A subject that has been widely debated in the world of arbitration is whether failure to pay the advance on arbitration costs constitutes a waiver of the arbitration clause. The response to this debate not only differs from jurisdiction to jurisdiction, but may differ within the same jurisdiction. This blog post examines how courts in the United Arab Emirates (“United Arab Emirates”) to deal with the non-payment of the advance on the costs of arbitration.
Failure by defendants to pay upfront fees and expenses in arbitrations is not uncommon and often leaves claimants in arbitration proceedings in a difficult position. One way to deal with such an event would be for the claimant to pay the respondent’s share of the advance on costs so that the arbitration can proceed. When the service provider chooses this path, he risks finding himself in a financially burdensome situation. The claimant may, on the contrary, decide not to pay the advance on costs and to bring the claim before the courts. This raises further issues for the claimant, such as ending up in the courts when they intended to evade their jurisdiction by agreeing to arbitration. Equally problematic for the claimant would be the case where the courts have already decided that they lack jurisdiction based on the arbitration clause, in which case the claimant is left with no forum to hear their claim.
What is the position in the UAE?
There are very few decisions from UAE courts that shed light on this issue. One of these decisions is made by the Dubai Court of Cassation (“Court of Cassation”) No. 215/2019 (Commercial). In this case, the Court of Cassation dealt with a claim that had originally been filed before the Dubai International Arbitration Center (“DIAC”). The respondent had also filed a counterclaim in this case. Neither party has paid the advance on costs for its respective claim and counterclaim. Consequently, the DIAC closed the file and considered the requests of the two parties as withdrawn. When filing the case before the courts, the Court of Cassation decided that the arbitration clause was considered non-existent and therefore the plaintiff could only have recourse to the courts because they have the “home jurisdictionto hear disputes.
The term “home jurisdictionwhich is often used by courts in the UAE, reflects the view of the courts that they are the default forum to hear disputes and that arbitration is a departure from the norm. Other avenues for resolving disputes, such as arbitration, are considered exceptional and, therefore, when arbitration of a dispute is no longer possible, the jurisdiction of the courts to hear the dispute is automatically restored.
In its reasoning, the Court of Cassation took into consideration that after the closure of the file by the DIAC, the defendant had not challenged the decision to consider the case as without further action and that there was no further action by Claimant to resubmit the matter to arbitration in accordance with the applicable rules (i.e. DIAC Rules 2007 Appendix Cost of Arbitration). The Court of Cassation concluded that, therefore, it was not possible to hear the claim which was previously the subject of the arbitration procedure.
Although the Court of Cassation did not analyze whether there had been a waiver of the arbitration clause by the parties, it is possible to conclude that there had indeed been a waiver on the grounds that each of the parties had refused to pay the advance on costs relating to its own claims and none of the parties objected to the DIAC’s decision to close the file and to consider the claims and counterclaims as withdrawn.
In a recent case that ended up in the courts of Dubai, a subcontractor initiated arbitration proceedings against the contractor but failed to pay its share of the advance on costs due to lack of funding. The respondent (contractor) was asked to pay both parties’ share, but refused to do so. Accordingly, the court issued a decision declaring the proceedings closed. The subcontractor then brought an action in the Dubai Magistrate’s Court (“CFI“) (To see Case No. 678/2020 (commercial)). The contractor challenged the jurisdiction of the courts on the basis of the arbitration clause but his challenge was dismissed. The TPI explained that when the arbitration clause is not likely to be executed for any cause and reason whatsoever, jurisdiction rests with the court because the judiciary has “general competenceto resolve disputes. He further explained that when the arbitral award is invalidated1) or the arbitration clause is no longer applicable, the purpose of the arbitration is extinguished. Consequently, each of the parties may go to court and is not required to submit the case to arbitration unless there is a new arbitration agreement. According to the TPI, the arbitral tribunal had decided to terminate the arbitration proceedings for non-payment of the arbitration costs and as a result, the arbitration clause became inoperative. . The case was then heard by the Court of Appeal, which upheld the TPI’s decision. Subsequently, the case was appealed to the Court of Cassation, which upheld the decision of the lower courts and adopted the same analysis. Also in this case, the plaintiff had not paid the advance on costs. Although the court did not mention that the claimant had waived the arbitration, one could conclude that the waiver took place on the grounds that the claimant did not pay the advance on costs, for which he is responsible.
Unlike the two decisions above, in Dubai Court of Cassation 379/2013 (Real Estate), it was not the plaintiff who had not paid the advance on costs, but the defendant, who prompted the DIAC to declare the case closed. The plaintiff then brought his claims before the courts. The Court of Cassation, once again, relied on the fact that when the arbitration agreement cannot be enforced, jurisdiction falls to the courts because they have “general jurisdiction”. He further explained that the decision of the DIAC to close the file renders the arbitration clause non-existent because the object of the arbitration is extinguished since it was not possible to continue the arbitration. This then gives the plaintiff the right to file their claim in court. The tribunal added that the claimant was not required to pay the defendant’s fees, as Article 2(4) of the Arbitration Fees Schedule to the 2007 DIAC Rules states that the advance must be paid equally. The reference in the decision to Article 2(4) raises the question whether the Court of Cassation would have reached a different conclusion in the absence of such a provision in the 2007 DIAC Regulation. On the one hand, it may not be wise to draw any conclusion on this point in the absence of sufficient court decisions that would illuminate this point. On the other hand, given the well-established concept that the courts of the United Arab Emirates have general jurisdiction and that arbitration is an exceptional remedy, it is likely that the conclusion of the Court of Cassation would not have been different. in the absence of Article 2(4) .
It can be concluded from the above rulings that where the conduct of the parties can be construed as a waiver of the arbitration clause, the courts of the United Arab Emirates will exercise jurisdiction if and when the claim is filed before them. This does not raise any concern because it is legitimate for the dispute to be resolved by the courts only when the parties no longer wish to resolve it by arbitration. The parties are free to opt for arbitration and are also free to opt out of arbitration.
When there is no indication that the parties have waived the arbitration clause and that the plaintiff seizes the jurisdiction because of the non-payment of the costs by the defendant, it appears that the courts would consider the arbitration agreement as having become ineffective and would exercise jurisdiction. . Such an approach ensures, on the one hand, that the plaintiff is not deprived of a forum and is not forced to bear the entire advance on costs. On the other hand, this approach encourages frustration of the arbitration agreement by respondents intending to obstruct the arbitration process.
There are not yet enough decisions dealing with this issue and given how quickly the arbitration landscape has changed in recent years, it would be very interesting to see how the courts in the UAE will deal with this thorny issue. in the years to come.
(The author of this blog post was involved in one of the cases discussed as an attorney for a defendant in court.)