Many dispute resolution clauses, in which arbitration is the agreed mode of dispute resolution, often require that parties – before initiating any arbitration proceedings – either (i) follow a structured mechanism to settle disputes and/or (ii) engage in good faith settlement negotiations with the ultimate aim of resolving their disputes or differences amicably. With the considerable costs associated with the initial stages of arbitration proceedings (especially in large value claims), it is hardly surprising that parties choose to incorporate such pre-conditions into their contractual agreements.

The Position Under UAE Law

Under UAE law and in accordance with the provisions of the UAE Federal Law No. 5 of 1985 (the “Civil Code”), the parties to an agreement must perform their respective contractual obligations. In this way, UAE law considers a valid contractual agreement as the law of the parties; and consequently, its terms and conditions should be respected and not deviated from. In this respect, UAE courts have consistently determined that dispute resolution clauses – requiring parties to perform certain pre-conditions – are valid and enforceable. This position was well set out by the Dubai Court of Cassation:

“[…] arbitration – being a contract between the two parties – may include any condition that the two parties thereto deem appropriate in a manner not contrary to pubic order or morals, which entitles them to provide for preconditions prior to resorting to arbitration, so that if none of these conditions are materialised, the request for arbitration shall not be accepted in application of the rule of pacta sunt servanda.”

Multi-Tiered Dispute Resolution Clauses

Certain multi-tiered dispute resolution clauses, such as those incorporated into FIDIC-styled construction contracts, establish clear procedures and time limits that require strict compliance before any arbitration proceedings can commence. For instance, Clause 67 of the FIDIC 1987 Red Book requires that all disputes be referred in writing to an engineer for his determination. The engineer is thereafter (and within 84 days) obliged to issue a decision in respect of the dispute. The parties are then given a period of 17 days (from the date of receipt of the engineer’s decision) within which to notify the other party – if it objects to the engineer’s determination – of its intention to initiate arbitration proceedings.

In comparison, the dispute resolution clause provided for in the FIDIC 1999 Red Book is even more structured and exhaustive. Clause 20.4 of the FIDIC 1999 Red Book requires that all disputes be referred to a Dispute Adjudication Board (DAB) for it to make a determination; this determination should be issued to the parties within 84 days. The parties are then given a further period of 28 days within which to give notice of their dissatisfaction (if any) with the DAB’s decision (the “NoD”). This NoD is a pre-requisite to commencing arbitration since the DAB’s decision will be final and binding if no NoD is given within the stipulated 28 days. Clause 20.5 goes a step further by obliging the parties – after a NoD has been submitted – to attempt to settle their dispute amicably before arbitration can be initiated.

In circumstances such as these, where pre-conditions have been (i) set out clearly in the parties’ agreement and (ii) are capable of being objectively determined, the Dubai Courts have found such provisions to be enforceable. For instance, the Dubai Court of Cassation held the following in respect of a dispute resolution clause that required a referral of a dispute to an auditor prior to commencing arbitration:

“If both parties agree that the dispute should be referred to a certain auditor to be settled amicably before starting the request of resorting to arbitration, neither party shall have the right to resort to arbitration before submitting the dispute to this auditor.”

In a more recent judgment , the Dubai Court of Cassation went on to confirm the approach it adopted in its 2008 decision. In summary, the Court was required to consider whether a party was permitted to initiate arbitration proceedings in circumstances where the relevant dispute resolution clause required that the parties engage a consulting engineer to assist them in resolving their dispute amicably. The claimant in this case had initially approached the court a quo requesting that it appoint an arbitrator on the respondent’s behalf. The Court found that since the claimant had failed to refer the dispute to the consulting engineer (before initiating arbitration proceedings), the arbitration proceedings were prematurely initiated.

Vague & Ambiguous Dispute Resolution Clauses

While many of these multi-tiered clauses create clear and methodical steps to be followed prior to commencing arbitration proceedings, issues in interpretation tend to arise in circumstances where the pre-conditions are not as clearly set out. For instance, a significant amount of dispute resolution clauses that we have come across usually require that parties enter into “good faith settlement negotiations”. Unfortunately, the vast majority of these clauses do not prescribe (i) what would constitute good faith settlement negotiations and/or (ii) when would such negotiations be considered exhausted. One such clause presented itself before the Dubai Court of Cassation in early 2015.

