

(Dubai Court of Cassation – Commercial Cassation number 367/2011 – Hearing 10-10-2012).

In the fashion of presenting the concept of this Article, I shall give an example of a matter that constitutes a violation to public policy which accordingly can’t be Arbitrable. The example is related to the Company’s violation to its license and articles of association by conducting Finance and Loan activity. I shall firstly discuss how the UAE Law Regime governs and regulates the aforementioned activities and especially the activity of Financing in light of the following three legislations:

c) UAE Commercial Companies Law relevant articles.

Article 11(1) of the UAE Commercial Companies Law clearly provides that:

Practice of the Activity

“The company must obtain all the approvals and licenses required to undertake the activity in the State prior to the commencement of its activity.”

In this regard, Dubai Court of Cassation has ascertained the above peremptory norm and the legislative wisdom behind the same by establishing in its judiciary the following norm:

“It is established that the company’s memorandum of association and trade license shall include the object of its establishment together with its name, address and trade name (if any). The juridical personality of the company shall be qualified within the object for which it was established. It may earn new money, dispose of its present funds, deal with third parties as creditor and debtor; provided however that the company shall at all times comply with limits and restriction specified in the company’s memorandum of association and the object for which it is established in accordance with the rule of identification of juridical person. This rule provides that the juridical person has no rights other than those derived from its objects. If the company’s memorandum of association provides for certain kind of trade to be practiced by the company, it shall not be permitted to practice any other kind unless and until its memorandum of association has been amended by adding such activities as ancillary, related or similar to the original object of the company. If companies are allowed to trade outside their objects which are shown in the Company’s Memorandum of Association and reflected in its commercial license, chaos ensues and the economy will be prejudiced and business will be disrupted. Moreover, this will lead to non-compliance with the rules and regulations observed by the competent authority when approving the establishment of this company, and based on which the commercial license was issued. This may also lead to the establishment of companies with several subsidiaries conducting disparate business activities; hence, the economy of the state will be prejudiced. “

(Dubai Court of Cassation – Commercial Cassation number 367/2011 – Hearing 10-10-2012)

d) UAE Central Bank Law:

i. Article 114:

“For the provisions of this Law, the term “financial institutions” shall refer to those institutions whose principal functions are to extend credit, to carry out financial transactions, to take part in the financing of existing or planned projects, to invest in movable properties, and such other functions as may be specified by the Bank.

Financial institutions may not accept funds in the form of deposits but may borrow from their head offices, from local and foreign banks, or from financial markets.”

ii. Article 115:

“Financial institutions may not commence operations in the United Arab Emirates or open branches abroad unless so licensed by the Bank.”

e) UAE Central Bank Resolution Concerning Finance Companies relevant articles:

Article (4) of the UAE Central Resolution Concerning Finance Companies clearly provides that:

Obtaining a License is Compulsory

“A Legal Entity may not exercise the financing activity in the United Arab Emirates before obtaining a proper License from the Central Bank upon a decision by the Board of Directors.”

From the obvious wording of the relevant articles of law identified above, it is clear that the UAE legislator has set a peremptory/mandatory obligation on the company or the legal entity to obtain the compulsory approvals and licenses before practicing its activity, in particular the activity of financing. In this regard, it is worth making the necessary reference our above previous discussion on how peremptory norms are part of public policy and any violation to the same cannot be conciliated and the given example related to violating a peremptory norm provided in Article 22 of UAE Commercial Companies Law.

To emphasise more in the license restriction regarding the activity of credit extending and carrying out financial transactions, Dubai Court of Cassation has provided in its judiciary the following norm:

“It is decided – in the judiciary of this court – that Articles 5, 77, 114, 115 of Law No. 10/1980 regarding the Central Bank, the Monetary System and the Organization of the Banking Profession, stipulate that financial institutions are those its main subject of their work is to carry out lending or financial operations, It is not permissible for these institutions to start their work in the United Arab Emirates or to open branches for them abroad before being authorized to do so by the Central Bank, which is entrusted by the legislator to organize monetary, credit and banking policy and supervise its implementation to support the national economy and the stability of money and to extend its authority, control and inspection over banks Commercial and investment, financial institutions, financial and monetary intermediaries and representative offices “

(Dubai Court of Cassation – Commercial Cassation number 367/2011 – Hearing 10-10-2012)

Based on the above and in conclusion, the following actions shall constitute a violation against peremptory norm associated to public policy which cannot be conciliated or be subject to an Arbitration:

f) Practicing commercial activity not licensed in the company memorandum of association and trade license by the competent authority.

g) Practicing financing and credit extending activity without obtaining the compulsory license from UAE Central Bank.

Author: Mr. Ahmed Elmahdy, Associate