Onshore Dubai Court concludes that a unilateral option to refer to arbitration does not constitute a valid arbitration agreement

12 November 2024

The Dubai Court of Cassation has recently ruled that an arbitration provision within a unilateral option clause was not a valid agreement to arbitrate under the laws of the UAE.

Background:

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 elect to refer a dispute to litigation before the courts; or (b) litigation, but giving one party the right to elect to refer the dispute to arbitration.

Whilst the courts in ADGM and DIFC freezones have considered and opined on the enforceability of such unilateral option clauses, there are few (if any) known examples of the onshore UAE courts considering such clauses.

On 29 October 2024, the Dubai Court of Cassation issued Judgment No. 735 of 2024 (Commercial Appeal by Cassation), in which it considered a clause that gave one party the power to decide if disputes were referred to arbitration or litigation.

The dispute originated from a series of contracts between a contractor (the Defendant) and a subcontractor (the Claimant). The contracts involved the supply and implementation of waterproofing works and the installation of suspended ceilings across different projects. A dispute arose between the two parties regarding payment of amounts said to be due under the contracts. The Claimant brought claims in the onshore Dubai Court.

The contracts included the following dispute resolution clause: "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 Defendant (i.e., the party in whose favour the option was granted) argued that the proceedings should be dismissed in favour of arbitration. This argument was rejected by the Court of First Instance. The Defendant appealed, arguing that the arbitration clause granted it sole authority, as the contractor, to determine the adjudicating authority for any disputes arising from the contracts. Given this discretion, and the fact that the Defendant wished to resolve the dispute through arbitration, the Defendant argued that the Claimant should not be allowed to bring a claim in the UAE courts. The Dubai Court of Appeal rejected the appeal and upheld the initial judgment (Judgment No. 701 of 2024 (Commercial Appeal)). The Defendant lodged a further appeal against that decision.

Decision:

The Dubai Court of Cassation found that the arbitration clause in the contracts was not binding, as it did not unequivocally mandate arbitration as the sole method of dispute resolution. The clause allowed for the possibility of either arbitration or court jurisdiction, and did not therefore preclude the Claimant from seeking judicial intervention.

The Court emphasised that, for an arbitration clause to be binding, it must be clear, explicit and unambiguous. It found that the clause at hand, which provided the contractor alone with the option to choose the dispute resolution method, did not meet such criteria.

The Court also noted that arbitration is a consensual process requiring the unequivocal agreement of both parties. There should be a 'meeting of the minds' between the parties that does not cast doubt or cause controversy on their consensus to arbitration. In this case, the clause did not reflect a mutual agreement among the parties to arbitrate disputes exclusively and therefore did not deprive the Claimant from bringing a claim in the local courts.

Commentary:

In its judgment, the Court of Cassation acknowledged that there are varying approaches to unilateral option clauses in different jurisdictions. Indeed, it noted that some legal systems recognise such clauses under the principle of freedom of contract, while others do not due to their 'arbitrary nature' and potential to violate the 'principle of equality' and the 'balance of interests' between contracting parties. The decision of the Court – while not expressly stating that unilateral option clauses of any sort ought not to be upheld by the UAE courts – would seem clearly to indicate that the onshore UAE Courts are likely to fall into the group of jurisdictions that are less receptive to unilateral option clauses.

Notwithstanding the above, it is not entirely clear to what extent the particular wording of the clause in the relevant contracts influenced the Court's decision. In particular, the fact that the clause simply recorded two alternatives, to be selected by the contractor. The clause did not, for example, purport to present arbitration as having been agreed between the parties, subject only to an election by the contractor to refer a relevant dispute to the UAE court. It is not clear whether such a clause would satisfy the Court's requirement for a clear agreement to arbitrate.

Pending any further decisions on this topic by the Dubai – or other onshore UAE – courts, parties would be well-advised to exercise caution before including unilateral option clauses in contracts with UAE counterparties. In light of the decision of the Court of Cassation, there is clearly a danger that even the best-drafted unilateral option clause might not be enforced.