Decree No. 34 of 2021 – Big Changes for Arbitration in Dubai, Turbulent Times for DIFC-LCIA Arbitration


Client Alert
14 October 2021 By ALEXANDER LÜTGENDORF

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On 14 September 2021, Decree No. 34 of 2021 concerning the Dubai International Arbitration Centre was issued (the Decree) in an astonishing move that will fundamentally change the landscape for arbitration in Dubai.  The Decree came into force only a few days after on 20 September 2021. We have considered the Decree and its impact and advise on what it means for you.

 

What are the changes?

In summary, the Decree abolished with immediate effect two arbitration institutions in Dubai – the DIFC Arbitration Institute (DAI), which administered the DIFC-LCIA Arbitration Centre (DIFC-LCIA) through a joint venture with the London Court of International Arbitration (LCIA), and the Emirates Maritime Arbitration Centre (EMAC).  The DIFC-LCIA, a leading arbitral institution in the MENA region and EMAC, a specialised maritime arbitral institution, are both located in the Dubai International Financial Centre (DIFC).  By eliminating the two institutions, the Decree seeks to establish a single unified arbitration institution for Dubai, the new Dubai International Arbitration Centre (DIAC) replacing the existing DIAC as it currently operates.

To this end, all EMAC and DAI’s assets, real estate, financial funds, rights and obligations, and potentially employees are to be transferred to DIAC.  DIAC will be headquartered in “onshore” Dubai and maintain a branch office in the “offshore” DIFC.  It will consist of a board of directors, a newly established arbitration court of 13 members and an administrative body to manage and supervise all arbitrations under the DIAC Arbitration Rules or such other rules as the parties may agree, but no further information is currently known on how the new DIAC will operate.

What are the effects of the Decree?

These changes came entirely unexpected and raised concerns over the status of the DIFC-LCIA, the case management of ongoing arbitrations and existing agreements providing for arbitration under the DIFC-LCIA Rules. 

DIAC has six months to comply with the Decree and replace the institutions of DAI and EMAC.  Detailed arrangements for an orderly transition are yet to be announced. 

While the sudden enactment of the Decree baffled most stakeholders, the consolidation of Dubai’s arbitration institutions into a single restructured DIAC is intended and widely promoted to boost Dubai’s reputation as a leading hub for alternative dispute resolution in the region and globally.  In doing so, the Decree is looking to harmonise and streamline Dubai’s arbitration offering.

That being said, the DIFC-LCIA was one of the most successful, if not the most successful, arbitration institution in the region supported by, and benefitting from, its association with the LCIA, one of the world’s leading and oldest arbitral institutions based in London, United Kingdom.  The DIFC-LCIA drew on the international best practices and reputation of the LCIA, combining them with the unique understanding of local and regional legal cultures in the Gulf and wider MENA region.  With the abolition of DAI, it appears that the DIFC-LCIA will also be abolished.  By contrast, the abolition of EMAC will not likely have any significant impact, given that EMAC does not appear to have ever had a high caseload. 

Consultation between the Government of Dubai, DIAC and the LCIA is ongoing to hammer out the details of the six months’ transition period and seek to ensure the uninterrupted management of existing and future cases.

What happens to existing DIFC-LCIA arbitrations?

There are a number of potential practical issues and concerns for parties currently engaged in arbitral proceedings under the DIFC-LCIA Rules.  The Decree provides that any arbitral tribunal constituted before 20 September 2021 shall remain in place and conduct the proceedings under the current DIFC-LCIA Rules.  The Decree further stipulates that DIAC will supervise these ongoing cases.  That of course raised questions and confusion among parties and tribunals as to the inherent complexity of DIAC taking over from the DIFC-LCIA and conflicts with the LCIA Court’s functions under the DIFC-LCIA Rules. 

Consequently, on 7 October 2021, each the DIFC and LCIA issued a press release to clarify and propose that existing cases that were referred to DIFC-LCIA before 20 September 2021 will continue to be administered by the DIFC-LCIA’s Registrar and case management team rather than DIAC.  According to the DIFC, this means that the LCIA will continue the administration of all ongoing cases through the DIFC-LCIA, whereby the DIFC proposed that the DIFC-LCIA’s Registrar and case management team would act on behalf of the LCIA on a secondment basis from DIAC until the proceedings are concluded.  The proposed “secondment” structure is intriguing and provokes all sorts of issues (including notably the possibility of challenges of future awards) but what it means is that for now ongoing cases shall continue to be administered by the DIFC-LCIA (whether on secondment from DIAC or otherwise).

The announcements provided a welcome reassurance to parties in ongoing proceedings but further clarification on the scope and application of the Decree remains to be provided.  However, there has not been any explicit statement that the DIFC proposal set out in the DIFC press release of 7 October 2021 has been accepted by all parties concerned, and the LCIA’s press release referred to certain outstanding issues.  Specifically, the LCIA emphasised that the “current status of the DIFC-LCIA casework team, their ability to access the funds held by DAI on behalf of the parties to existing DIFC-LCIA cases and the way in which the authorities intend to equip DIAC to perform its new functions” must be resolved as a matter of urgency.

