Sami Tannous Joseph Chedrawe December 18 2014 Arbitration clauses and the Dubai government Freshfields Bruckhaus Deringer | Arbitration & ADR - United Arab Emirates Sami Tannous, Joseph Chedrawe Arbitration & ADR Restrictions on foreign arbitration and foreign lawApplicability of Government Contracts LawDispute resolution options – DIFC as alternativeCommentWhen negotiating contracts with the Dubai government and certain government-related entities, foreign corporations should be aware that there are legislative restrictions on what can be agreed in an arbitration clause. This update examines those restrictions and the options available to foreign corporations in such situations.Restrictions on foreign arbitration and foreign lawContracts with the Dubai government must comply with, among other things, the Government Contracts Law (6/1997)(1) which applies broadly to contracts:concluded by government departments representing an expense related to supplying materials, carrying out works or providing services of any nature; andthat generate income.(2)Article 34 of the Government Contracts Law lists various elements that contracts must cover, including "provisions related to the determination of disputes and the competent courts".(3) However, parties' ability to shape their arbitration clause freely is restricted by Article 36, which requires that the seat of arbitration be Dubai and that the law applicable to the contract be Dubai law, save when the ruler of Dubai grants an exemption in the public interest.(4) These exemptions appear to be uncommon. However, when granted, exemptions can cover all contracts entered into by a particular government department or be limited to particular types of contract.(5)Applicability of Government Contracts LawOne question that has given rise to some debate is the scope of the Government Contracts Law. Article 2 defines 'government department' as including "establishments, bodies or authorities that belong to the government in the Emirate of Dubai". As the Dubai government has a hand in many corporations and other entities in Dubai, it begs the question of how broadly the Government Contracts Law applies.Some guidance can be taken from the entities that have obtained exemptions from the Government Contracts Law:the Emirates Petroleum Products Company (ENOC) (by an order dated December 23 1996);the Emirates National Oil Company (EPPCO), its subsidiaries and companies owned by it (by an order dated December 23 1996);Dubai World and its affiliates (by Dubai Law 3/2006);the Dubai World Trade Centre Corporation and its affiliates (by Dubai Law 10/2008);the Dubai Aviation Corporation, affiliated public institutions and institutions to which it contributes (by an order dated August 14 2008);DNATA World Travel, its subsidiaries and the companies in which it is a shareholder (by an order dated November 23 2008);the Higher Committee of Financial Policies in the Emirate of Dubai (by Dubai Law 7/2008 Concerning the Procedures of Public Debt, which also allows the committee itself to exempt other government entities from the same law); andthe Department of Tourism and Commerce Marketing and its offices abroad for contracts performed outside the United Arab Emirates (by Dubai Resolution 3/2012).These exempt entities fall into three categories:corporations established by law or decree (eg, the Dubai World Trade Centre, Dubai Aviation Corporation and DNATA World Travel);non-corporations established by law or decree (eg, the Department of Tourism and Commerce Marketing and the Higher Committee of Financial Policies (government institutions) and Dubai World (an investment company)); andcertain wholly government-owned corporations not established by decree (eg, ENOC and EPPCO (both petroleum companies)).However, government ownership of a company's shares does not automatically make that entity fall within the scope of the Government Contracts Law. A 2014 Dubai Court of Appeal ruling held that, despite the Dubai government being a minor shareholder in the respondent company, it qualified as a private company under UAE law and, as such, did not benefit from any special limitations or conditions precedent before recourse to arbitration.(6)Dispute resolution options – DIFC as alternativeThere is a potential alternative to Dubai-seated arbitration – the Dubai International Financial Centre (DIFC), which is an autonomous 'offshore' financial free zone and legal jurisdiction physically located within the Emirate of Dubai, established in 2004 with the intention of creating an international business and commercial centre within Dubai.The DIFC may be selected as the legal seat for domestic and international arbitrations. The DIFC Arbitration Law is based on the United Nations Commission on International Trade Law Model Law – an internationally recognised standard.(7) The DIFC hosts a sophisticated arbitral institution, the DIFC-London Court of International Arbitration, which oversee arbitrations seated within the DIFC, whether local or international in nature.There are no known instances in which the Dubai government has agreed to DIFC-seated arbitration or to the application of DIFC law. In practice, the Dubai government may be reluctant to agree to this. Nevertheless, on its face, Article 36 should at least allow parties to put forward these options.(8)That said, there is a question surrounding whether the requirement in Article 36 to have arbitration seated in Dubai and contracts subject to Dubai law would extend to the DIFC or whether the term 'Dubai' is restricted to 'onshore' Dubai. Arguably, given that the DIFC is within the Emirate of Dubai, it should be encompassed by Article 36, which refers simply to Dubai.The contrary view is that, as the Government Contracts Law entered into force before the DIFC was established, the legislature did not contemplate the DIFC as an option for arbitration or DIFC law as an applicable law. Nonetheless, when the Government Contracts Law was partially amended in 2014 (in respect of performance bond exemptions), Article 36 was not amended to restrict its potential application to DIFC-seated arbitration or the application of DIFC law.While the position is untested, there are strong arguments in favour of interpreting the Government Contracts Law expansively, to include the DIFC as a seat of arbitration and the application of DIFC law.CommentWhen negotiating a dispute resolution clause with the Dubai government or government-related entities, foreign corporations should consider:whether their counterparty is subject to the Government Contracts Law and, if so, whether it has (or can obtain) an exemption to apply foreign arbitration and foreign law to its arbitration clause; andwhere the party is subject to the Government Contracts Law and there is no exemption, proposing DIFC-seated arbitration and, if required, DIFC law.While an analysis of the pros and cons of Dubai-seated arbitration and DIFC-seated arbitration (and thus Dubai law and DIFC law) is beyond the scope of this update, foreign corporations familiar with arbitrations seated in more established centres (eg, London or Paris) may find that they are more comfortable with the DIFC option, which offers a modern arbitration law and supervision by arbitration-friendly courts.For further information on this topic please contact Sami Tannous or Joseph Chedrawe at Freshfields Bruckhaus Deringer LLP by telephone (+971 4 5099 100), fax (+971 4 5099 111) or email ([email protected] and [email protected]). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.May Khoury, intern, assisted in the preparation of this update.Endnotes(1) Dubai Law 6/1997 on Contracts of Governmental Departments in the Emirate of Dubai, dated April 23 1997.(2) Article 3 of the Government Contracts Law.(3) Article 34 of the Government Contracts Law.(4) Article 36 of the Government Contracts Law. Article 36 echoes two earlier instructions on the same subject, which similarly limit the ability of parties to agree to the application of laws other than local laws to contracts with government departments or to arbitration outside Dubai: the Instructions Concerning Contracts Entered into by the Government of Dubai and its Departments and Corporations (issued February 6 1988) and the Instructions Concerning the Arbitration Clause in Contracts Entered into by the Government of Dubai and its Departments and Corporations (issued February 6 1988), as amended by instructions dated March 15 1988.(5) For example, only contracts that will be performed outside the United Arab Emirates are exempt for the Department of Tourism and Commerce Marketing.(6) Middle East Foundations LLC v Meydan Group LLC, Dubai Court of Appeal, Commercial Appeal Case 249/2013.(7) DIFC Law 1/2008.(8) All contracts concluded by government entities that contain arbitration clauses are subject to review by the Ministry of Justice, Islamic Affairs and Endowments, in coordination with the Ministry of Finance and Industry. Further, such contracts require the cabinet of ministers' prior approval (Cabinet of Ministers Decree 406/2 of 2003).