Introduction
In a recent judgment, the Dubai Court of Cassation (the most senior judicial authority in the Emirate of Dubai) ruled that incorporation into a contract, by reference, of the FIDIC Red Book General Conditions of Contract ("Red Book Conditions"), does not automatically mean the parties are bound by the arbitration clause found in the Red Book Conditions. This judgment provides insight to the application of Article 7(2)(b) of United Arab Emirates ("UAE") Federal Law No. 6/2018 on Arbitration ("Arbitration Law"), which permits arbitration clauses to be incorporated into contracts, where that contract references a model contract (such as the Red Book Conditions), international agreement or any other document containing an arbitration clause.
Background Facts
The underlying dispute related to the construction of a villa. The quantum in dispute was approximately AED 20m. Legally contentious issues included variation, site discharge, termination for convenience and other construction related points.
The parties agreed that the Red Book Conditions were incorporated into their contract. Clause 67 of the Red Book Conditions contains a multi-faceted dispute resolution clause which requires that all disputes are, first, referred to an engineer and, second, submitted to arbitration under ICC Rules.
The employer sued the contractor before the Dubai Court of First Instance. The Court of First Instance ruled in favour of the employer and found that the Dubai Courts had jurisdiction over the dispute. The contractor appealed to the Dubai Court of Appeal, which overturned the first instance judgment. The Dubai Court of Appeal ruled that the Dubai Courts had no jurisdiction over the dispute due to the arbitration clause found in the Red Book Conditions.
The employer appealed against the Dubai Court of Appeal's ruling in the Dubai Court of Cassation.
Judgment
The Dubai Court of Cassation overturned the Court of Appeal's ruling. It found that the arbitration clause in the Red Book Conditions was not enforceable and, therefore, the Dubai Courts had jurisdiction to hear the dispute. The Court of Cassation reviewed Article 7 of the Arbitration Law which requires arbitration agreements to be in writing. The Court of Cassation ruling also considered Article 7(2)(b), by reviewing the extent to which it is valid to incorporate an arbitration clause into a contract by reference to other documents.
The Court of Cassation ruled that, even though the parties in this case agreed to be bound by the Red Book Conditions, they had not agreed to be bound by the arbitration clause in the Red Book Conditions. This was because the contract between the parties did not itself explicitly contain an arbitration clause nor did it refer to the arbitration clause in the Red Book Conditions. The Court of Cassation approved the following passage set out in the ruling of the Court of First Instance:
"An agreement to arbitration is considered when it is a referral contained in the original contract to the document that includes the arbitration clause if the referral is clear and explicit in adopting this condition, and the effect of the referral is only achieved if it includes an indication to the arbitration clause included in the document referring to it, yet if the referral to the aforementioned document is merely a referral in general for the texts of this document without specifying the aforementioned arbitration clause in particular that establishes the parties’ knowledge of its existence in the document, the referral does not extend to such arbitration clause, and the arbitration is not deemed agreed upon between the parties to the contract."
Commentary
This judgment is significant for any party in Dubai and / or the UAE drafting a contract where they intend to refer disputes arising from that contract to arbitration. It is not sufficient for the contract to merely refer to the Red Book Conditions, international agreement or other document that contains an arbitration clause. Mere reference will likely mean the contract is not subject to arbitration and, instead, will be within the jurisdiction of the Dubai courts.
If parties want a dispute under their contract to be referred to arbitration, they must: (i) at the very least, explicitly state that they intend for the arbitration clause in the Red Book Conditions (or other document they are incorporating by reference) to apply, preferably under a dispute resolution or arbitration heading in the main contract; and / or (ii) preferably, provide a separate arbitration clause in their signed contract to avoid all ambiguity.
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