One urgent issue is access to deposits of the parties that the DIFC-LCIA currently holds on account of the parties in its many ongoing arbitrations.  Given the inherent uncertainty owing to DAI having been abolished, there is no clarity as to whether the DIFC-LCIA is able to pay tribunal fees and expenses, let alone the case management team fees and the DIFC-LCIA employees.  Delays may also occur for proceedings where no sufficient advances were collected from the parties before 20 September 2021.  Unless this is resolved, tribunals may be cautious in continuing proceedings. 

The press releases were also most certainly made to avoid potential challenges against the validity and enforcement of future DIFC-LCIA awards on the ground of the change of case management of the proceedings to DIAC without the parties’ agreement.  Nevertheless, the DIFC’s proposal that existing cases be managed by the LCIA through the DIFC-LCIA on secondment from DIAC will not likely be able to eliminate that risk.

What happens to existing agreements?

Most parties to existing agreements containing DIFC-LCIA arbitration clauses will be concerned about the impact of the Decree on future disputes.  The Decree states that existing agreements providing for DIFC-LCIA arbitration, which have been concluded before 20 September 2021, remain valid and DIAC will substitute the DIFC-LCIA, unless the parties agree otherwise.  As explained, the DIFC announced on 7 October 2021 that disputes that were referred to DIFC-LCIA arbitration before 20 September 2021 continue to be administered by the DIFC-LCIA (acting on behalf of the LCIA on secondment from DIAC) and the proceedings conducted under the DIFC-LCIA Rules.

Conversely, according to the DIFC announcement, any dispute referred to DIFC-LCIA arbitration after 20 September 2021 arising out of an agreement containing a DIFC-LCIA arbitration clause concluded before 20 September 2021 will be administered by DIAC in accordance with the DIAC Rules.  The Decree indicates that DIAC will issue new rules.  As with cases filed on or before 20 September 2021, the risk remains however that such cases will be exposed to potential challenges against the validity and enforcement of future awards, unless parties subsequently agree the application of the DIAC Rules and that their proceedings be administered by DIAC.

Parties to DIFC-LCIA arbitration agreements will and ought now to consider renegotiating their DIFC-LCIA clauses and substitute with another institution, provided that it can be agreed.  It is questionable whether parties would agree the application of the DIAC Rules.  The current DIAC Rules date back to 2007 and are antiquated by international standards.  Although revised DIAC Rules were announced in 2017, they have not been adopted to date.  For example, one of the issues under the DIAC Rules is the risk and lack of clarity for a successful party to be able to recover its costs of legal representation.  Onshore Dubai courts have interpreted the cost provisions of the DIAC Rules to mean that legal costs are excluded from recovery.  The dilemma is unique to DIAC arbitrations seated in Dubai.  Notwithstanding the possibility of including an express provision for the recovery of legal costs in the arbitration clause, parties may still opt for one of the more established international institutions, such as the ICC or LCIA. 

What happens to future agreements?

Parties seeking to agree to arbitration in the Middle East should no longer provide for arbitration under the DIFC-LCIA or EMAC Rules.  Future agreements providing for DIFC-LCIA or EMAC arbitration concluded after 20 September 2021 will either default to DIAC and its rules or become inoperable on the basis that DIFC-LCIA and EMAC have been abolished.  In the latter case, it is conceivable that an arbitration agreement providing for DIFC-LCIA or EMAC arbitration will not entirely be held invalid and instead allow for ad hoc arbitral proceedings under the applicable arbitration law of the seat of the arbitration (albeit without the institutional support of an administering institution but with the assistance of the competent national court) on the basis that the parties had agreed in principle to arbitrate disputes rather than resolve them before the national courts.  In most cases, ad hoc proceedings under the applicable arbitration law without the support of an arbitral institution ought to be avoided, for it may require the support of the competent courts in respect of the constitution of the arbitral tribunal and other matters.  Parties will be best served to agree DIAC or another arbitral institution.

While DIAC may not initially be the preferred choice for parties, there are other good options for arbitral institutions and seats.  The LCIA will in all likelihood be most attractive to parties and suitable, because of the similarity and overlap of rules and the LCIA Court’s supervisory role in proceedings under both the LCIA and DIFC-LCIA Rules.  Parties choosing the DIFC-LCIA Rules trust in their application which are very similar to the LCIA Rules, including its provision for the appointment of arbitrators and handling of arbitrator challenges by the well-respected LCIA Court.  It therefore seems unlikely that parties whose preference lie with the DIFC-LCIA (or any other international institution) will opt for DIAC instead in the near future. 

What does it mean for you?

