Arbitration agreements frequently impose preconditions to arbitration, requiring the parties to engage in a sequential combination of mediation, conciliation, good faith negotiations, and/or other such mechanisms, prior to initiating arbitration.
While often well intended, so as to cause the parties to pause before initiating formal dispute resolution, and potentially avoid unnecessary costs and time on proceedings, all too often, by the point a dispute has materialised, formal dispute resolution is the only answer.
In those circumstances, the pre-conditions can become a headache: compliance is vital (as failure could be fatal to any proceedings) but the terms of pre-conditions can be vague.
Given the UAE’s role both as a port of Belt and Road commerce, as well as a source of Belt and Road investment, investors should take care in drafting waterfall clauses lest they become subject to burdensome pre-conditions to arbitration.
Waterfall clauses are common in the Gulf States, as elsewhere. Mega construction projects governed by the FIDIC Conditions as amended, typically include pre-conditions including: determination by the Employer's representative, and/or amicable settlement discussions, and mediation and conciliation provisions are increasingly common place. But, are they enforceable?
United Arab Emirates
The approach of the UAE Courts to pre-conditions to dispute resolution depends on whether the relevant provision nominates the Court or an arbitral tribunal.
Whereas any measure restricting access to the UAE Courts is likely to be unenforceable on public policy grounds, as arbitration is a carve out from the jurisdiction of the UAE Courts, the Courts take the approach that the parties are free to agree pre-conditions to be fulfilled before arbitration can be commenced.
The Dubai Courts have consistently held that the parties may insert any clause in their agreement that they deem appropriate provided it does not violate public policy or moral norms, including a clause imposing preconditions to arbitration (Dubai Court of Cassation Case Number 124 of 2008; Dubai Court of Cassation Commercial Appeal Number 53 of 2011; and Dubai Court of Cassation Commercial Appeal Number 188 of 2012), and have consistently upheld pre-conditions to arbitration.
Dealing with pre-conditions under UAE Law - Key principles to note
The burden of proving that preconditions have been satisfied lies with the party initiating arbitration (Dubai Court of Cassation Commercial Appeal Number 53 of 2011; Dubai Court of Cassation Commercial Appeal Number 188 of 2012).
Whether a precondition has been satisfied is a question of fact (Dubai Court of Cassation Commercial Appeal Number 188 of 2012). Typically, the tribunal or Court will look for meaningful compliance, in particular in relation to provisions requiring amicable settlement discussions.
Under UAE law, the duty to perform a contract (including any preconditions) in good faith, is an over-arching and is applicable to all terms.
For preconditions to be mandatory, the condition needs to set out specific steps that must be taken by the parties to enable the Court to determine it has been followed (Dubai Court of Cassation Property Appeal Case No 75 of 2015, dated 12 August 2015). In the circumstances where the agreement does not offer any guidance on the process to be followed, then the clause lacks certainty, and cannot be enforced by the Court.
It is necessary for a plea of non-compliance with the precondition to arbitration to be taken before the arbitral tribunal. It is not sufficient for such an objection to be directly raised before the Court at the time of enforcement of an award (Dubai Court of Cassation Property Appeal Case No 75 of 2015, dated 12 August 2015).
Waterfall clauses are commonly encountered in the UAE; pre-conditions to arbitration are enforceable, and should be taken seriously.
Failure to adhere to arbitration pre-conditions can leave a Claimant’s claims exposed and vulnerable to attack for the full extent of the proceedings:
- In the arbitration, the Respondent can argue that the reference to arbitration is premature and that the tribunal does not have jurisdiction to hear the dispute failing satisfaction of the agreed pre-conditions.
- Before the Courts, in any later enforcement proceedings, the Respondent can argue the Award is a nullity, having been made without arbitral jurisdiction.
Our recent experience in other jurisdictions in the region has been consistent with the approach adopted by the Dubai Courts in relation to preconditions.
In 2016, KWM successfully defended a Developer in a dispute arising under the Laws of Qatar. It was a rocky road to conclusion, partly on account of the Claimant’s failure to adhere to pre-conditions to arbitration, which were twofold:
- prior determination by the Engineer or Employer’s Representative; and
- amicable settlement discussions.
The tribunal held, amongst other things, that there had been a failure to refer the matter to the Engineer for determination, and a failure to comply with the amicable settlement provision: a letter sent by the Claimant, listing its claims and titled “Notice of Amicable Settlement” was not sufficient. The contents of the letter were not consistent with an endeavour to settle the dispute amicably, and the threshold for satisfying the pre-condition had not been met. The Claimant’s claims were held to be inadmissible, and the proceedings terminated.
This is a good reminder that meaningful compliance is required to satisfy pre-conditions, in a form that is recorded, and which can be produced to any later tribunal or Court.