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Validity of arbitration agreements in the UAE - what does the POA say?

02 September 2021

Our experts in the Middle East review the latest Judgment from the Abu Dhabi Court of Cassation regarding power of attorney and what this could mean for the future of arbitration agreements.

Introduction 

In a recent judgement (No.922-2020), (1) the Abu Dhabi Court of Cassation (the most senior judicial authority in the Emirate of Abu Dhabi) ruled that a representative acting under a power of attorney ("POA") is only authorised to enter into an arbitration agreement provided their POA allows them to do so in clear and unequivocal terms. 

Background facts 

The underlying dispute concerned a construction project. The subcontractor's representative was in possession of a valid POA to represent the Subcontractor ("First POA") as early as November 2012. However, the First POA stated that it was without prejudice to Article 58(2) of the UAE Civil Procedures Law. In other words, the representative had no authority to waive the rights of the subcontractor, settle disputes on the subcontractor's behalf or agree to bind the subcontractor to arbitration. The subcontractor's representative entered into the subcontracts, containing arbitration agreements, in February of 2014. The works were completed in July 2017. 

Following the completion of the works, a dispute arose between the contractor and the subcontractor in relation to around AED 75 million due to the subcontractor. 

In May 2018, the subcontractor's representative received a separate POA ("Second POA"), which granted the right to bind the subcontractor in respect of Article 58(2) of the UAE Civil Procedures Law. 

The subcontractor referred the dispute to the Court of First Instance in 2019. On 16 February 2020, the Court of First Instance ruled that the dispute should be heard in arbitration in line with the arbitration agreements contained in the subcontracts. The subcontractor appealed this decision.  

On 10 June 2020, the Court of Appeal upheld the Court of First Instance's decision on the basis that: i) the Second POA gave the representative a right to enter into an arbitration agreement; and ii) the Second POA ratified the entry into the arbitration agreements retroactively, as the Second POA had the "same effect as a prior agency". 

The subcontractor made a final appeal to the Court of Cassation. 

The Court of Cassation Judgement

The Court of Cassation reversed the earlier decisions. At this stage, it is important to highlight the following provisions of UAE law (as unofficially translated): 

i. Article 8, Federal law No 6/2018 on Arbitration: "The court, before which an action was instituted regarding a dispute in respect of which an Arbitration Agreement exists, shall dismiss the action, if the Respondent moves to dismiss on this ground before making any other motions or plea on the subject matter of the action, unless the court finds that the Arbitration Agreement is void, or unenforceable.

ii. Article 217(1) Federal Law No 5/1985 Civil Transactions Law of the UAE: "If consent is given to a suspended transaction, it shall become effective retroactively to the time it was made, and the subsequent consent shall have the same effect as a prior agency.

iii. Article 930 Federal Law No 5/1985 Civil Transaction Law of the UAE: "Subsequent permission for a dealing shall be regarded as a prior grant of agency."

In respect of the representative's authority generally, the Court of Cassation clarified that: 

"The authority of the attorney may be explicit, implicit, or apparent. Authorisation is explicit if stated orally or in writing and implicit if inferable from the state of affairs, from what has been said or written, or from the ordinary course of dealing. Acts of an attorney which fall outside the scope of the power are null and such nullity is relative in favour of the principal whose approval is necessary for such acts to be valid. Determinations on such matters are within the discretion of the trial court whose reasoning must be sound and demonstrative of the operative part of its decision."

The Court of Cassation then decided that the Second POA did not ratify the prior acts of the representative and was "applicable only to new contracts and works and not to the subcontracts in question." The Court of Cassation relied on the fact that the works under the subcontracts were completed by the time the Second POA was issued. It is important to note that the Second POA appears not to have included express language that prior acts were ratified. 

Based on this, the Court of Cassation concluded that, since the Second POA did not ratify the acts under the First POA, the initial entry into the arbitration agreements under the subcontracts was carried out outside the scope of the representative's authority. Therefore, these acts were void at the time they were made. 

The Court of Cassation also mentioned that "the [contractor] deliberated extensively on the merits" in the expert procedure before the courts and, therefore, "waived its right to invoke the arbitration clause." 

While all of the above grounds appear sufficient to reach the Court of Cassation's ultimate decision, the judgement expressly states: 

"Indeed, the arbitration agreement is an exceptional arrangement whereby its parties opt for arbitration rather than litigation before the ordinary courts of law. This exception may not be interpreted broadly or extracted through analogy and must be construed within the narrowest limits. Furthermore, the parties’ intent must be clear and explicit and free from ambiguity and doubt."

Based on this, the Court of Cassation ordered the action to be remanded back to the Court of First Instance for the consideration of the merits of the dispute. 

Commentary 

This article is a third in a recent series of the Court of Cassation decisions in Dubai and Abu Dhabi, see our first update here and our second update here. It is somewhat worrying that the tide appears to be turning against upholding arbitration agreements, despite prior sentiment amongst the UAE Courts. 

The Court of Cassation's reiteration of the "exceptional arrangement" of arbitration is also likely to concern parties who are relying on the terms of the New York Convention that an "agreement in writing" is sufficient. 

Any parties seeking to resolve their disputes in arbitration should be aware of the intricacies of entering into a valid and binding arbitration agreement while conducting business (or dealing with parties based) in the UAE.

References: 

(1) Unofficial translation obtained from http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2021/06/Cassation-922-of-2020-Abu-Dhabi-Court-of-Cassation-Decision.pdf 

Further Reading

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