If you are involved in an arbitration under the rules of the DIFC-LCIA or EMAC, your proceedings will continue without interruption.  To the extent that the arbitration commenced prior to 20 September 2021, it will continue to be administered by the DIFC-LCIA’s Registrar and case management team.  You will proceed as before.

As regards cases commenced after 20 September 2021, it is envisaged that the new DIAC will take over the case management from the DIFC-LCIA and likely administer them in accordance with the DIAC Rules, subject to whatever further arrangements the Dubai Government and those institutions may agree and announce in the coming weeks.  However, parties to existing proceedings may also decide whether to accept DIAC’s case management and Rules or amend their arbitration agreement to select another arbitral institution to manage their case. 

If your existing agreements provide for arbitration under either the DIFC-LCIA Rules or EMAC, you may wish to seek legal advice on how to navigate the changes and further developments.  Where disputes have not yet arisen, parties ought to review their agreements and seek to agree amendments to their arbitration clauses to account for the upcoming changes and eliminate any ambiguity and risk in respect of a future award issued in such arbitral proceedings.

What to include in future agreements?

The DIFC-LCIA or EMAC are no longer an option.  If you include them in your arbitration agreement, they will either default to DIAC, become inoperable or potentially allow the parties to proceed ad hoc pursuant to the arbitration law of the chosen seat of arbitration (without being administered by DIAC or any other arbitral institution for that matter). 

DIAC is one option but instead parties may be able to choose from a number of other arbitral institutions (such as ICC, LCIA, SIAC, CRCICA, ADCCAC, etc.) and arbitral seats that depending on the circumstances of their particular agreements will best suit their needs.  The choices are complex, and parties ought to seek legal advice to make that choice.

Parties should also carefully consider the seat or legal place of the arbitration and may continue to select “onshore” Dubai or the “offshore” DIFC as their seat of arbitration.  The Decree now provides that the DIFC will be the default seat for any DIAC arbitration agreement that fails to determine the seat.  The development is important, because arbitration agreements that are silent on the selection of a seat will now be defaulted to the DIFC rather than “onshore” Dubai.  This will be attractive to international parties because the DIFC seat allows for supervisory courts that operate in English based on English common law principles and are governed by the DIFC Arbitration Law which is rooted in the UNCITRAL Model Arbitration Law for supervisory and procedural matters.

What does it mean for Dubai arbitration?

In the short term, the Decree is likely to adversely affect Dubai’s reputation as a hub for international arbitration.  The various unresolved key issues resulting from the unexpected and swift abolition of DAI affecting parties conducting proceedings under the DIFC-LCIA Rules, and not least the inherent uncertainty pertaining to future disputes, will impact Dubai’s reputation as a reliable place of arbitration.  Unless clarity is provided and clear transitory rules are issued respecting the parties’ choices to resolve their disputes and allowing a smooth and unhampered transition for ongoing and future cases, there are bound to be challenges before the competent national courts in the United Arab Emirates and abroad against the validity and enforcement of future arbitral awards issued in such proceedings.

That not being enough, all this takes place against the backdrop of competition Dubai is facing with other attractive international arbitral seats around the world (including Abu Dhabi, Singapore, London, Paris, to name a few), but also with numerous international arbitral institutions, such as ICC, LCIA and SIAC, and regional competitors in the MENA region, including CRCICA in Egypt and SCCA in the Kingdom of Saudi Arabia, as well as Abu Dhabi’s arbitration offering, including the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) attached to the Abu Dhabi Chamber of Commerce and Industry, the ADGM Arbitration Centre located within the Abu Dhabi Global Market (ADGM), an international financial centre with its own courts, competing with the DIFC, and the ICC’s case management office located at ADGM.

In the longer term however, there are numerous positive foundations for the future of Dubai arbitration, including a fairly new arbitration legislation in onshore Dubai and its increasingly supportive court system, the DIFC’s modern arbitration legislation as an alternative to onshore Dubai’s jurisdiction within the emirate of Dubai, compounded by various international conventions, such as the 1958 New York Convention on the Recognition and Enforcement of Foreign Awards and the Riyadh Convention, to which the United Arab Emirates is party allowing the enforcement of awards issued in Dubai or the DIFC in most countries around the globe.  The number of arbitration cases seated in Dubai or the DIFC is thus expected to grow, and the consolidation of the DIFC-LCIA, EMAC and DIAC into a unified and restructured DIAC may well in the long run stimulate that growth and enhance Dubai’s reputation. 

The Decree has the Government of Dubai’s backing.  The Government of Dubai remains committed to establishing Dubai as a reliable global hub for resolving disputes through alternative means of dispute resolution.  More clarity is needed on the scope and application of the Decree through additional legislation, including unequivocal transitory arrangements that respect party autonomy.  We are monitoring developments and heard through the grapevine that further announcements are expected to be released within the next few weeks. 


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