What Is Arbitration and Why Do Businesses Choose It?
Many business deals are concluded without an understanding of the dispute resolution mechanism being agreed to by the parties. Often, business owners and contract managers overlook the “dispute resolution clause” when signing a commercial contract. It is only when a business relationship turns sour and a disagreement or conflict arises that there is focus on this important clause.
Increasingly, parties now prefer arbitration as the method for resolving commercial disputes rather than choosing litigation in the local courts.
Simply speaking, arbitration can be described as a procedure whereby the parties appoint an independent person (or persons) to settle a commercial dispute by way of a binding decision as an alternative to court litigation.
Benefits of Arbitration Over Litigation
Besides speed and efficiency, one of the primary reasons why businesses choose arbitration as the preferred mode of dispute resolution is the fact that court proceedings are often heard in public, not privately. Consequently, there is a risk of sensitive information, trade secrets and confidential business strategies being exposed in the public domain. Arbitration, on the other hand, is generally a private process, keeping the details of the commercial dispute and the resolution confidential. Thus, arbitration is particularly appealing when businesses want to keep the dispute private, proprietary information confidential and wish to save their long-term business relationship once the ongoing dispute is resolved.
Drafting an Arbitration Clause: Key Considerations
Given the growing preference for arbitration, it is important to understand the key aspects of an arbitration clause in commercial contracts, as summarised below-
- Whether the parties are choosing “ad hoc arbitration” or “institutional arbitration”?
- Ad hoc arbitration; where a business contract states simply that the parties agree to resolve disputes through arbitration, without selecting any institution to administer such arbitration. As a result, no institution would be administering the procedure and conduct of the arbitral proceedings.
- Institutional arbitration; which institution shall deal with the arbitration.
- Whether appointment of a sole arbitrator or an arbitral tribunal constituting 3-5 arbitrators?
- Choice of language for the arbitral proceedings and the final binding arbitral award.
- Choice in relation to the oft-confused concepts of “seat” and “venue”.
UAE Arbitration Laws and Institutions
In recent years, the UAE has emerged as an arbitration-supportive jurisdiction, with a comprehensive legislative framework and robust institutional framework, as discussed briefly below.
Federal and Free Zone Arbitration Laws
Within the UAE mainland and the two UAE financial freezones, the following are the relevant arbitration laws currently in force:
- UAE Mainland: Federal Law No. 6 of 2018 Concerning Arbitration (as amended).
- Dubai International Financial Centre (DIFC): Arbitration Law DIFC Law No. 1 of 2008 (as amended).
- Abu Dhabi Global Market (ADGM): ADGM Arbitration Regulations 2015 (as amended).
Key Arbitration Centers in the UAE
Currently, the following are the key arbitration institutions in the UAE:
- Dubai International Arbitration Centre (DIAC)– which is regarded as the region’s largest alternative dispute resolution centre for commercial disputes.
- Abu Dhabi International Arbitration Centre, popularly referred to as “ArbitrateAD”.
- With effect from February 1, 2024, ArbitrateAD replaced the ‘Abu Dhabi Commercial Conciliation and Arbitration Centre’ (ADCCAC).
- Sharjah International Commercial Arbitration Centre, also known as “Takheem”.
It is further interesting to mention that the International Chamber of Commerce (ICC) has opened its regional office in Abu Dhabi Global Market, whilst the Saudi Centre for Commercial Arbitration (SCCA) has recently opened its Dubai branch office in the Dubai International Financial Centre (DIFC).
Also, the UAE acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention) in the year 2006 and did not make any reservations upon its accession. As of today, there are 173 countries which have acceded to the New York Convention as a contracting state.
The New York Convention establishes a “pro-enforcement” framework for arbitral awards rendered in cross-border commercial disputes, as courts in the contracting states are generally obligated to recognise and enforce foreign arbitral awards and rejection is a possibility (at the request of the party against whom the award is invoked) only if limited circumstances are met. These are outlined under Article V of the New York Convention.
From the decisions rendered by the Dubai Courts in the last few years, it is noteworthy that the Dubai Courts are strictly adhering to the New York Convention whilst ratifying and enforcing foreign arbitral awards.
Seat vs Venue: Key Differences Explained
Demystifying “Seat” v. “Venue”
Ideally, an arbitration clause should always clearly specify both the “seat” and the “venue” for arbitral proceedings.
A loosely drafted commercial contract that merely states “arbitration in Dubai” creates significant ambiguity. Such unclear drafting would likely lead to arguments as to whether Dubai is the “seat” (the legal home of the arbitration) or just the “venue” (the physical location for the proceedings).
This kind of ambiguity can lead to jurisdictional challenges and unnecessary roadblocks to resolving business disputes efficiently, resulting in protracted legal proceedings, wasted time and unnecessary costs and expenses.
Legal Implications of Choosing the Seat
Essentially, the choice of “seat” (curial law/ lex arbitri) will establish the applicable legal and procedural framework of the arbitration and determines the relevant court which will have jurisdiction to support the arbitration in the event a party seeks interim measures, e.g. an injunction application. Additionally, the choice of “seat” will determine the court which has jurisdiction in the event there is a challenge to the validity of the award passed by the arbitral tribunal.
Practical Considerations for Venue Selection
By contrast, the “venue” represents the physical location where the arbitration proceedings would be conducted i.e. where the arbitral meetings and hearings will take place. The venue for arbitration is typically chosen based on the parties’ logistical and practical convenience. In fact, with the necessity for hearings by video conferencing during the Covid-19 pandemic, virtual meetings and hearings are becoming the preferred mode in arbitral proceedings.
Example Clause: DIFC as Seat, Dubai as Venue
“The seat of arbitration shall be Dubai International Financial Centre (DIFC). The venue for hearings shall be Dubai, or such other place as the Tribunal may determine.”
- DIFC (Seat): Arbitration Law DIFC Arbitration Law No. 1 of 2008 (as amended) is the crucial law and would govern the procedural aspects of the arbitration, and the DIFC Courts would have the supervisory jurisdiction to review an injunction application or set aside the arbitral award if it is challenged by the award debtor.
- Dubai (Venue): The parties’ representatives and appointed arbitrator(s) would meet (in-person) at a suitable location anywhere in the Emirate of Dubai for the arbitral hearings. Alternatively, the parties may request the arbitral tribunal to arrange virtual hearings by way of video-conferencing facilities as opposed to physical meetings, but the venue remains Dubai.
Final Thoughts:
Whilst the venue of an arbitration is a matter of practical and logistical convenience, the choice of seat is a fundamentally important choice which will define the curial law for the procedural and supervisory court framework of the arbitration.
Parties entering into an arbitration agreement must carefully consider and clearly understand the distinction between these two concepts prior to signing, so as to avoid uncertainty and long, drawn-out jurisdictional challenges.
In summary, when signing a business contract, it is not enough to just stipulate your commercial terms and protect your rights; it is equally important to ensure that a well-defined dispute resolution clause is drafted in your contract to ensure both cost-effective and time-efficient resolution if a commercial dispute arises.
At James Berry & Associates, we possess substantial experience to advise and assist clients with all facets of commercial dispute resolution, including amicable settlements, mediation and arbitration. Should you wish to seek specific legal advice and assistance, please click here to contact us.
Disclaimer: This blog provides general information and does not constitute legal advice. For bespoke legal advice and assistance, please consult with a qualified legal professional.
Partner, Head of Litigation, Dispute Resolution, and Real Property
Legal Consultant