In this case , the parties had entered into a Sale and Purchase Agreement (the “SPA”) where the seller had sold certain real estate property and vehicle parking bays to the purchaser. A dispute had subsequently crystallised as a result of the seller’s apparent breach of the SPA. The purchaser had initiated arbitration proceedings under the auspices of the Dubai International Arbitration Centre (DIAC) Rules and was able to obtain an award in its favour. The purchaser thereafter approached the Dubai Court of First Instance to have the award ratified; the Court of First Instance granted the purchaser’s request. The seller filed an appeal before the Court of Appeal on the basis that the purchaser had allegedly failed to comply with certain pre-conditions to arbitration. The Court of Appeal found in the seller’s favour by declaring the arbitration award invalid since the purchaser had failed to attempt any other settlement methods contained in the SPA.

The purchaser consequently filed an appeal before the Dubai Court of Cassation. In determining that the Court of Appeal’s judgment was incorrect and should therefore be overturned, the Dubai Court of Cassation held that:

“given that the [SPA] did not clearly define the dispute settlement procedures that can be taken by the parties before resorting to arbitration it is not possible to verify the extent of the efforts exerted by either party to actually settle the dispute in any other way other than through arbitration, which makes the claim that the arbitration ruling should be revoked because the [purchaser] did not seek other dispute settling measures first is invalid.”

What the Dubai Court of Cassation effectively established in this case was that since the SPA failed to provide any clear procedural mechanism by which the Court could accurately “verify the extent of the efforts exerted” by the purchaser, the Court could not objectively determine whether such pre-conditions were in fact satisfied.

There has even been some judicial support for the view that parties may even be completely justified in dispensing with certain pre-conditions that require mere amicable settlement negotiations. For instance, the Dubai Court of Cassation held as follows:

“It is established that the agreement of the contracting parties to follow certain procedures for amicable resolution of a conflict between them regarding the execution of a certain work does not prevent resorting to court directly, given that the court has the general jurisdiction to settle disputes, and considering that the direct resort of one party to court is proof of failure to reach amicable resolution or settlement.”

There is even some support for this view in the context of international arbitration. As an illustration, in an International Chamber of Commerce (ICC) arbitration, the respondent asserted that the claimant had prematurely commenced arbitration proceedings because the claimant made no initial efforts to resolve their dispute amicably (despite this being required in the parties’ agreement). The parties had exchanged a series of letters, wherein they both asserting their respective positions on the dispute. The latest of the claimant’s letters proposed that the parties converge for a meeting, to which the respondent did not respond. In determining that the arbitration proceedings were not prematurely initiated, the arbitral tribunal said the following:

“The arbitrators are of the opinion that a clause calling for attempts to settle a dispute amicably are primarily expression of intention, and must be viewed in the light of the circumstances. They should not be applied to oblige parties to engage in fruitless negotiations or to delay an orderly resolution of the dispute. Accordingly, the arbitrators have determined that there was no obligation on the claimant to carry out further efforts to find an amicable solution, and that the commencement of these arbitration proceedings was neither premature nor improper.”


Conclusion

While the UAE courts always consider the facts of a particular matter, they will almost certainly determine that arbitration proceedings initiated prior to the satisfaction of explicit and clearly worded dispute resolution mechanisms (such as those incorporated into FIDIC-based contracts) have been prematurely initiated.

In contrast, dispute resolution clauses that oblige parties to engage in amicable settlement negotiations but do not necessarily (i) set out a clear procedure to follow or (ii) stipulate what would amount to “amicable settlement negotiations”, may be prone to being overlooked purely because the UAE courts would have no objective way of determining whether such negotiations have indeed been exhausted. In such circumstances, the UAE courts may very well determine that the mere fact that a claimant has chosen to resort to arbitration demonstrates the parties’ failure to reach an amicable resolution.

That said, it is always advisable for parties to comply with any and all pre-conditions to arbitration; especially in circumstances where the pre-conditions in question have been well structured, clearly defined, and comprehensively set out. Initiating arbitration proceedings prematurely (i.e., without complying with the pre-conditions), may result in significant time and cost implications for a claimant; in particular, in situations where a court – after the arbitration having run its course – nullifies the arbitral award on the basis that certain pre-conditions were not satisfied.