Dubai Court of Cassation Judgment – No. 735 of 2024 (29 October 2024) – Unilateral Arbitration Clause

The Dubai Court of Cassation (DCC) considered a contract between two parties for provision of waterproofing and ceiling works (Contract). The Contract’s dispute resolution clause provided that one party (the main contractor) had the unilateral right to choose between: (i) arbitration; or (ii) the Dubai Court as the proper forum of the dispute. The DCC held that the language / clause in question did not constitute a valid agreement to arbitrate and, therefore, that the Dubai Courts were the proper forum for the dispute.

Factual Background

The dispute related to a series of contracts between the Defendant (the main contractor) and the Claimant (a subcontractor) under which the subcontractor supplied and installed waterproofing and suspended ceilings on the Remraam, Warsan, and Palmarosa Projects (factory, commercial and residential, and villas projects, respectively).
The subcontractor claimed that it had fulfilled all its contractual obligations but the main contractor had failed to pay it in accordance with the contract terms.

Legal Background

The subcontractor submitted a claim to the Dubai Courts for payment of the amounts owed (AED 1,815,022) by the main contractor (Case No. 417 of 2020). At the Court of First instance, the main contractor argued that arbitration was the correct forum for the dispute. This argument was rejected.

The main contractor appealed the first instance judgment (Appeal No. 701 of 2024) on grounds that the Dubai Courts lacked jurisdiction to determine the dispute due to the existence of an arbitration clause in the Contract. The Court of Appeal rejected the main contractor’s appeal.

The main contractor re-appealed the matter to the Court of Cassation (Cassation Appeal No. 735 of 2024) again on grounds that the Contract contained an arbitration clause.

It is crucial to note that the ‘arbitration clause’ in the Contract was unilateral. Unilateral option clauses include (among other things) clauses that provide for disputes to be referred to (a) arbitration, but giving one party the exclusive right to refer any dispute to litigation; or (b) litigation, but giving one party the exclusive right to refer any dispute to arbitration. In this case, the main contractor held the unilateral right under the Contract.

Arguments by the Parties

The main contractor’s argument throughout the lawsuit was the same. It argued that it had the unilateral right to refer any dispute under the Contract to arbitration due to the language in the Contracts’ dispute resolution clauses (Clause 29). These stated:

“In the event of a dispute arising from the interpretation or implementation of any of the provisions of this agreement, this dispute shall be settled by mutual agreement between the parties. In the absence of such agreement, the dispute shall be referred either to (a) arbitration in the Dubai Chamber of Commerce or (b) the local court in the UAE, at the discretion of the Contractor“.

The subcontractor argued that the main contractor did not have the right to refer any dispute to arbitration and that the original judgment (Case No. 417 of 2020) was valid and enforceable.

Judgment

The Court of Cassation found in favour of the subcontractor on multiple grounds. The most relevant being:

1. The Court of Cassation has the right, whether or not raised by the parties, to determine whether it can judge a case. This is a matter of public order.
2. The Dubai Courts have full authority to understand the reality of a case, interpret agreements, contracts and other documents, and determine the intention behind an arbitration clause according to what it considers must have been the intention of the parties, provided that its interpretation does not evidently deviate from the meaning of the contract’s words on their face.
3. The plea that the lawsuit was inadmissible in the Dubai Courts due to the existence of an arbitration clause amounted to a plea that the Dubai Courts lacked jurisdiction.
4. Articles 1, 2, 4, 5, 6, and 7 of Arbitration Law No. 6 of 2018 make clear that for an arbitration agreement to be valid (and therefore that the Dubai Courts lack jurisdiction) the parties must expressly agree to arbitration in writing. This is because an agreement to arbitrate is a conscious diversion from the ‘status quo’ where it is assumed that the Dubai Courts have jurisdiction.
5. Therefore, to be enforceable, arbitration clauses must be clear and explicit, and in terms that are not ambiguous, vague, subject to doubt, subject to possible alternate meanings, or susceptible to controversy. There must be clear ‘offer and acceptance’ and a ‘meeting of minds’ for an agreement to arbitrate to exist as it is a ‘contract within a contract’.
6. An arbitration clause will not be valid if the relevant clause has to be interpreted by a court or its meaning inferred. Further, the effect of an arbitration clause cannot be directed to anyone other than those parties expressly entering into it.
7. A unilateral arbitration option clause (as in this case) is where two parties agree to grant one of them the authority to choose between the judiciary of the state or arbitration. The Dubai Courts acknowledged that numerous judicial systems hold opposing views on whether a unilateral arbitration option clause is an expression of both parties’ wills (or not).
8. The Court of Cassation concluded that, a unilateral arbitration clause gives rise to an arbitrary condition that violates the principle of equality between the parties before a judicial body, as it affords one party an unfair advantage in any dispute over the other.
9. Further, the Court of Cassation held that a unilateral arbitration option clause is not valid because it is not a ‘meeting of minds’ or final expression of ‘offer and acceptance’, where the parties conclusively agree to arbitration as their chosen dispute resolution mechanism. At time of entry into a contract a unilateral arbitration option clause such as in this case, by definition, does not constitute a clear and unambiguous agreement to arbitrate.
10. Finally, therefore, the Court of Cassation concluded that nothing in the Contract prevented them from having jurisdiction over this dispute.

Pursuant to all the above, the Court of Cassation rejected the main contractor’s appeal, and held that the original judgment in favour of the subcontractor must be executed.

Conclusion

As we know, judgments of courts in civil law jurisdictions are not binding precedent, and are only of persuasive or indicative value in future dispute.

This judgment highlights that the Dubai Courts are, nonetheless, more likely to find a unilateral arbitration option clause to be unenforceable.

It is likely that this type of provision will be tested in the Dubai Courts at some time in the future, as similar provisions are not uncommon. However, for now, our recommendation is that, it is best to avoid unilateral arbitration option clauses to give the parties certainty over the correct forum of dispute resolution.