In Brief:
- The UAE Courts have traditionally held that only signatories to an arbitration clause can be parties to an arbitration, based on the principle of privity of contracts and the requirement that arbitration clauses be in writing.
- In a recent judgment, the Dubai Court of Cassation has tempered this principle by recognising that successors to signatories are also bound by an arbitration clause and can be parties to arbitration proceedings.
- It remains to be seen whether this is a first step towards a greater recognition by the UAE Courts of the possibility of including non-signatories as parties to arbitrations: the inclusion of parent companies for example could be a next frontier.
The UAE Courts, including the Dubai Court of Cassation, have long held that an arbitration clause is only binding upon its signatories. Particular emphasis has been put in various judgments on the requirement that an arbitration agreement must be in writing: the view is that this requirement prevents any non-signatories from becoming parties to an arbitration.
However, the Dubai Court of Cassation, in a judgment issued on 30 March 2023, has tempered this principle by holding that the General or Special Successors to a signatory will also be bound (or can make use of) an arbitration clause in the event of a succession.
The terms “General Successor” (خلف عام) and “Special Successor” (خلف خاص) may not be familiar to some readers:
- A General Successor is a successor in title who takes on the entire assets and liabilities of the predecessor (or a portion thereof) without distinguishing between the various assets and liabilities. The most common examples are: (1) the heirs of a deceased person, (2) an acquiring company with regard to the assets and liabilities of the acquired company, and (3) a newly formed company with regard to the companies that merged in order to create it.
- A Special Successor is a successor in title who only takes on a specific asset or transaction, for example: the buyer of an asset or the assignee of a right or obligation.
In its above-mentioned judgment, the Court of Cassation highlighted that the basic tenet of contract law in the UAE is of course privity of contract, meaning that a contract can only bind those that concluded and executed it. In other words, a contract cannot create obligations upon a third party, and this includes the obligation to commence proceedings in arbitration, rather than before the courts.
The Court of Cassation noted that the assignment of a contract is an exception to the principle of privity which allows the assignee to “inherit” the rights and obligations of the assignor (assuming all the requirements of an assignment were met). The novel element of this judgment is that it confirms that the assignment of a contractor also transfers the rights and obligation arising out of an arbitration clause to the assignee.
It had previously been argued that, given the principle of severability which holds that an arbitration clause is in effect a separate agreement (independent of the contract wherein it resides), the assignment of a contract does not automatically apply to the arbitration provision, and thus would require additional formalities.
The judgment has toppled the previous argument by holding that an assignment automatically includes any arbitration provision, unless expressly excluded. It must be noted, however, that the assignment is only enforceable against the non-assigning party if said party has been notified of the assignment. Although the facts examined by the Court pertained to the assignment of a contract to a third party who then becomes a Special Successor, the Court also expressly stated that the same principles apply to General Successors who also become bound by an existing arbitration agreement.
This newly confirmed principle cuts both ways: a successor to an arbitration agreement benefits from such clause, allowing him to commence arbitration against the other party, but is also bound by it, meaning that he can be subject to arbitration proceedings. Equally, the other party can raise the existence of an arbitration clause as a defence, should the successor opt to commence court proceedings.
This is an important development in UAE arbitration law which brings Dubai in line with other arbitration-friendly jurisdictions.
From a risk perspective, any entities undergoing a corporate restructuring / M&A exercise should keep their eyes peeled for arbitration clauses in the agreements being transferred, and consider what implications such transfers might have.
It remains to be seen whether the Dubai Courts will venture further into the extension of arbitration agreements to non-signatories and apply the group of companies and group of contracts doctrines which have been recognised in some other countries in the world.
For further information related to this article, we recommend reaching out to Kadry Zaghawa, Partner, Dispute Resolutions at Hadef & Partners or our Dispute Resolution team.