Recent UAE Ruling Deems FIDIC Arbitration Clauses Unenforceable

In a stunning judgment, the highest Court in Dubai, the Dubai Cassation Court, ruled that incorporating a FIDIC contract (general conditions) by reference into a transaction does not necessarily bind the parties to the arbitration clause therein that FIDIC contract (general conditions). FIDIC refers to the International Federation of Consulting Engineers for consulting, engineering, and construction, and is best known for its FIDIC family of contract templates.

The Dubai Cassation Court also shed light on the court’s approach with respect to Article 7(2)(b) of the Federal Arbitration Law which permits incorporating arbitration clauses by reference to any model contract, international agreement, or any other document containing an arbitration clause. Article 7(2)(b) states:

“An Arbitration Agreement shall be deemed to be in writing if:

(a) it is contained in a document signed by the Parties or in an exchange of correspondence or other written means of communication or in the form of an electronic message in accordance with the applicable rules of the State concerning electronic transactions.

(b) there is reference in a written contract to any model contract, international agreement, or any other document containing an arbitration clause and the reference is such as to make that clause part of the contract.

(c) It was made during the hearing of the dispute by the court competent to entertain it, in which case the court shall issue a decision confirming the Arbitration Agreement, leaving the Parties to commence the Arbitration at such place and time as shall be specified, under the rules governing its proceedings, while ruling the action void.

(d) It is included in written statements exchanged between the Parties during the arbitration proceedings or is acknowledged before the courts, where either party requests referral of the dispute to Arbitration and the other party does not challenge the request in its response.”

FACTS

An employer sued a contractor before the Dubai Primary Court for variations, site discharges, termination for convenience, and other issues related to the construction of a villa. The disputed value was approximately AED 20,000,000.

The Dubai Primary Court found that the courts had jurisdiction over the dispute and ruled in favor of the employer.

The contractor appealed the judgment to the Dubai Appeals Court, which ruled that the courts do not have jurisdiction over the dispute due to the existence of the arbitration clause which was incorporated by reference between the disputing parties, as they had agreed that the 1987 FIDIC Red Book General Conditions of Contract would govern the transaction.

Clause 67 of the 1987 FIDIC Red Book General Conditions (“FIDIC General Conditions”) contains a multi-tiered dispute resolution clause. Clause 67.1 requires that all disputes be referred to the engineer first for a decision. In the event one of the disputing parties seeks to challenge the decision of the engineer, Clause 67.3 stipulates that such dispute shall be submitted before to arbitration under the ICC Rules of Arbitration. Clause 67.1 of the FIDIC General Conditions states:

“If a dispute of any kind whatsoever arises between the Employer and the Contractor in connection with, or arising out of, the Contract or the execution of the Works, whether during the execution of the Works or after their completion and whether before or after repudiation or other termination of the Contract, including any dispute as to any opinion, instruction, determination, certificate or valuation of the Engineer, the matter in dispute shall, in the first place, be referred in writing to the Engineer, with a copy to the other party. Such reference shall state that it is made pursuant to this Clause. No later than the eighty-fourth day after the day on which he received such reference the Engineer shall give notice of his decision to the Employer and the Contractor. Such decision shall state that it is made pursuant to this Clause. Unless the Contract has already been repudiated or terminated, the Contractor shall, in every case, continue to proceed with the Works with all due diligence and the Contractor and the Employer shall give effect forthwith to every such decision of the Engineer unless and until the same shall be revised, as hereinafter provided, in an amicable settlement or an arbitral award. If either the Employer or the Contractor be dissatisfied with any decision of the Engineer, or if the Engineer fails to give notice of his decision on or before the eighty-fourth day after the day on which he received the reference, then either the Employer or the Contractor may, on or before the seventieth day after the day on which he received notice of such decision, or on or before the seventieth day after the day on which the said period of 84 days expired, as the case may be, give notice to the other party, with a copy for information to the Engineer, of his intention to commence arbitration, as hereinafter provided, as to the matter in dispute. Such notice shall establish the entitlement of the party giving the same to commence arbitration, as hereinafter provided, as to such dispute and, subject to Sub-Clause 67.4, no arbitration in respect thereof may be commenced unless such notice is given. If the Engineer has given notice of his decision as to a matter in dispute to the Employer and the Contractor and no notice of intention to commence arbitration as to such dispute has been given by either the Employer or the Contractor on or before the seventieth day after the day on which the parties received notice as to such decision from the Engineer, the said decision shall become final and binding upon the Employer and the Contractor.”

Clause 67.3 of the FIDIC General Conditions goes on to state:

“Any dispute in respect of which:

(a) the decision, if any, of the Engineer has not become final and binding

pursuant to Sub-Clause 67.1, and

(b) amicable settlement has not been reached within the period stated in Sub-Clause 67.2, shall be finally settled, unless otherwise specified in the Contract, under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed under such Rules. The said arbitrator/s shall have full power to open up, review and revise any decision, opinion, instruction, determination, certificate or valuation of the Engineer related to the dispute. Neither party shall be limited in the proceedings before such arbitrator/s to the evidence or arguments put before the Engineer for the purpose of obtaining his said decision pursuant to Sub-Clause 67.1. No such decision shall disqualify the Engineer from being called as a witness and giving evidence before the arbitrator/s on any matter whatsoever relevant to the dispute. Arbitration may be commenced prior to or after completion of the Works,

provided that the obligations of the Employer, the Engineer and the Contractor shall not be altered by reason of the arbitration being conducted during the progress of the Works.”

In its ruling, the Dubai Appeals Court found that incorporating the entirety of the 1987 FIDIC General Conditions by general reference is sufficient to bind the parties to the arbitration clause contained therein.

The employer opted to challenge the judgment of the Dubai Appeals Court before the Dubai Cassation Court. The Dubai Cassation Court overturned the Appeals Court judgment and found that the arbitration clause was not enforceable and that the Dubai Courts had jurisdiction to determine the dispute.

Referring to statute; the Cassation Court relied on Article 7 of the Federal Arbitration Law which requires arbitration agreements to be in writing (cited earlier in this article).

Although the judgment references the entirety of Article 7, the judgment continues to implicitly highlight the provisions of Article 7(2)(b) by elaborating on the permissibility of incorporating an arbitration clause by reference in a written contract to any document containing an arbitration clause, if the reference is tasked with making the arbitration clause part of the contract.

Despite the fact that the parties agreed that the 1987 FIDIC Red Book General Conditions would govern the transaction, the Dubai Cassation Court found that because there was no explicit reference to the arbitration clause in the FIDIC General Conditions (Clause 67 of the FIDIC General Conditions), it cannot be construed that the parties had explicitly agreed to the arbitration clause therein.

The Dubai Cassation Court upheld the Dubai Primary Court’s reasoning. To provide a more in-depth analysis, the Dubai Primary Court stated, as follows:

“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, and it is also decided that if there are appendices or schedules to the contract, it is not required that the parties sign them if the parties stipulate in the contract that these appendices or schedules are considered an integral part of the contract, considering that these appendices or schedules are nothing more than a detailed statement of what the parties have agreed in substantive issues, except that if these appendices or schedules include an exceptional condition such as the arbitration clause, which does not apply to the parties, unless signed by the parties…the contract concluded between the plaintiff and the defendant which governs the relationship that is the subject of the lawsuit does not evidence the will of the parties to bring into effect the arbitration clause to settle the disputes arising from the implementation of the contract.”

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