Navigating pathological clauses: the curious case of the abolition of the DIFC-LCIA Arbitration Centre

On 14 September 2021, the Dubai Government issued Decree 34/2021, which abolished the DIFC Arbitration Institute (DAI). DAI was the LCIA's counterparty to an operating agreement that established the DIFC-LCIA Arbitration Centre. The Decree provided that arbitration agreements referring to the DIFC-LCIA Rules would remain valid, but that the existing Dubai International Arbitration Centre (DIAC) would administer cases commenced after the Decree came into effect.

This article will examine international cases where courts have grappled with the following question: is an arbitration agreement that refers to arbitration under the DIFC-LCIA Rules valid? The cases can be divided into two categories: those where a (1) defendant in court proceedings raises the arbitration agreement to challenge the court’s jurisdiction and (2) party seeks to resist enforcement of an award on the ground that the arbitration proceeded under different rules to what was agreed.

Abu Dhabi Court of First Instance Case 1046/2023

The claimant brought a claim for unpaid invoices and compensation under a contract for the supply of medical equipment. The defendant argued that the court had no jurisdiction because the contract contained an arbitration agreement. The arbitration agreement, however, provided for arbitration under the DIFC-LCIA Rules and the DIFC-LCIA no longer existed. The claimant argued, therefore, that (1) it was impossible to enforce the arbitration agreement because the DIFC-LCIA no longer existed and (2) the parties did not intend to refer disputes to DIAC, which existed at the time of the agreement.

The court considered whether the clause was valid and enforceable under the law governing the arbitration agreement. This, it found, was UAE law because that was the law governing the main contract and the parties had not agreed to a different governing law for the arbitration agreement. It also, however, considered the approach of courts from other jurisdictions when faced with pathological clauses (e.g., where the arbitration agreement referred to a non-existent institution).

Referring to the travaux preparatoires of the New York Convention, the court noted that the abolition of an arbitral institution is not a situation which would render an arbitration agreement ‘’null and void, inoperative or incapable of being performed’’ under Article II(3). The travaux preparatoires are silent on the criteria to be applied when determining whether an agreement was impossible to perform nor do they provide additional clarification on the meaning of ‘’null and void, inoperative or incapable of being performed’’.

In its analysis, the court also highlighted that the arbitration agreement referred to the DIFC-LCIA Rules ‘’in effect at the time of the dispute’’. This meant that the parties accepted that the rules to which their arbitration may be subject at the time of the dispute might differ from those in effect at the time the agreement was concluded.

It emphasised that arbitration agreements should not be interpreted restrictively. The parties’ main intention was to resolve disputes by arbitration. The court treated the means by which that is effected as incidental. Because of this, it upheld the arbitration agreement. In doing so, it took a different approach to the Eastern District Court of Louisiana in an earlier case, to which it had been referred.

Baker Hughes Saudi Arabia Co. Ltd vs Dynamic Industries [1] (Louisiana) 

Baker Hughes sued Dynamic Industries for allegedly failing to pay sums due under a contract for the supply of materials and services for an oil and gas project in Saudi Arabia. Dynamic Industries moved to dismiss the claim, relying on the DIFC-LCIA arbitration agreement in the contract.

The court dismissed Dynamic Industries’ motion. It stated that arbitration is a creature of contract and parties cannot be compelled to arbitrate under rules to which they had not agreed.

DFL vs DFM [2024] SGHC 71 (Singapore) and Mr Nasser Sulaiman H M Al-Haidar vs Mr Jetty Venkata Uma Maheshwara Rao (Cayman Islands)

These cases concerned applications to set aside provisional awards for interim relief because the arbitration was not conducted in accordance with the parties’ agreement (i.e., it was conducted under the DIAC Rules instead of the DIFC-LCIA Rules).

Both courts agreed with the Louisiana court that the arbitration agreement had been frustrated. The Singapore court highlighted differences between the DIAC Rules and the DIFC-LCIA Rules and held that parties cannot be forced to arbitrate under a different set of rules to what they had agreed.

Both courts refused, however, to set aside the award. But they only did so because they found that the applicant had submitted to the tribunal’s jurisdiction for the purposes of the interim relief proceedings.

Dominant Purpose Test vs Textual Fidelity Approach

The cases above illustrate the different treatments of DIFC-LCIA arbitration agreements. The Abu Dhabi court adopted ‘’the dominant purpose’’ test: the agreement’s dominant purpose was to resolve disputes by arbitration. Courts should give effect to this purpose. The Louisiana, Singapore, and Cayman Islands courts took what might be termed a ‘’textual fidelity’’ approach by strictly interpreting the arbitration agreement. While there is nothing wrong with this approach, it could result in something that neither party intended when concluding the arbitration agreement: one party may sue another in either party’s national courts. The DIAC Rules differ from the DIFC-LCIA Rules. But they are likely to have more in common with each other than with the idiosyncratic civil procedure rules of any nation.

No matter which approach one ascribes to, parties may wish to cure arbitration agreements referring to the DIFC-LCIA. This can be by expressly agreeing to DIAC arbitration or arbitration under the supervision of another institution. This will of course be easier pre-dispute. If a cure is not plausible, parties should consider the likelihood of the clause being found ‘’null and void, inoperative or incapable of being performed’’ under the following before proceeding with an arbitration:

1. Law governing the arbitration agreement (if one is specified);
2. Law of the seat;
3. Law governing the main contract;
4. Law of the jurisdiction in whose local courts the arbitration agreement might need to be enforced (e.g., the law of either party’s domicile if different to any of the above laws); 
5. Law where any award will likely be enforced (this will likely be the jurisdiction where the parties have a substantial presence or significant assets against which to enforce an award); and
6. Any relevant enforcement treaties, like the New York Convention or Riyadh Convention, that may be applicable.

These considerations are also likely to be relevant to other abolished institutions like the Abu Dhabi Commercial Conciliation and Arbitration Centre, which was recently replaced by the Abu Dhabi International Arbitration Centre.

This article was first published in ThoughtLeaders4 Disputes Magazine (Disputes Issue 14: Reaching The Summit - Q3’s Insights On Next Gen Disputes).

^{[1] Baker Hughes Saudi Arabia Co Ltd vs (1) Dynamic Industries Inc, (2) Dynamic Industries International, LLC, and (3) Dynamic Industries International Holdings LLC.}